The majority of insurers and reinsurers in Europe, Middle East and Africa (EMEA) demonstrated stability and resilience in 2021 despite a challenging economic environment, according to a new benchmarking report by A.M. Best.
Challenges include the ongoing impact of COVID-19, as well as geopolitical tensions, inflation risk, catastrophe losses and climate risk.
A.M. Best anticipates that uncertainty and inflation risk in particular are likely to remain an obstacle over the coming months as geopolitical tensions continue.
Despite this environment, the report notes that the majority of rated companies (including insurers, reinsurers, captives, mutuals, takaful operators, and protection and indemnity clubs) have strong balance sheets that are able to withstand shocks.
The benchmarking report finds that 90 per cent of EMEA rating units are within the strongest assessment of risk-adjusted capitalisation.
General insurers in mature markets have low-risk asset profiles, with the majority of risk derived from underwriting, while the capital consumption of emerging market companies is driven by investment risk.
A.M. Best notes that for developed market companies the combined ratio’s average standard deviation is generally above that of emerging market companies because of the inclusion of captives in the sample.
The report notes that captives are generally located in the developed market, and tend to show an increased volatility in terms of combined ratio.
Therefore, while the standard deviation appears higher for these companies, captives benefit from the parent’s financial flexibility, as this mitigates risks which show a potential higher technical performance volatility.
In terms of business profile, A.M Best identifies that captives tend to be classified as either neutral or limited, owing to little diversification in their role as a subsidiary of a parent company. In addition, because of this function captives have somewhat less control over their premium distribution than traditional insurers.
The report says: “While certain captives may suffer from a lack of diversification, for example where they are not able to diversify through the access to third-party premium, captives generally are of strategic importance to their parent and tend to secure a good access to premiums.”
Analysis in the benchmarking report shows a distinct correlation between a company’s business profile assessment and its innovation assessment.
A.M. Best’s enterprise risk management (ERM) assessment focuses on two key areas. Firstly, risk framework evaluation encompasses risk appetite and tolerance, stress testing and non-modelled risks, risk identifications and reporting, risk management and controls, and governance and risk culture.
Secondly, risk profile evaluation includes risks related to product and underwriting, reserving, concentration, reinsurance, liquidity and capital management, legislative and regulatory, investments, and operational.
Less than 3 per cent of rated insurers have a very strong ERM assessment. To achieve this, companies must demonstrate that their risk management approach has been effectively embedded and utilised over the medium-to-long term and is adding value to the organisation, the benchmarking report concludes.
