While larger insurers can contemplate their future equanimity, the smaller companies will have to run harder
Italy’s largest insurance groups are in the virtuous circle of having the critical mass to take advantage of the economies of scale to achieve ‘robust levels’ of financial strength, according to S&P’s analysis. Led by world class insurer Generali, which has a life market share in Italy of over 26%, the top five groups sit on almost two thirds of the market and top 10 have over 80%.
The development of these leading groups has been fuelled by the growth in the life market, which over the four years to 1997 saw premiums double. Taking that year on its own, the increase was of the order of 40%.
Individual savings policies constitute the bulk of the business, with group contracts accounting for less than 10% of the market. S&P says that many traditional Italian life policies distribute a low proportion of profits to policyholders, compared with other countries, such as Germany, and have heavy surrender penalties. But the raters reckon that the insurers have been somewhat lucky having been protected by the rapid premium growth and the rise in the value of their invested assets. This is not going to last for ever, insurers are warned and traditional players will see their margins eroded unless they lift their game.
Other products, particularly the newer open pension schemes, as well as single premium policies and unit-linked and index-linked products will help the market expand. Awareness of the pressures on the generous state retirement provision will drive demand the way of the industry.
The marketplace is markedly more competitive than it was at the beginning of the decade as a result of deregulation removing the barriers between banking and insurance, increasing banks presence directly or indirectly in the market, through alliance as and associations a la mode Italian. The restructuring of the financial services industry is continuing apace and life insurance is very much caught up in the current round of realignments. Also, the EC insurance directives have opened the market to outside influences and a number of the major international groups are present, sometimes through other groups. With insurance products, distribution is the name of game and bancassurance is emerging as a potent force, as S&P points out, with a third of all business and half of new business coming through the banking portals. But the newer direct selling via telephone and internet is also on the increase.
Judging by the figures reported, S&P says that Italian insurance companies seem to have ‘relatively modest levels of solvency’ but further analysis of the hidden asset values and the technical reserves reveals that capitalisation levels vary from strong to extremely strong, particularly for the more traditional insurers.
While new business acquisition expenses are a factor hitting margins and earnings, S&P believes the reducing yields on investments, plus increasing competition, are other key elements that drag down earnings prospects.
The search for higher returns is changing the pattern of asset holdings for Italy’s insurance operations. Equity investment is on the rise, albeit gradual and from an extremely low base, up from 11.4% in 1995 to 14.3% end 1997, for non-linked life assets. For Italian investors bonds were for a long time a ‘no brainer’ decision, as is confirmed by fixed income holdings of over 67% in 1997. If anything, insurance investors are divesting themselves of real estate rather than bonds, down over three years from 14% to 10% in 1997, when moving to equities.
S&P concludes that the major players in the market are firmly positioned both in competitive and capitalisation terms to meet the challenges from pressures on earnings, it is the mid-sized life insurers who may have problems maintaining their position. Fennell Betson