European Insurers facing margin crush if premiums cannot be hiked, Bloomberg

According to a new analysis by Bloomberg Intelligence, a sustainable margin recovery looks “increasingly challenging” for European insurers, with premiums needing to increase in real terms in order to prevent any erosion after a tripling of costs to 10.9% last year from 2022’s 3.5%.

BI noted that the bulk of expenses are effectively fixed and are being driven higher by inflation.

Looking back, premium volume rose 7.5% on average in 2023, following 2022’s 3.8% shift after COVID-19 driven declines. However, BI explains that the recent record is mixed, as average premium growth exceeded that of expenses in 2018-19-  reversing 2017’s performance –  but premium volume then fell 3.5% in 2020 vs. a 3.9% jump in costs.

“The insurance industry historically has struggled with a fundamentally significant problem: costs rising faster than premiums. This puts constant pressure on underwriting margin. Yet the situation reversed in 2018 and extended into 2019. Comparing averages across the industry can be a blunt approach, but the 2019 advance in costs (4.5%) and premiums (5%) nonetheless shows the sector was in better shape than at the end of 2017. Insurers have two basic profit streams: underwriting and investment income,” commented Kevin Ryan, BI Senior Industry Analyst – Insurance.

Adding: “The pandemic affected 2020 but 2021 saw a bounce back with net premiums out-pacing total costs; this momentum was just maintained in 2022. 2023 and the advent of IFRS 17 has seen costs rise faster than premiums once again.”

A key factor to highlight is that total costs as a percentage of premiums in BI’s insurer universe climbed 10.9% in 2023 (3.5% in 2022), having edged down 0.3% in 2021.

BI explained that the natural upward momentum here is hard to halt, therefore any progress should be considered as a positive.

In addition, BI noted that costs usually tend to be higher in general insurance than in life under IFRS, but this has reversed under IFRS 17.

A key example is how Aviva’s general-insurance business had total costs as a percentage of premiums of 27.5% in 2023, (31.6% in 2022), compared with the life business at 86.7% (expenses/revenue), compared with 23.8% in 2022 under IFRS 4.

As well as this, across general and life-insurance companies in BI’s analysis, the average total cost-to-net earned premium ratio was 29.3% in 2023, compared to 27.6% in 2022, and 27.8% in 2021.

Ryan added: “In aggregate, general insurance-acquisition costs increased 6% in 2023 having been up 0.3% on average in 2022 (2021: 7.3%, 2020: 3.8%, 2019: 4%) across the group of insurance companies we cover. This matters, because these expenses averaged 17.1% (2022: 19.4%, 2021: 19.3%) of net earned premiums. Within this average, the general-insurance segment seems to be under the most pressure. Our sample of 40 European life and general insurers had an average acquisition cost-to-net earned premium ratio of 14.7% (2021: 14.8%).

“These ratios are unlikely to be directly comparable, due to different approaches to cost allocation and divergent business mixes but does flag that this is likely an area of focus for all insurers.”

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