Up to 20% growth in emerging European insurance markets could boost credit quality over the next five years, so long as corporate governance and risk management keep pace.
Fitch Ratings said today that market growth is positive for ratings as it leads to companies with larger operating size, economies of scale and greater risk diversification.
Emerging European insurance markets are growing rapidly, at rates of up to 20% or more a year. This contrasts with developed European markets where premium income declined by 2% in 2012. The expectation of strong growth in the middle classes is a key factor, according to Clara Hughes, Senior Director in Fitch’s Insurance team.
“Growth in insurance is driven by increasing GDP per capita,” she says. “As populations become wealthier, they have more valuable possessions to insure and more wealth to invest in savings products. Government initiatives, such as the introduction of compulsory insurance or tax incentives to encourage saving, can also drive growth in insurance markets.”
“The main constraints on insurers’ ratings in emerging markets typically relate to the operating environment,” says Hughes. “Negative rating factors include weak corporate governance, risk management and regulation, and limited financial flexibility, often associated with private ownership. However, governance, risk management, and regulatory and accounting standards are developing in some emerging markets. Such improvements are crucial for higher ratings.”
Sh added that insurers operating predominantly in just one country will typically not be rated higher than the sovereign, with their exposures to the same negative factors, economic weaknesses or systemic issues.
Given this fact, with most emerging-market sovereign debt below Fitch’s ‘BBB+’ rating, this is a handicap relative to many developed markets, could be a challenge for isolated firms.
This is a particular problem for reinsurers wanting to write international business, for which high ratings are a prerequisite.
Fitch suggested that foreign investment in emerging markets through joint ventures, branches or subsidiaries may help develop the market, bringing in capital and expertise. “Ultimately, this is likely to be positive for markets and ratings,” added Hughes.