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TOUGH TIMES FORECAST FOR INSURERS

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European insurers and reinsurers are in for tough times, according to two studies published last week.

The greater sophistication of corporate risk managers is leading to a decline in the amount of business being placed with the European commercial non-life insurance market, according to one study, "European Commercial General Insurance: Opportunities and Threats in a Declining Market."

This study, by strategic management consultant Datamonitor in London, indicates that total premiums in the European commercial non-life market will fall 8.3% to $132 billion in 2003 from $144 billion now.

But Datamonitor's report says that despite the expected fall in the level of premiums, the amount of cross-border premiums underwritten within Europe will more than double to $20.5 billion by 2003 from $9.4 billion in 1996.

Datamonitor attributes this to the introduction of a single European currency, which will facilitate the comparison of cross-border insurance business. Another reason is the implementation of life and non-life insurance directives in the European Union, which mean an insurer authorized to write in one E.U. country may conduct business in any other E.U. country.

Datamonitor's study says commercial customers' increasing ability to manage and control risks is reducing their need to buy insurance. It says demand for insurance also is falling because manufacturing industries, traditionally the biggest commercial buyers of insurance, are decreasing in size and economic importance relative to the service sector, which has less need for insurance.

It predicts this will lead to increased competition in a declining market and will erode underwriting margins and reduce profitability. Combined with an increase in cross-border business, these trends will fuel further consolidation within the European insurance market, according to Datamonitor.

"Traditional generalist underwriters are the most vulnerable, as they lack the capital resources to aggressively differentiate themselves from the competition. . . . Underwriters most likely to succeed are those with value to add; companies with recognized specialties or other key sources of differentiation, such as financial strength or expertise in a particular channel," said Datamonitor.

Meanwhile, in its 1998 Global Reinsurance Outlook Series for the U.K. and European markets, Moody's Investors Service says deregulation of the E.U. insurance market will put pressure on reinsurers' earnings. The Moody's report says liberalization of the European Union insurance market will lead to tighter margins and greater earnings volatility for reinsurers.

The increased competition among insurers that will result from deregulation will cause them to raise their retention levels, which in Europe have traditionally been low over the past 50 years, and reduce the amount of business they place with reinsurers.

Large proportional cessions to reinsurers, averaging 72% of primary insurers' premiums in Germany, no longer make sense, given that most insurers don't have the same capital restraints they had after World War II, Datamonitor said. Roger Harvey, the Datamonitor report's author, said this change will take place gradually over the next five to 10 years.

Mr. Harvey said E.U. deregulation will challenge the non-life reinsurance sector the most because it is non-life primary insurers that will be the most affected.

The report says primary insurers are likely to demand far greater risk management service and innovation from reinsurers. This will favor those top-tier and midsize reinsurers that have strong technical expertise in specific products and capacity.

Moody's also says that demand for non-proportional and facultative reinsurance will increase at the expense of proportional reinsurance.

Mr. Harvey says this is both because shareholders are now becoming more demanding and because the market has become less volatile, leading companies to ask if quota-share arrangements are sensible any longer.

However, the report says "significant" growth prospects exist in Europe's life and health reinsurance market. It attributes this to demographic changes in countries such as Germany, France and Italy, which are likely to pressure governments to amend their social welfare systems, leading to a shift away from state provision of benefits toward private provision.

"The winners will be those reinsurers that can develop new products that meet the demands of the local market," says Moody's.

However, Moody's adds that it is uncertain whether these strong growth prospects will translate into profitability, given the considerable amount of capital that is expected to chase this business.

Copies of the report, "European Commercial General Insurance: Opportunities and Threats in a Declining Market," are available by contacting Datamonitor Europe, 106 Baker St., London W1M 1LA, U.K.; 44-171-625-8548, fax: 44-171-625-5080. The cost is L1,995 or $2,995.

Moody's Investors Service's 1998 Global Reinsurance Outlook Series is available only to subscribers. However, highlights of the report are available by visiting Moody's site on the World Wide Web: www.moodys.com/insurance.