Insurance firms feel the market pinch

OVER-expansion and over-reliance on stock markets have resulted in pressure on the global insurance sector.

This is particularly true of European firms which expanded in the US when times were good, but which also had up to 40% exposure in global equities when the bubble started to burst in early 2000.

Rising underwriting losses and a disastrous stock market performance in recent years added to their woes.

Balancing the twin risks of underwriting and investment has worked in the past, with shortfalls in underwriting losses compensated by market returns.

But developments in recent years brought the European insurance sector close to meltdown as losses mounted and investment returns were badly eroded by collapsing stock markets.

As a result, European insurance firms saw their stock market values fall by a mean 51% last year, 23% more than the average.

Zurich Financial Services last week reported losses some $3.4bn worse than expected.

Several other Swiss firms have also incurred substantial losses in the past year, as markets continue to underperform.

Overall, life insurance companies have been harder hit than general insurers.

In Britain, Prudential said recently it may not raise its dividend, and has cut payments to its with-profit policyholders in order to protect its solvency ratios.

Legal & General warned it might have to apply for a waiver from solvency requirements from the Financial Services Authority, while Equitable Life's struggles have been well documented.

It has reduced payments to policyholders and has been forced to impose penalties on those trying to cash in existing policies in order to prevent insolvency.

According to the Economist, European companies have suffered more than those in the US. There, some non-life companies invest as little as 2% of their funds in equities, serving them well in the current environment. But the US has not stood totally apart.

Huge payments for personal damages are an ongoing concern, while moves into credit derivatives have resulted in poor returns, recent surveys report.

Furthermore, corporate America is facing a second wave of asbestos lawsuits.

In 2001, US insurers paid $1.53 for every dollar of premium on medical malpractices.

Last year was only slightly better, according to the insurance-rating agency AM Best.

Even the US's top performer, the American Insurance Group, had to set aside an additional $2.8bn for workers' compensation and health care.

In February, the world's biggest insurer renowned for its stringent adherence to tough liability underwriting practices posted a loss for the last quarter of 2002.

Some 200,000 asbestos claims are currently pending in the US, with substantially more on the way. Estimates by the RAND Institute of Civil Justice say there could be as many as 2.5m down the line.

Closer to home, the leading French insurer Axa, owners of the PMPA, posted an 82% increase in profits last year, to €949m, or $1.02bn.

This should allow it to moderate its pricing policy in the Irish market, where it is the major player.