A new A.M. Best report sees favorable market conditions emerging for European life insurers.

The report, “European Life Insurers Rebuild, But Solvency II Strains Await,” says premium volumes in 2009 generally increased across the continent, primarily driven by demand for guaranteed life products. The growth was most pronounced in Italy (48%), followed by France (12%) and Germany, which saw an increase of roughly 7%.

Yet, A.M. Best does express concern over the potential effects of insurers operating in a prolonged low-interest rate environment.

“In sum, European insurers have put more capital-intensive guaranteed products on their books—albeit with lower minimum guarantees than they’ve had to offer in the recent past,” the report states. “These new business trends have clear implications for capitalization and profitability and come during a time of low interest rates. Insurers, then, face lower margins from this less profitable business mix, while some companies have seen expenses such as acquisition costs increase because of a higher contribution of single premiums.”

Another mitigating factor is the pending Solvency II regulations of the European Union. The report predicts that life insurers writing interest-sensitive products, small mutuals and some single-country life companies will be among those most pressured under Solvency II, contributing to demand for more and higher quality reinsurance.

In addition to the unpredictability surrounding Solvency II, the lingering impact of the financial crisis is still distorting the market, A.M. Best concludes.

“Consolidation has not accelerated, partly due to Solvency II’s ongoing rulemaking process and the resulting uncertainty over future capital requirements and the treatment of various forms of debt, and partly due to capital levels of potential acquirers that have not recovered to pre-crisis levels,” the report states.

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