The stalwart reputation garnered by global insurance companies over the years may be fleeting, according to a report by rating agency A.M. Best.
The research takes into account A.M. Best rating actions from 2008 until mid-April 2010, which reveal that throughout the recent financial crisis, mutuals (which include U.S.- and Europe-based cooperatives, friendly societies, fraternals and nonprofit companies) have shown relative stability compared with non-mutual-type insurers. In addition, mutuals have benefited from a lack of pressure to return capital to shareholders once balance sheets recovered, and from their tendency to retain a loyal customer base within affinity groups that are often trade based.
The agency’s research, “Mutuals Maintain Momentum, But Challenges Mount,” notes that being well-capitalized is a positive, but that mutual firms’ limited financial flexibility is among the biggest challenges yet facing the sector.
Yvette Essen, head of market analysis for A.M. Best’s global financial services division and report author, said growth potential for mutuals could become limited, given the difficulties facing mutuals in accessing the capital markets to raise money. “In comparison, conventional insurers quoted on the stock markets have greater opportunities to fund expansion as the capital markets reopen,” she said.
The report states that although many mutuals have been able to grow during the recession, in Europe, the planned introduction of Solvency II in 2012 is a major issue for some companies. New insurance regulations could lead to some small and medium-sized mutuals to close their doors if capital demands become too onerous.
Essen said: “Financing challenges are expected to create hurdles for some mutuals, particularly the smaller European ones, which are anticipating increased capital requirements from Solvency II. The need to also achieve scale, combined with the limited financing opportunities for mutuals, will lead to more affiliations, partnerships and joint ventures. The global mutual landscape could be on the brink of changing significantly.”
The report is being released ahead of the International Cooperative and Mutual Insurance Federation's 20th Meeting of Reinsurance Officials (MORO), May 16-19 2010 at the Dorint Pallas Hotel in Wiesbaden, Germany. A.M. Best Co. will sponsor and participate in the conference.
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