Emerging European markets to fuel growth

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Buoyant growth in emerging European insurance markets is set to improve credit quality over the next five years, Fitch Ratings has said in a new report.

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 is faster than developed European markets, where premium income fell by 2% in 2012. Fitch expects strong growth in the middle classes in emerging Europe.

Fitch Insurance senior director Clara Hughes said: “Growth in insurance is driven by increasing GDP per capita. 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.”

Hughes added that the main constraints on insurers’ ratings in emerging markets generally relate to their operating environment.

“Negative rating factors include weak corporate governance, risk management and regulation, and limited financial flexibility, often associated with private ownership,” Hughes said. “However, governance, risk management, and regulatory and accounting standards are developing in some emerging markets. Such improvements are crucial for higher ratings.”

Insurers operating predominantly in just one country will typically not be rated higher than the sovereign. Insurers are exposed to the same negative factors that constrain sovereign ratings, such as economic weaknesses or systemic issues. With most emerging-market sovereigns below ‘BBB+’, this is a handicap relative to many developed markets, where sovereigns are typically rated higher.

This is a particular problem for reinsurers wanting to write international business, for which high ratings are a prerequisite.

Foreign investment in emerging markets through joint ventures, branches or subsidiaries can develop the market, bringing capital and expertise. Ultimately, this is likely to be positive for markets and ratings.