S&P’s Revises Outlook for Danish Non-Life Insurers to Dev

Claims inflation on liability policies in the Danish non-life insurance market looks set to put short-term stress on some companies’ solvency levels, Standard & Poor’s said, following a review of its insurer financial strength ratings in the market.

Reflecting the short-term volatility of the market, Standard & Poor’s has revised its outlook for Danish non-life insurers to developing from stable. The change in outlook indicates the possibility for change in some ratings in an environment that has long been stable, with premium income and claims growth both averaging about 3.2 percent per year over the past 10 years.

“A recent amendment to the Danish Liabilities for Damages Act, which is expected to result in a 70 percent-100 percent increase in claims on liability policies, promises a brief period of volatility for the market, as the tail from policies written before the change in the law is run off,” said Standard & Poor’s credit analyst Paul Oates. “Loss ratios on liability lines are already rising, although insurers are expected to increase liability premiums to pay for the increased claims cost over the long term.”

Although the liability claims tail is not expected to have a significant
impact on the solvency of most insurers, those companies that are heavily weighted toward liability policies in their business mix might feel an adverse impact. The pressure on the market will not be protracted, however. “Despite failing to recover to the 50 percent average seen prior to Windstorm Anatol in 1999, solvency levels (defined as net premiums written divided by net asset value)
marketwide remain strong, at an average 96 percent for 2001,” said Oates.

Meanwhile, the underlying stability of the market is further shored up by its underwriting performance, which has improved following the losses of Windstorm Anatol. This has been largely due to the lack of weather losses, but also to an effort to drive up premium rates in the wake of poor investment market returns. “Of the investment-grade rated entities in the market, seven reported combined ratios – a key indicator of profitability – at the 100 percent break-even level in 2001,” said Oates.

Nevertheless, Standard & Poor’s expects to see the number of companies reduce over the next decade. “With a population of just 5.3 million, Denmark is too small to sustain the 150 insurers currently writing non-life business in the region,” said Oates. “Consolidation will inevitably become a feature of the market, with the demise of some smaller unrated entities expected over the long term.”

With many insurers lacking the size to make them attractive as a takeover target by a major insurer, M&A activity is not expected to any significant degree. As the larger players refocus their efforts on domestic growth, rationalization or cooperation between the small mutual insurers is likely.

“As the market is rationalized, many of the smaller insurers in the
market will struggle, while their stronger competitors will benefit from
organic growth and improved earnings,” added Oates.