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The Actuary The magazine of the Institute & Faculty of Actuaries

Life in Europe will not be easy

The European life insurance industry must make some very tough decisions or have them made for it, and quickly, if it is to take advantage of the huge growth opportunities offered by economic growth, financial deepening, and demographic changes in the region. Life companies must face up to a capital shortfall of up to _100bn (£70bn) between the statutory minimum and what is economically required, and find ways of eradicating it. They must tackle this funding gap by raising fresh capital, derisking their businesses, and, above all, consolidating and restructuring. The alternative is a sustained period of stagnation and long-term decline for the sector and a deepening of Europe’s growing long-term savings and pensions conundrum.

These are some of the key conclusions of a report published this month by Mercer Consulting entitled ‘Life at the end of the tunnel? The capital crisis in the European life sector’. Mercer continues to be very positive about the future prospects of the life sector. ‘The growth prospects of life insurance are still extremely strong. A combination of continued economic growth, financial deepening and demographic changes is likely to lead to above-GDP growth rates for the life insurance markets, even without taking into account the potential effects of pension deregulation,’ states the report.

The consulting firm forecasts that between 2004 and 2020 medium and long-term savings markets, including individual life and pensions and occupational pensions, will grow at an annual rate of some 7.5%. This is 4% higher than the predicted annual growth in flows into cash and bank deposits. Hoped-for pension reform in France, Italy, and Germany could provide an extra 2% boost to annual growth. ‘This suggests there are enormous growth opportunities for life insurers that are able to tap into this source of assets,’ states the report. But the big question, according to Mercer, is whether the currently battered and bruised group of European life companies are up to the challenge, and whether they can raise profitability and provide the capital to support that potential growth. The consulting firm says it does not have a chance if it does not tackle the capital issue and remove the _100bn gap that currently exists. Mercer’s gap is essentially the difference between the solvency capital that is required by the regulators and economic capital.