Low interest rates and investment returns, low business volumes and more onerous capital requirements all mean that the Eurozone insurance industry is not expected to return to profitability until 2015 at the earliest, Ernst & Young said today.
In its latest Eurozone financial services forecast, the consultancy said the interplay between these factors was preventing a quicker return to pre-crisis profitability levels, which are measured according to the industry's net operating surplus.
The relationship between historically low interest rates and capital requirements being implemented under Solvency II are a 'particular problem' for the industry, it said.
Life insurers in the single currency bloc face an additional gap to plug between low investment returns and the higher return guarantees they often have embedded in existing products.
Andy Baldwin, leader of financial services for Europe, Middle East, India and Africa at Ernst & Young, said: 'Insurers are struggling to fund products sold in better times. The dividends customers expect from products sold with guaranteed returns cannot be matched by the investment returns available to insurers now or in the foreseeable future.'
The higher capital requirements of the imminent Solvency II regime will compound the situation, he added.
'The challenge for insurers will be funding the gap on the existing book while directly customers to products with fewer guarantees and inevitably a more volatile return profile at a time when customers want capital preservation and certainty of return, not more volatility.'
In order to bridge the gap, insurers are looking to optimise their asset class mix. 'The irony is that some of the best returns are probably available from selected sovereign debt - precisely the asset class many regulators want insurers to reduce their exposure to,' Mr Baldwin added.
Ernst & Young also forecast an increase of just 1.4% in assets under management this year. Last year the value of assets managed by the Eurozone asset management industry fell by over 7%, largely due to a 12% fall in fund of fund assets and a 16% fall in equity assets.
AUM recovered in the first quarter of 2012, but then 'probably' fell again in the second quarter as another phase of the eurozone debt crisis depressed equity markets and increased yields on peripheral bonds. Ernst & Young now does not expect the losses of AUM to be recovered this year
Marie Diron, economic adviser to the E&Y Eurozone financial services forecast, said: 'Investor caution is likely to bolster flows into multi-asset and absolute return funds in the short term but the rising requirements for funding pensions suggests that pensions could absorb more than 50% of the increase in savings flow over the next 20-30 years.
'Pension funds could therefore expand toward 50% of retail funds under management.'