European insurers are grappling with mounting challenges in maintaining profit margins, as premiums must increase significantly to offset surging costs, according to a recent analysis by Bloomberg Intelligence (BI). The report highlights that total costs soared to 10.9% of premiums in 2023, a sharp increase from 3.5% in 2022, primarily driven by inflation.
“The bulk of expenses are effectively fixed and being driven higher by inflation,” BI noted. In 2023, premium volumes rose by 7.5% on average, up from a 3.8% increase in 2022, following declines during the COVID-19 pandemic. Despite this growth, the industry faces a mixed recent performance, with costs rising faster than premiums once again.
Kevin Ryan, BI’s senior industry analyst for insurance, commented on the historical struggle within the industry. “The insurance industry historically has struggled with a fundamentally significant problem: costs rising faster than premiums. This puts constant pressure on underwriting margin.”
He explained that while the situation improved in 2018 and 2019, the trend reversed in 2023 with the implementation of IFRS 17, which has seen costs rise faster than premiums again.
In detail, BI’s analysis showed that total costs as a percentage of premiums climbed to 10.9% in 2023 from 3.5% in 2022, after a slight decrease of 0.3% in 2021. The introduction of IFRS 17 has altered the cost landscape, with costs generally higher in general insurance compared to life insurance under previous standards. For example, Aviva’s general insurance costs were 27.5% of premiums in 2023, down from 31.6% in 2022, whereas life insurance costs were 86.7% of revenue, up from 23.8% under IFRS 4 in 2022.
The report also revealed that across the 40 European life and general insurers analysed, the average total cost-to-net earned premium ratio rose to 29.3% in 2023 from 27.6% in 2022 and 27.8% in 2021. Specifically, acquisition costs for general insurance increased by 6% in 2023, compared to a 0.3% rise in 2022.
Ryan emphasised the significance of these findings. “This matters, because these expenses averaged 17.1% of net earned premiums. The general insurance segment seems to be under the most pressure.”
These cost ratios, Ryan explained, while not directly comparable due to varying approaches to cost allocation and different business models, highlight a critical area of focus for European insurers as they navigate the current economic landscape.
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