Europe Braces for Financial Quake

LONDON, Oct 06, 2008 (A. M. Best via COMTEX) -- AIG | Quote | Chart | News | PowerRating -- The ongoing credit crisis that has gripped Washington and Wall Street and nearly wrecked American International Group is gaining ground in Europe, where another government bailout -- that of Dutch-Belgian financial services group Fortis -- shook European confidence in the financial services sector.

Since the Sept. 15 announcement that investment bank Lehman Bros. was going under, the global financial world has been shuddering under one shock after another, with Merrill Lynch coming close to the brink and AIG having to be bailed out by the U.S. government.

European companies such as Swiss Re and Munich Re have stated their potential investment exposure to some of these companies. However, in the wake of the initial failure of the U.S. House of Representatives to pass a $700 billion (506.2 billion euro) financial stabilization plan, stock markets all over the world continued to see wide swings in a broadly downward direction.

These fluctuations may have been one of the reasons why Fortis had to be bailed out by the governments of Belgium, Netherlands and Luxembourg on Sept. 29, to the tune of 11.2 billion euros. Just before the bailout, the share price of Fortis saw substantial swings as the company was forced to issue repeated statements saying rumors that it was in trouble were incorrect. Despite this government intervention became inevitable.

?What is happening in the U.S. is key,? Graham Fulcher, senior consultant at Watson Wyatt, told BestWeek Europe. ?Serious and systematic problems need serious and systematic solutions. The level of contagion in the markets requires strategic solutions, not tactical ones. The contagion started from the U.S. so the rebuilding of the financial architecture needs to start there too.?

According to Fulcher, ?If we have a global economic slump, it will be bad for everyone, particularly the insurance industry, which would suffer increased claims from high inflation, economic slowdown and financial market dislocation. Further, insurance is a financial services industry and London is still the hub of the global insurance community. Any break-down in globalization and free markets is going to be bad for London."

He said the big European insurers and reinsurers write their business on a pan-global basis and would not want to see any switch to retrenchment by countries and trade barriers going up. "As for the smaller players in Europe, they might see opportunities if some of the bigger companies are unable to compete on the same basis as before, but if that is as the result of the global economic slump then the downside risks are greater than the upside benefit.?

The Fortis deal effectively made the governments of Belgium, Netherlands and Luxembourg major shareholders of those parts of Fortis in each country. The price tag attached was a hefty one, with Fortis announcing plans to sell off its ABN Amro subsidiary and then casting doubt on the viability of its asset management deal with China?s Ping An Insurance Co. Ltd. (BestWire, Oct. 2, 2008).

Representatives of the European insurance market insist insurers and reinsurers will be fine, and that European regulatory standards are up to the task of protecting the market.

?While it is obviously still too early to learn definitive lessons from the current problems in the world?s financial markets, one message is clear: a piecemeal approach to the supervision of large financial groups does not work,? said Michaela Koller, director general of the CEA, in a statement released on the economic situation. ?Regulatory and supervisory regimes must reflect the risk and capital management of the entities they oversee."

Koller said "this is crisis prevention, pure and simple." She said the future Solvency II regulatory regime must be able to identify the consolidated exposures of insurance groups and supervisors should be able to act in cooperation. "If Europe?s insurers are to be encouraged to develop internationally, European regulatory and supervisory approaches cannot lag behind.?

The CEA pointed out that it has long argued that appropriate group supervision ultimately increases policyholder protection and at the same time facilitates the optimum allocation of capital.

According to the Dutch insurers association the NVV, both the Dutch and the European insurance market are generally secure. The NVV said while it could not comment on the case of individual companies like Fortis, insurers as a whole in the area were in relatively good shape, thanks to strict European and Dutch legislation that lays down rules on solvency and reserving.

?So far the credit crisis has had a limited impact on the insurance line in the Netherlands,? the NVV said in a statement. ?Moreover Dutch insurers are cooperating in the introduction of the Solvency II regime in the European Union, with which the risk management of insurers will get a new pulse. Crises like the current one in the United States will be caught in time thanks to the assistance that Solvency II offers.?

Although Solvency II is still in the early planning stages, regulation certainly does seem to be the topic of the hour, both in the United States and in Europe. At an emergency meeting on Sept. 30 at the Élysée Palace between the French President, Prime Minister and Minister for the Economy, Industry and Employment, as well as leaders of French banks and insurance companies, President Nicholas Sarkozy said that the French Government has announced that it would announce new guidelines for banks and the financial industry by Oct. 3, 2008.

(By Marc Jones, London news editor: marc.jones@ambest.com)

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