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European Insurers Face Same Issues As Companies In The U.S.

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Solid results and stable ratings have European insurers channeling extra funds into acquisitions or capital initiatives, according to a recent report on the European market issued by Moody’s Investors Service, London.

The report notes that despite a few difficult years at the start of the decade, European insurers have rebounded and recently have actively pursued growth in far flung markets ranging from Central and Eastern Europe to India and China.

European insurers face some of the same trends that insurers in other parts of the world, such as the U.S., face, the report notes. For instance, it says that a demographic change will affect the risk profile of life insurers and longevity risk is also increasing because of longer life spans.

Dominic Simpson, senior credit officer with Moody’s in London, says there are trends that parallel what is going on in other parts of the world. For instance, he says, longevity risk is impacting annuity business. “Longevity risk is a global issue,” he continues.

This risk is also noted in a report on the Austrian insurance market issued by the Frankfurt office of Standard & Poor’s Corp. While risk for Austrian life insurers is considered moderate and the business outlook is favorable, the report states that longevity is a risk faced by these companies.

In Germany, according to an S&P report, the life insurance market is saturated with little room for growth, although it also notes that the level of concentration for individual companies remained largely stable between 1995 and 2005.

One company that says it is actively pursuing some of these trends, such as global growth and trying to address consumers’ concerns about living too long, is Aviva plc, London.

Aviva’s management team says the U.S. is a key part in its plan to become a global player and that fixed indexed annuities are a key part of establishing itself in the U.S.

“We are now very firmly classed as being international and are well on our way to being global,” Andrew Moss, Aviva’s group chief executive said during a recent briefing on the company’s plans.

For the first half of 2000, according to the company, 58% of ?12.8 billion in sales were from the United Kingdom, 33% from Europe, and 9% from North America. Asia Pacific and North America will have a bigger share of sales in 2007, according to the company which anticipates that the breakout for ?24.7 billion in half-year results will be: 42%, United Kingdom; 40%, Europe; 10%, North America; and 8%, Asia Pacific.

Targets cited by the company include a minimum 10% per annum average growth in new business sales and profits to 2010 in Europe; a minimum 20% per annum average growth in new business sales to 2010 in the Asia Pacific region and growth in the U.K. that is at least as fast as the market.

In North America, Aviva says it is hoping to double the volume of new business sales within three years of acquisition, while maintaining margins.

There are several actions Aviva plans to take to realize this goal, according to Tom Godlasky, chief executive of Aviva North America. The operation is shifting from its AmerUs Group brand name to the Aviva name and will add financial institutions to its distribution along with its independent agent distribution system, he adds.

And the sale of its indexed annuity product fits in well, Godlasky says, with the income planning needs of the baby boomer market as it approaches retirement.

As part of the effort to ensure that product is sold correctly and that the market can grow, Godlasky says Aviva has set up a new compliance program that includes auditing roughly 40% of the 60,000 contracts issued annually. That audit includes asking prospective clients questions such as whether they understood what they were about to purchase and whether they understand what the surrender charge schedule means.

When asked what would be a ‘red flag,’ Godlasky cited warning signs including a large amount of net worth represented in a contract and the degree of liquidity potential contract holders would have after entering into a contract.

If Aviva does not have comfort with the way an agent is making a sale, Godlasky says the relationship is terminated.

In fact, according to Godlasky, Aviva has been working with Iowa regulators to ensure better suitability for these products.

Commissions for these types of products, he continues, are gradually being lowered because of reduced issue ages and shorter surrender charge periods. A total of 75% of new business is 10 years or under and the agent street level commission is approximately 8%, he said. Commissions for products sold through banks are typically 1% for each year of surrender charge, Godlasky continued.

If the trend is to sell a fixed indexed annuity with shorter terms, then a company wants to make sure that contracts stay on the books, he said


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