Announcing an unemployment rate that could now top 27% and an untamed public deficit of over 6% of output, the news from the Bank of Spain last week could hardly have been more gloomy. Declining retail sales of 10% in January suggests consumer confidence remains weak. Worse still, recovering investor sentiment looks set to falter following the Cyprus bailout fiasco. Analysts are forecasting GDP to fall by 2.2% this year and 2.1% in 2014. There are few signs that Spain will emerge from the grips of recession anytime soon.
Unexpectedly, therefore, when the industry met in Madrid for its annual insurance week, Semana Del Seguro, the mood was far from downcast. Just like everything else in Spain, the insurance sector motored ahead over the first decade of this century; doubling in size to 2008. Retreating only modestly since then the non-life market premium volume has stabilised around the EUR 31 billion mark over the past three years. Most insurers remain solvent; the stronger ones are making inroads into the health and retirement sectors as the state transfers to the private sector its burden.
Demand has been surprisingly resilient and despite an over-supply of capacity, Spanish insurers have remained profitable. The non-life market has been registering combined ratios around the 93% mark since the financial crisis hit and judging by the third quarter 2012 results just released, a small improving trend could even be evident. The conventional wisdom is that insurers suffer in a recession as businesses cut corners on health and safety and some fabricate or exaggerate claims. All the more remarkable therefore that in Spain where economic conditions are as bleak as it gets, insurance continues to make money.
Out of necessity large Spanish businesses like Telfonica, Inditex, Repsol, Ferrovial and Santander have become more internationally orientated and so have probably adopted higher risk management standards in the process. Accustomed now to far stricter building controls and benefiting from improved infrastructure, Spanish firms of today compared to their predecessors are more cognisant of modern loss prevention techniques. At least these were some of the factors put forward by delegates at Semana Del Seguro to explain the good claims experience.
Whether these theories are true or not, what is happening in Spain suggests that our preconceptions of how insurance behaves in a downturn may need rethinking: profitability is perhaps less sensitive than we may have expected to the broader economic peaks and troughs that affect most other areas of business. Unfortunately the regulators’ obsession with semi-theoretical financial meltdown scenarios could mean that much needed research on how our industry reacts to more commonly encountered economic pressures may have to wait.