Europe's life insurance sector had a £68bn black hole,with the UK accounting for£27bn at the end of 2002 although this has now been cut to £10bn in the UK, says strategy consultancy firm Mercer Oliver Wyman.
In its forthcoming report, Life at the End of the Tunnel? The Capital Crisis in the European Life Sector, the firm warns that the shortfall will dramatically affect life companies' ability to write some types of new business. It predicts a move towards the investment banking model, with financially strong insurers with global scale becoming the only ones able to offer capital-intensive products such as guarantees.
It says the economic capital techniques for measuring capital under EU directive Solvency II, expected to be implemented in 2007, created a deficit of £68bn at the end of 2002, with £27bn in the UK.
But head of global insurance practice and report author Anthony Stevens says this is now more likely to be £34bn-£41bn due to equity market rises and £10bn in the UK. This is based on firms achieving a BBB rating, which Stevens believes is the minimum nee-ded to be a viable life company.
He says: “The growth prospects for the industry are still extremely good. The restructuring might cause turbulence and uncertainty in the short term but survivors will emerge as stronger businesses.”