The European general insurance sector is approaching a critical time which will “severely test” individual companies and the industry as a whole, according to a new report by AM Best.

The ratings agency says a culmination of economic, regulatory and market forces are challenging the industry. It blames the ongoing recession and financial volatility in many countries, issues surrounding meeting the changing solvency and accounting rules, and the persistent soft market.

The report says underwriting results show “growing tension” between deteriorating loss experience and resistance by markets to price increases, while “stubbornly low” interest rates are also placing pressure on insurers’ results.

“Rates are moving modestly upwards in a few lines, but overall the pricing environment remains flat to declining,” the report says.

In terms of regulation, it says the delays in the implementation of Solvency II mean that uncertainty persists around the costs of the changes.

Slow-moving implementation has “been costly already and promises to further strain insurers with its potentially stricter risk-based capital requirements”.