While rising, but still low, interest rates will continue to be a headwind to profitability, life and property and casualty (P&C) insurers will adapt their products and maintain underwriting discipline.
The report, "Insurance -- Europe: 2018 outlook stable as economic growth, financial stability and underwriting discipline partly offset low rates," is now available. The research is an update to the markets and does not constitute a rating action.
"Favorable trends, such as economic growth and a low risk of financial markets disruption will be supportive for the P&C and life insurance businesses," said Benjamin Serra, a Vice President and Senior Credit Officer at Moody's. Moody's expects interest rates to normalize gradually in Europe. "However, insurers will continue to face headwinds from still low interest rates which will pull down their investment income," said Serra.
In order to adapt to the low rates environment, European life insurers are changing their products, notably by increasing the proportion of unit-linked business in their new business mix, a trend that will continue in the next 12 to 18 months. Nonetheless, Moody's expects this strategy to constrain sales volumes. In addition, lower guarantees, coupled with reducing tax advantages, expose European life insurers to more competition from other savings providers such as banks and asset managers. Moody's also expects P&C insurers to remain disciplined in their underwriting, notably by increasing prices. However, tough competition in most markets will curb their ability to fully offset claims inflation.
In addition, insurers will continue to reduce costs, for example by leveraging new technology. Other levers that insurers will activate to offset the pressure from low interest rates include in-force management and changes to their asset mix. Moody's expects closed-book consolidation to gain ground. Nonetheless, the risky nature of liabilities in Germany or in the Netherlands will continue to make such consolidation challenging in these countries.
According to Moody's, solvency pressures are high on some life insurers in Germany where about one third of life insurers have a Solvency II ratio below 100% without transitional measures. Insurers will continue to increase their investments in illiquid assets but the limited supply of good quality assets will mean the change in insurers' asset mix will be gradual. Moody's has identified a number of factors that could pose downside risks to insurers.
Geopolitical risks, such as Brexit and tensions over North Korea, could affect economic growth and create volatility in financial markets and thus impact insurers. Also, the profitability of European insurers would further decline if interest rates do not rise as expected, while a sharp increase in rates would expose insurers to risk of lapsation. Technological changes could disrupt insurers' business models. Finally, climate change could increase the frequency and severity of P&C claims.
|
