"Although low interest rates remain one of the main credit challenges for life insurers globally, Moody's views the Italian market as only moderately exposed to low interest rates," said Benjamin Serra, VP Senior Credit Officer and the report's author.
"Italian life insurers are partly insulated from the low interest rate environment because their in-force traditional savings products have a relatively low and declining average guaranteed rate and include features that allow them to share the impact of declining investment returns with policyholders."
Moody's anticipates that low interest rates will generate only limited profitability risk, and no solvency risk, for Italian life insurers over the next 12 to 18 months. Sales of traditional guaranteed products are declining. However, Italian life insurers have been able to partly offset this decline through increased sales of unit-linked products, in which insurers carry no investment risk. Unit-linked sales have traditionally been correlated with financial markets, particularly equity markets, and have therefore been volatile. Moody's believes that a strengthening Italian economy and improving global macro-economic conditions will further support sales of unit-linked products over the next 12 to 18 months.
The Italian life insurance market's shift towards unit-linked business will also be supported by insurers' growing focus on selling hybrid products, mixing guaranteed and unit-linked components. Nonetheless, Moody's says that, since Italian life insurers' total new business volumes are declining, it will take time for this trend to materially strengthen their balance sheets. In the P&C sector, Moody's report highlights that Italian insurers' underwriting profit is likely to decline in 2017 and 2018, with their combined ratio (claims and costs as a percentage of premium income) rising by one to two percentage points each year. Prices in the key motor market continued to decrease in the first half of 2017 in Italy, although at a slower pace than in previous years. Moody's expects prices to fall by around 2% for the full year. Moody's believes that slowdown in prices decline will likely continue in 2018 as motor insurance has become unprofitable in Italy since 2016. Nonetheless, the rating agency also mentions that intense competition makes price increases challenging.
Moody's also anticipates that improvements in non-motor profits and increases in reserve releases, which have been key drivers of the good overall profitability of P&C insurers in the last three years, will come to a halt. Nonetheless, with combined ratios likely to remain strong at below 95% over the next 12-18 months, Moody's maintains a stable outlook for the sector. The Italian insurance sector is well-capitalized, with an average Solvency II ratio of 220%. However, this ratio does not take into account sovereign risk, which is material for Italian insurers given their large holdings of Italian sovereign bonds. Although insurers continue to diversify their asset portfolio by reducing their investments in sovereign bonds and increasing their investments in corporate bonds, Moody's believes that Italian insurers' asset exposure will continue to constrain their credit profiles.
Moody's report, "Insurance -- Italy: Outlook stable as unit-linked sales grow, P&C profit remains strong"
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