The economic fallout from Russia’s invasion of Ukraine and the energy crisis that the world is facing looks as likely to erode insurers’ capital in 2022 as the Covid-19 pandemic did in 2020.
That is according to new research by S&P Global Ratings, which has published EMEA Insurance Mid-Year Outlook 2022: In the Eye of the Perfect Storm.
The authors of the report wrote: “Insurers’ capital surplus protects against investment market volatility, currently at an average 9% redundancy on the ‘AA’ level, which may erode during 2022.”
S&P write that the current situation is affecting non-life insurers, who are seeing a short-term rise in claims costs alongside increased premium rates, and insurers, mainly those on the life side, who are losing unrealised gains while benefitting from rising reinvestment rates.
Elsewhere, the authors wrote: “The COVID-19 pandemic created the perfect storm to stress test EMEA insurers in 2020. It resulted in significant capital surplus erosion, which has been almost fully recovered, to €73.7bn.”
It added: “The fallout might be similar in 2022—European insurers have been hit by the drop in equity and bond markets overall as the capital requirement for asset risks reduced; capital recognition of unrealised gains diminished; recognition of discounting undiscounted non-life reserves increased with rising rates; life-embedded value recognition rose, reflected in our view of capital, however we do not consider fluctuation in life bonds; and private equity and private debt, and other less liquid assets, have become a source of default risk.”
The firm also said that EMEA insurers have so far proven resilient against the geopolitical turmoil caused by the Russia/Ukraine war—and the resulting uncertainty around energy supply—and China-based supply chain issues affecting manufacturing. These, it added, had impacted European countries’ GDP, consumer price indices, and long-term rates. Meanwhile, insurers’ capital surplus protects against investment market volatility, currently at an average 9% redundancy on the ‘AA’ level, which may erode during 2022.
It went on to add that rising inflation and long-term interest rates and depressed capital markets are affecting insurers in the following ways:
- Non-life insurers see a short-term rise in claims costs and increased premium rates. We do not expect margins to erode materially or competition to increase.
- Insurers, mainly life, are losing unrealized gains, but benefit from rising reinvestment rates.
- Of the EMEA insurers that we rate, 90% have a stable outlook; the robustness of rated insurers in EMEA will be tested in the coming months.
