Analysts at Moody’s believe that coronavirus-induced volatility in the financial markets could erode the capital of EMEA insurers in the short term, with low interest rates also set to add pressure over the coming quarters.
A recent heat map produced by the rating agency identified these two factors as the key risks facing insurers in the EMEA region over the next 12 to 18 months.
Moody’s noted that the most vulnerable insurers will likely be those with the greatest dependence on savings policies that offer high guaranteed returns.
While the sector continues to respond by refocusing on less interest rate-sensitive products, analysts believe that sluggish growth and market volatility will make this more challenging.
“Recent significant financial market fluctuation driven by the coronavirus outbreak will erode insurers capital in the short-term,” said Helena Kingsley-Tomkins, an AVP analyst at Moody’s Investors Service.
“Low interest rates, with bond yields dropping to record lows in March, will further pressure European insurers’ profitability and economic solvency over the coming quarters.”
Moody’s observed that the credit quality of EMEA insurers’ investment portfolios remains good, and suggested that insurers may turn to cash as macroeconomic uncertainty increases investment risks, including the risk of a rise in European corporate default rates.
Higher default rates would affect insurers solvency ratios, although analysts are confident that the industry has the capacity to absorb moderate shocks.
In the long term, Moody’s expects a slow and steady migration towards lower quality assets, as well as moderate growth in illiquid assets in insurers’ investment portfolios, as insurers seek to boost returns by investing in riskier assets.
As an additional factor, insurers are also dealing with the impact of disruptive technologies and environmental, social and governance (ESG) risks.
While they have been limited to date, Moody’s sees these considerations as more important drivers of credit risk in the medium term.