The European Central Bank’s (ECB) decision to continue its accommodative monetary policy is expected to further prolong low-yield investment conditions in Europe, according to S&P Global Ratings.
The rating agency said the continuation of the policy will signal a macroeconomic softening, and is highlighted as one of the key risks for European re/insurers in the firm’s EMEA outlook for 2019.
S&P does not expect to take rating actions on any European re/insurers as a direct result of the ECB’s decision, although it is likely to impact investment returns for all companies, especially life insurers with a focus on Europe.
The ECB will delay rate hikes and prolong its quantitative easing program, while continuing to reinvest in its asset purchasing program and implementing a third round of longer-term refinancing operations (TLTROs).
In combination, these measures will likely keep interest rates and investment yields low for longer, analysts explained.
S&P noted that re/insurers have been preparing for this risk over the last decade by lowering guarantee rates on new products and shifting investment allocations, as well as diversifying their risk profiles away from rate-sensitive business lines to reduce reliance on investment yields.
However, shifting the business mix is a slow process and, given the already relatively low guarantee levels, insurers have little room to reduce guarantee rates further without eroding competitiveness, S&P said.
The firm expects non-life business to remain profitable in 2019 provided re/insurers continue to focus on underwriting returns in the current environment.
It observed that average combined ratios have been strong in Europe in recent years, and noted that re/insurers have tried to ensure profitability by concentrating on pricing and reducing expenses.
Although the ECB’s accommodative monetary policy helps to ensure favourable financing conditions for insurers, S&P expects issuance levels to continue to decline, in line with trends over recent years.
