Analysts at S&P Global Ratings note in a new report that EMEA insurers are facing a “perfect storm” of capital market volatility, recessionary risks and heightened inflation, even as rising interest rates support investment income.
But Credit Analyst Volker Kudszus notes that these risks are not expected to “fundamentally question business positions in 2023,” due to strong operating performances in this sector.
That said, S&P continues to maintain a negative view of the EMEA reinsurance subsector, as premium rate increases might match inflation but be insufficient to strengthen profitability.
Across the broader EMEA property and casualty (P&C) space, S&P generally expects technical margins to persist, highlighting business model resilience, although heightened inflation will require some reserve additions, mainly in long-tail lines like casualty.
Overall, analysts only anticipate a slight hit to earnings, but geopolitical risks will also depress GDP growth and subsequently gross written premiums.
Rising reinvestment rates should also help to cushion heightened capital market risks, and unrealized losses on shortduration bond investments are expected to pull to par.
Meanwhile, for life insurers, higher reinvestment rates should also support the sector, although illiquid investments in private credit and private equity might lead to some impairments in 2023, as refinancing costs for corporates rise and recessionary risks prevail, S&P warns.
It also expects to see increasing pressure from policyholders to increase crediting rates because of rising interest rates, despite overall volatile capital markets, and some headwinds to the push into capital-light products in some markets.
Major external factors that could influence the outlook for the EMEA insurance sector include Russian threats to escalate and broaden out the conflict in Ukraine, S&P suggests, as well as financing conditions become overly restrictive as ECB front-loads monetary policy tightening.
The rating agency also flagged growing recession risks from slowing growth in the US and China, costly energy market interventions in the EU and UK, heightened disruptions from physical and transition risks from climate change, and mounting cyber attack risks from geopolitical tensions and increasing digitalization.