A new report by Moody’s highlights that European life insurers are at risk of significant unrealised losses on their bond portfolios due to higher interest rates.
The risk of mass savings policy lapses, if customers switch to higher-yielding bank products, could force insurers to sell bonds at a loss, Moody’s said in a report.
The report ranks European markets according to their exposure to lapse risk based on four factors: insurers’ business mix, competition from higher-yielding savings products, distribution strategy, and asset/liability management. Insurers’ exposure to surrender risk varies by country and by issuer.
Insurers that sell traditional savings policies without mechanisms such as market value adjustments or large surrender penalties are most exposed, as are those with low guaranteed returns and low remuneration to policyholders.
Companies with a high weight of long-duration fixed income securities in their asset portfolio also report the highest level of unrealised losses.
French and Italian insurers are more vulnerable due to low surrender penalties, while German and Swiss insurers have higher penalties in place, the rating agency noted.
Banks in most European countries offer no yield advantage, limiting the incentives for policyholders to switch. However, competition is increasing in all countries, and insurers with proprietary distribution channels and shorter asset duration are better protected.
Insurers in France, Italy, Switzerland, and Norway have proprietary distribution channels and shorter asset duration, providing protection from asset losses.
“The overall risk of higher lapses remains low in most countries, notably because the level of competition with banks remains moderate,” Moody’s noted.
“Nonetheless, in the most exposed countries, the risk of realisation of losses is limited thanks to a low asset duration or an ALM approach that provides insurers with recurring strong liquidity flows.”
