European life insurers are gradually shifting away from traditional guarantees towards more capital-light products, transferring part of the investment risk to policyholders, according to analysts at Fitch Ratings.
The rating agency noted that the shift is the result of the protracted low interest rate environment, which it sees as posing major challenges to insurance companies operating in the euro area.
Fitch says that extremely low rates across the eurozone are driving life insurers towards hybrid products, a combination of traditional savings and unit-linked features.
It believes that hybrids are more appealing to insurers than traditional guaranteed products as they support insurers’ capital requirements by transferring some market risk to the policyholders.
“Insurers have either stopped offering guarantees on new contracts or reduced the level of guarantees, but the shift towards capital-light products is slow to implement and legacy guarantees still make up most of the insurers’ technical liabilities,” the firm said.
According to Fitch, setting up sales restrictions on investment guarantees and focusing on products with lower capital requirements is credit positive.