Fitch Ratings has revised its sector outlooks for French and German life insurance from stable to negative, citing the impact of ultra-low interest rates on capital, earnings, and business models.
Ratings for most insurers still remain stable, however, due to strong capital positions and ongoing efforts to reduce sensitivity to interest rates.
Long-term bond yields in Europe have fallen significantly in 2019 from already low levels, reducing the returns that life insurers can make when investing policyholders’ premiums or reinvesting maturing assets.
This has intensified the pressure on the profitability of savings contracts with built-in investment guarantees.
Fitch notes that this pressure has been particularly problematic in Germany, where guarantees run for many years, and in France, where insurers may struggle to attract customers to alternative products without guarantees.
Analysts argue that the decline in bond yields has limited insurers’ ability to cover policyholders’ guarantees solely from investment income, despite lower guarantees for newer contracts.
Lower investment yields weaken capital positions and earnings for insurers that write savings contracts with investment guarantees, and Fitch anticipates visible deterioration in the average Solvency II ratio of French and German insurers by the end of 2019.
For several years, life insurers in both countries have been shifting their new business mix away from traditional life insurance products with investment guarantees and towards unit-linked and hybrid products.
This has had the effect of gradually desensitising capital and earnings to interest rates, but the fall in bond yields has also increased the pressure for French companies to re-orient their product mix towards unit-linked products.
Fitch believes this shift will be difficult given the risk aversion of French savers, who have traditionally favoured products with investment guarantees.
As such, the rating agency believes the French life sector’s credit fundamentals could come under pressure if low interest rates persist and unit-linked products do not gain popularity with customers.
Elsewhere in Europe, Fitch’s Italian life sector outlook was already negative, reflecting insurers’ exposure to credit spreads on Italian government debt, and low interest rates add to capital pressure.
In contrast, Dutch and UK life sector outlooks are stable, as Fitch believes Dutch insurers have convincingly adapted their balance sheets and product mix to low interest rates, while UK business does not have significant interest rate risk.