In a new report, Fitch Ratings has warned that insurance sector outlooks in several markets across the world could move to deteriorating if both high inflation and rising interest rates continue to persist beyond the rating agency’s latest forecasts.
Analysts have analysed the potential impact of a conservative economic scenario with mid-to-high single-digit inflation throughout 2023 in most regions, together with escalating US and European interest rates.
The scenario, would be likely to trigger deteriorating sector outlooks for many insurance markets in 2023, and some weaker insurers could potentially wind up facing negative rating actions.
Moreover, non-life insurance sectors would usually be the most exposed under the scenario, particularly those with a high proportion of long-tail business where higher-than-anticipated claims inflation could lead to reserve deficiencies.
At the same time, high inflation potentially may also lead to margin pressure for short-tail business in markets where both strong competition and societal pressure limit insurers’ ability to increase prices.
Non-life insurance companies that already have weak reserving levels or lack pricing power would be most at risk of negative rating action due to the adverse impact of claims inflation on margins and capital.
Furthermore, life sectors with large books of spread-based business, backed by assets of shorter duration than liabilities would be net beneficiaries from rising interest rates.
Fitch stated that it would expect the positive effects on capital and medium-term earnings to offset the negative short-term effects of increased investment volatility, higher lapse rates and lower new business volumes.
Meanwhile, at this year’s 2022 annual briefings in Monte Carlo, analysts at Goldman Sachs highlighted that there is a strong demand for reinsurance amid higher inflation, while capital supply is flat to down.