Analysts at Fitch Ratings have forecast that European life re/insurers’ earnings will be under pressure through 2021, due to the protracted low interest rate environment.
As a result of these low interest rates, investment margins will be reduced, making it difficult for insurers to finance policyholders’ liability with capital guarantees, the rating agency says.
Life insurers are typically exposed to interest rate risk through asset leverage and product guarantees.
However, low interest rates have led European life insurers to reduce sales of traditional savings contracts in favour of capital-light hybrid products, Fitch notes, which combine traditional savings with unit-linked product features and offer more remunerative returns to policyholders.
Additionally, analysts observed that the sudden onset of the pandemic led most European insurers to accelerate their corporate digitalisation plans.
While this streamlines operations and reduces costs for insurers, it also introduces a need for additional regulatory oversight and reporting requirements.
“Ultra-low interest rates in response to the coronavirus pandemic have added further pressure to European life insurers’ credit fundamentals,” commented Alberto Messina, Director at Fitch Ratings. “However, the pandemic has also accelerated pre-existing priorities, such as digitalising insurers’ operating models.”
Looking ahead, Fitch anticipates a continued shift away from traditional savings products towards hybrid products, which tend to be more appealing to insurers as they provide relief to insurers’ capital positions by transferring some market risk to the policyholders.
Additionally, hybrid products provide policyholder capital protection combined with some of the benefits of the market movements.
There is also likely to be continued caution over long-term pandemic risks, Fitch warns, with many European life insurers assessing whether long-term health consequences should result in imposing waiting periods for recovered Covid-19 patients who want to buy a life insurance policy.
Post-infection diseases include severe respiratory problems, organ damage, circulatory impairment and chronic fatigue, and the pandemic has also increased mental health issues, as well as aggravated substance-abuse issues.