European life insurers have been responding to challenges of persistently low-interest rates squeezing already tight margins and making it difficult to cover rising capital requirements from prudential regulation by rethinking their product offerings to less capital-intensive products, according to S&P.
As insurers combat tough market conditions, they’re shifting toward “capital-light” products, such as unit-linked (UL) products or products with lower or no guarantees, in an attempt to consume less of the required capital holdings under Solvency II regulations.
And while this may help reduce product risk, S&P analysts called attention to obstacles in the way of the shift that are likely to hinder the sought-after transition to a less capital-intensive product model; “while life insurers can theoretically adjust their product offering relatively swiftly, market dynamics, as well as policyholder needs and expectations, may slow the uptake of capital-light products.
“What’s more, life insurers’ heavy back books, which are embedded with guarantees, will continue to weigh insurers down. Reducing their product risk will be like trying to turn around a supertanker–slow going. It will likely be years, or even decades before insurers see product moves translate into technical provisions with reduced guarantees in their back books and stronger risk profiles. For some insurers, this payoff might come too late.”
Although life insurance markets within Europe are taking various approaches to adapting their product strategies to meet the challenges and demands of the future, reducing exposure to earnings volatility stemming from inherent product features is likely to be a challenging long-term game.
S&P warned that for some insurers, seeing the pay-offs of this product shift could come too late, however, the tenacious could be rewarded with more efficient products and capital deployment.