According to Moody’s, the profitability of European property and casualty (P&C) re/insurers will come under increasing pressure as interest rates are set to stay low for longer than previously expected amid the slowdown in global growth.
With government bond yields falling in 2020, P&C re/insurers are also being forced to reinvest maturing assets at rates below their investment yield, analysts noted.
This will pressure investment income in 2020 and beyond, with the impact set to be more immediate for the P&C sector than for life insurers.
P&C re/insurers generally have shorter asset duration and are unable to share losses with policyholders, and investment returns account for about 50% of their profits on average.
“Persistently low yields will erode the investment returns of P&C insurers, weighing on their profitability and, to a lesser extent, their solvency.” said Dominic Simpson, VP-Senior Credit Officer at Moody’s.
“At the same time, claims inflation has largely offset the P&C sector’s efforts to raise prices, casting doubt over the sustainability of current reserve releases, a key contributor to earnings.”
European P&C re/insurers have responded to low interest rates by assuming more investment risk, and Moody’s believes the quality of their corporate bond portfolios has deteriorated as the sector seeks out higher-yielding investment assets.
The rating agency expects companies will try to counter the negative impact of low interest rates on earnings by increasing prices for policy renewals.
However, it warned that raising prices further is difficult in mature, highly competitive western European markets.
Additionally, reduced motor claims as a result of the coronavirus outbreak will make it harder to justify price increases.
