Analysts at Fitch Ratings have warned that mass lapse risk remains a threat to European life insurers, although they argue that liquidity profiles are still sufficiently strong to withstand a moderate to significant rise in lapses even in the two most exposed markets, France and Italy.
Lapse risk typically applies to life insurance traditional savings products, which may include minimum guarantees to the policyholders, and can develop in response to interest rate rises or a deterioration in macroeconomic conditions, Fitch explains.
Lapsing a policy is the act of the policyholders withdrawing the policy value on savings business, meaning an insurer may need to sell the underlying assets it previously invested in at the time the policy premium was paid in order to reimburse policyholders.
In case the market value of the assets at the time insurers are required to sell them is below their book value, the insurer would realise a loss.
While Fitch does view mass lapse risk as a threat to insurers, it doesn’t believe the sector is exposed to the degree that banks might face ‘run risk’ in the current financial climate, where customers could lose confidence and withdraw their deposits.
“When it comes to savings, there are fundamental differences between the bank and the insurance business models,” analysts at Fitch explained.
“Life insurers have more stable liabilities due to the long-term nature of insurance savings products. This drives the underlying reasons why these products are bought as well as policyholders’ expectations, both of which significantly affect the ‘run risk’. In contrast, money is typically available on call in the case of most bank deposits and this liquidity is an important component in the utility of a deposit.”
Fitch sees lapse risk as particularly pronounced in the French market, where the so-called fonds euro savings product is exposed via a capital guarantee that can be redeemed at any time in full with no surrender penalty.
And in Italy, the gestione separata product has similar features and also has minimum guaranteed return for the policyholders.
But Fitch still sees risks as “remote” for these markets and notes that insurers are appear to be conscious of the potential issues surrounding these products and “have levers they can action” to mitigate the danger.
The rating agency does note that mass lapse reinsurance could be useful in supporting some insurers, in that it could lower the capital charge for lapse risk.
However, while some European life insurers have explored the possibility of acquiring mass lapse reinsurance, Fitch suggests it may not be economically suitable given that mass lapse is seen as a tailrisk by insurers.