A recent Moody’s Investors Service report states that its outlook for the Belgian life insurance sector remains stable. The report suggests that higher interest rates will support insurers’ investment returns while the industry’s risk profile will continue to improve. This could offset a weakening in demand for life products amid low economic growth.
“Belgian life insurers will benefit in 2023 from better investment margins thanks to rising interest rates, a continued decline in guaranteed rates of return on savings policies, and good asset-liability management. The sector will also continue to promote sales of unit-linked policies, despite a slowdown in demand in 2022 due to volatile markets.” Benjamin Serra, Senior Vice President of Moody’s Investors Services stated in the report.
These factors will play a role in mitigating the negative effects of slower GDP growth and geopolitical uncertainty on life insurance demand as well as the negative impacts of inflation on insurers’ expenses.
The report finds that higher rates will gradually increase Belgian life insurers’ investment returns while the average guaranteed rate of return on their life savings products will continue to decrease. The insurance sector will continue to actively promote unit-linked savings policies, despite muted clients’ appetite for these products because of volatile financial markets. These factors will help offset the negative impact of slowing economic growth and geopolitical uncertainty on insurance demand.
In 2021, low-interest rates and rising valuations across most asset classes led to strong sales of unit-linked (“Branche 23”) products, these rose 17% to €4.2 billion (individual and group contracts). Higher market volatility in 2022 led to a decrease in inflows on Branche 23, down by 10% to €3.4 billion, whereas “Branche 21” (guaranteed rates contracts) continued to grow (+5% to €6 billion). However, since 2020, unit-linked revenues have been more resilient against market volatility than in the past, and Moody’s expect their share of total life revenues to remain strong in 2023.
The report suggests that the Belgian life premiums (excluding health) recovered well from the pandemic in 2021 with a growth of 4%, exceeding the annual average for 2014-2020. Although they remained below 2019 levels of almost €16 billion which were the highest since 2016. The demand for life insurance however slowed down in 2022. Premiums were down -0.9% compared to 2021, and will likely remain subdued in 2023 given the expected slower GDP growth and macroeconomic uncertainties, according to the report.
The report provides insight into how Belgian insurers have managed over the last decade steadily reduced the guaranteed rates they offer to customers with savings policies. Moody’s concluded that they have achieved this in part by buying back older contracts that offered the highest guaranteed rates. This has limited the Belgian insurers’ exposure to interest rate risk.
According to the data provided by the report, in 2021, Belgian life insurers’ average guaranteed rate was approximately 1.9%. While the gap between the guaranteed rate and the sector’s average return on invested assets (excluding unrealized gains) was stable at approximately 100 basis points. The reason for this as the report states are that this gap widened slightly in 2022 as average guaranteed rates continued to decrease and as rising interest rates strengthened, or at least reduced the pace of decline of, the yield on financial assets. This trend is to continue in 2023. The size of the gap varies between individual and group products, which had average guaranteed rates at YE2021 of around 1.8% and 2.1% respectively.
This increased gap between insurers’ investment returns and their guaranteed rate contributes to improving the risk profile of the industry, which according to the report is a key driver for a stable outlook for the Belgian life market.
Along with this, higher investment returns will also help insurers to offset the negative impacts of inflation on their expenses.
