Moody’s outlook for the European insurance sector in 2020 is negative, reflecting growing profitability and solvency pressures due to low interest rates, macroeconomic uncertainty, and rising environment, social and governance (ESG) risk.
Analysts believe that low interest rates have weakened insurers’ Solvency II ratios in 2019, with many experiencing declines of 10 to 20 percentage points, reducing their ability to absorb further shocks in 2020.
“Interest rates will stay lower for longer, weighing on the solvency and profits of both life and P&C insurers over the coming year and incentivizing them to take more asset risk,” said Benjamin Serra, a Moody’s Senior Vice President.
Moody’s also expects a decrease in investment yields of 15-40 basis points for property and casualty (P&C) insurers, leading to a 3% to 8% decline in profits in 2020.
Similarly, life insurers’ investment returns will fall by 10-30bps annually for several years, but the profitability impact will be more muted as they pass on most of the decline to policyholders through reductions in credited rates.
Volatile financial markets could also make it harder for insurers to increase sales of low-risk unit-linked products to shift their business mix, Moody’s noted.
In addition, a growing volume of consumer-friendly legislation is likely to further limit insurers’ margins, while the 2020 Solvency II review may result in a moderate increase in capital requirements, adding pressure to solvency ratios already weakened by low rates.
Moody’s has also changed the outlooks for the French insurance and the Dutch insurance sectors to negative, reflecting pressures from low interest rates on life and P&C players in these countries. The outlook for the German life insurance sector remains negative.
