Moody’s outlook remains stable for the European life insurance sector and negative for the property and casualty (P&C) sector, unchanged from the previous year.
Analysts at Moody’s have suggested that rising interest rates will support life insurers’ profit margins and capital, though sales could decrease as the economy slows.
The firm noted, “Interest rates are rising rapidly across many major European economies, allowing insurers to invest at higher yields. This is positive for life insurers because it reduces the earnings and capital risk associated with traditional savings products promising guaranteed rates of return to policyholders.”
The rating agency added that life insurers may also face mounting balance sheet risks, with corporate defaults accelerating and higher rates driving up surrender risk and pressuring fixed-income asset values.
The firm explained that between 2008 and 2021, low interest rates led to a steady decline in life insurers’ investment returns, increasing the risk that they might drop below the average minimum guaranteed rate promised to customers.
Life insurers responded to the prolonged low interest rate environment by switching to savings products offering lower guaranteed returns, or to unit linked policies, which leave investment risk with the customer.
This, combined with the run-off of older policies, gradually reduced the average guaranteed rate offered to policyholders, said the analysts.
Life insurers also sought to accelerate this shift by selling older policy portfolios to private equity firms.
The analysts write, “The decline in life insurers’ investment returns could start to reverse gradually in some European markets during 2023, helped by last year’s rapid rise in rates.
“Nevertheless, spreads will remain narrow, and insurers will need to continue managing interest rate risk, for example through increased sales of unit linked savings products.
“As a result, products that do not depend on a spread between investment yields and customer returns, such as protection policies, are becoming more significant earnings drivers for life insurers.”
Moody’s does not expect the industry to resume sales of savings products with high guaranteed rates, though it noted that higher interest rates enhance the appeal of spread/hybrid products, which also allow insurers to differentiate themselves from banks and asset managers.
Life insurers may therefore launch updated, less risky, versions of spread-based products, such as capital guaranteed policies, or negative guaranteed products of the kind sold in France.
Moody’s concluded, “Positively, life insurers are not exposed to inflation in the same way as P&C insurers. Since their policyholder obligations are typically set at the inception of the contract, the final payout is lower in real terms in an inflationary environment.
“However, persistently high inflation increases the risk of a recession, which could reduce new business sales and increase policy surrender rates and lapses.”
