Moody’s Investors Service reports that its outlook for the Belgian property and casualty (P&C) insurance sector looks bleak, with high inflation to push up claims and operating expenses, while intense competition could hinder industry efforts to push through counterbalancing price increases, particularly in the motor segment.
The rating agency concludes that the sector’s underwriting profitability is to deteriorate, partly offset by better investment returns.
Data shows that Belgian consumer prices rose at an annual rate of 10.4% in December 2022, which was one of the highest levels in Western Europe, and a recent report by Moody’s predicts that persistent inflation will weigh on P&C insurers’ claims and general expenses in 2023.
On the note of intense competition insurers will be able to absorb only part of the increase through higher prices. Motor insurance is predicted to be particularly vulnerable to inflation. Another factor that will weigh on Belgian P&C insurers’ profitability is their exposure to natural catastrophe risk and higher reinsurance prices. Positively, increasing interest rates will provide stronger investment returns and inflation will affect both claims and general expenses.
The report states the reason for this is the high level of inflation prevailing in Belgium which is driving up the cost of claims while the automatic wage indexation mechanism will also rapidly increase operating expenses for Belgian insurers.
According to the report, an inflationary increase in the cost of claims will likely decrease profitability in the leading P&C insurance lines, motor insurance and home insurance (also known as “fire insurance” in Belgium), these accounted for 55% of premiums in 2021.
Recently, the rising cost of vehicle spare parts has been the main driver of the increase in the average cost of claims. However, the cost of housing maintenance and repairs are currently rising even more quickly, increasing at an annual rate of 12% in late 2022.
According to Moody’s, since Belgium’s broker-driven insurance market is highly competitive, it makes it difficult for insurers to fully reflect claims inflation in their pricing. Distribution of P&C and other forms of non-life insurance relies heavily on nonexclusive broker networks, which accounted for 61% of insurance premiums in 2021. So far this proportion has been stable for a decade, and the report expects no change in the medium term, barring a potential slow increase in the market share of Belgian bancassurers.
“The reliance on nonexclusive brokers exacerbates competitive pressure in the P&C market, eroding insurers’ pricing power, and therefore their ability to absorb higher claims. The growth of bancassurers, driven by the willingness from banks to diversify their revenues, is also adding competitive pressures for traditional players.” Benjamin Serra, Senior Vice President of Moody’s Investors Services stated in the report.
Another factor according to the report, is the increase in natural catastrophe claims in 2021, which led to a sharp rise in Belgian P&C insurers’ combined ratios, with fire/home insurance contracts bearing the brunt of the deterioration. In 2022, the combined ratio on fire insurance contracts remained above 100% (102%) as catastrophe costs were still high during the year, driven by storms Eunice and Franklin in February 2022 that caused €573 million of insured losses.
The P&C sector also faces higher reinsurance costs while ongoing discussions with local and federal governments create uncertainties around insurers’ catastrophe claims burden.
The report states that capital remains strong, backed by conservative asset allocation, and surrender risk is limited. The Belgian life and P&C insurers’ solvency ratios are expected to remain solid in 2023, helped by higher interest rates after the turbulence of 2022. Although the sector has relatively high exposure to real estate, the sector’s very conservative investment portfolios will also support stability. The risk of mass lapse is also relatively limited in Belgium, finds Moody’s.
