Global financial services ratings agency, Moody’s Investors Service, has maintained its stable outlook on the European insurance industry in light of the expectation of gradually rising interest rates and still solid economic growth.
Despite its still stable outlook for the sector, Moody’s does warn that the prospect of more merger and acquisition (M&A) activity and continued changes in asset mix does create risks for the insurance industry.
Moody’s expects growth in property and casualty (P&C) premiums to be driven by an expected 2% growth in the Euro area in 2018, which the company says is likely to outpace the 1.8% growth in the region expected in 2019.
The ratings agency expects P&C companies to remain disciplined but warns that intense competition in the majority of markets will limit their ability to increase prices and offset higher claims. As a result, Moody’s expects most markets to experience combined ratio deterioration.
Interest rates, however, are expected to rise gradually, which in turn should result in less pressure on investment returns for P&C players, even if they still decline in 2019.
While this might be positive for P&C insurers, for life insurers, says Moody’s, the fact they hold assets with a longer duration means they are expected to face prolonged pressure on their investment results.
Benjamin Serra, a Senior Vice President (SVP) at Moody’s, commented: “The profitability of the European insurance sector is increasingly pressured by non-insurers, such as asset managers in the life segment, or technology firms and reinsurers in the P&C segment. As a response, insurers alter their business model and pursue growth opportunities, which will drive an increase in M&A activity, with cross-sector M&A becoming more frequent.”
One trend Moody’s does expect to see in the coming months, is a continuation of European insurance companies increasing their investments in illiquid assets and also in lower quality assets. For those companies not yet well equipped to manage declining credit quality within illiquid assets, Moody’s warns that asset risk is growing.
Another trend highlighted by Moody’s that is impacting the European insurance sector is M&A, which the ratings agency says, typically, reduces capital, increases leverage, and creates execution risk.
Regarding Brexit, the ratings agency says that its base case is that an agreement is likely to be reached after negotiations, but that a no deal scenario remains very significant.
Add to the above that other downside risks, such as flattening rates, the disruption caused by technology and the potential for increased P&C claims as a result of the changing climate, and it’s clear that the European insurance sector remains under pressure.
