Fitch Ratings has predicted that closed-fund consolidation will become prominent in the Italian life re/insurance market following the implementation of a new profit-sharing system set to be launched by the Italian regulator later this year.
The new system is expected to gradually reduce Italian life insurers and reinsurers sensitivity to interest rates, as well as offering greater flexibility and lower capital requirements, and so has been classified credit positive by Fitch Ratings.
The ratings agency notes that insurers offering new with-profit products will need to manage old-style contracts in separate funds to distinguish between which assets are subject to which profit-sharing system.
It predicts that the advantages of the new system will cause it to quickly overtake old business models, which will likely be largely managed in closed run-off funds.
Fitch Ratings points to the UK market as a successful example of how the new system will operate, as closed-fund consolidators like Phoenix and Admin Re have already operated for several years by acquiring closed funds from other insurers following downward trends in with-profit contract sales.
As old business slowly runs off or is sold to consolidators, and as new contracts are issued, Italian insurers will likely benefit from lower capital requirements under Solvency II as they become more resilient to interest rate changes, which could potentially lead to less demand for reinsurance protection.
The new profit-sharing system may also help revive the Italian with-profit savings market, which has suffered recently due to exorbitant capital requirements for businesses sensitive to interest rates, although it may be several years before the impacts are felt.
Fitch Ratings’ credit positive determination is given in consideration of this reduced sensitivity and anticipated savings market growth.
However, the agency’s sector outlook for the Italian life insurance market remains negative in light of the effects that high sensitivity to credit spreads on government debt could have on insurers’ capitalisation and profitability in 2018.











