Moody’s Investors Service has kept the outlook on Italy’s life and property and casualty (P&C) insurance sectors at stable.
Meanwhile, sustained sales of unit-linked products support profitability for the life insurance sector and while earnings for the P&C sector will decline moderately they will remain robust.
Moody’s says that, for life insurance companies, the growth in sales of unit-linked products has counterbalanced a decline in sales of traditional savings products, which pay minimum guaranteed returns.
Unit-linked and hybrid policies, which carry high margins and leave most of the investment risk with the customers, are supporting the profitability for life insurers and making their balance sheet more resilient to the low interest rate environment.
“The Italian life insurance market’s shift towards unit-linked business is partly driven by growing sales of hybrid products, which combine features of guaranteed and unit-linked products,” said Giovanni Meloni, an analyst at Moody’s.
“These hybrid policies also allow insurers to differentiate themselves from other savings institutions, such as banks and asset managers.”
Moody’s states that the Italian P&C sector has been among the more profitable large European markets over the last five years, delivering an average return on equity of 9%.
Italy’s P&C sector had a very strong average combined ratio of 90% over the 2013-2017 period, with earnings being bolstered by material releases from prior year reserves, and resilient investment results.
Moody’s expects Italian P&C insurers’ profitability to deteriorate modestly due to lower releases from prior year reserves and intensifying competition from the banking sector.
As Italian insurers are major holders of Italian government bonds, their regulatory capital levels will be reduced, should the widening of Italian credit spreads prove sustained.
Sovereign bonds accounted for 52% of Italian insurers’ assets as at year-end 2017, and more than 85% of these were Italian government bonds according to ANIA, the association of Italian insurers.