S&P Global Ratings report that persistent pressures from inflation, tightening financial conditions and slower economic growth in China and other markets are likely to cause constraints on operating conditions for property/casualty (P/C) insurers in emerging markets.
Overall, ratings are stable, but some markets are seeing weakening trends. The P/C sectors in China, Colombia, and Turkey continue to display negative credit trends. This is mainly driven by relatively weak underwriting results in China and Colombia and the weaker credit quality of the Turkish sovereign.
Higher inflation is set to increase the premium rates for P/C insurers as risks are being repriced. Short-term underwriting results are also anticipated to be constrained by increased claim costs, particularly in motor and property lines, and potential reserving shortfalls for longer-tail lines.
Elevated interest rates will gradually support investment results, though S&P suspect more volatile capital markets will lead to some revaluation losses.
“New regulatory developments will continue to enhance risk awareness and policyholder protection, but the implementation of more sophisticated requirements comes at a cost. New regulations with higher capital requirements may prompt capital raising. For some, re-evaluation of business models could lead to consolidation,” said S&P Global Ratings credit analyst, Emir Mujkic.
Capital adequacy remains a key strength for many, as 80% of S&Ps rated insurers in emerging markets maintained at or above the ‘A’ confidence level in 2021, due to the build-up of earnings in previous years. The overall size of capital remains small for insurers in most emerging markets, making capital buffers potentially more vulnerable to large single losses.
S&P expect capital buffers will remain robust in 2022 and 2023, though cushions could narrow if capital market volatility leading to lower asset valuations persists, completions remain high, and insurers are unable to adjust their rates for inflation.