Inflation is the key concern for European insurance Chief Financial Officers (CFOs) followed by a downbeat economic outlook and market volatility, a Moody’s survey has revealed.
CFOs from 22 leading European insurance firms participated in the survey, which also found that insurers are changing their investment plans and use of excess capital in response to rising rates and market volatility.
Moody’s noted that, while its outlooks on P&C and life insurance are negative and stable respectively, respondents were more optimistic regarding their P&C operation.
According to the survey findings, persistent inflation is the key threat, with 73% of respondents placing it among their top three worries.
“The vast majority of CFOs expect inflation to feed through into higher claims costs in 2023,” said Moody’s, “though most expressed confidence that price increases would offset or outweigh higher claims.
“CFOs were most concerned about price rises falling short of claims inflation in general liability lines, but expected stronger pricing in specialty and commercial lines.”
The survey also found that around two thirds of CFOs ranked low economic growth as their second most pressing concern, followed by market volatility.
Moody’s added: “Still, around 41% anticipate high single or double digit growth in their operating results. CFOs are optimistic that stronger investment results and new business growth, particularly in non-life lines, will support their earnings.”
The survey’s third key finding is that insurers are adjusting their investment plans. This is due to higher rates and economic headwinds, which have reduced respondents’ appetite for higher-risk investments.
Although most CFOs expect their exposure to these assets to remain stable, Moody’s noted.
It added: “Compared with our previous survey, more respondents plan to reduce their real estate investments. At the same time, more insurers expect to increase their allocation to Baa-rated bonds while reducing their sub investment grade exposures.
“We expect global speculative-grade corporate defaults to increase to 4.4% in 2023, above the long-term average, but to remain below recessionary highs.”
Finally, Moody’s survey found that CFO’s attention is turning to capital deployment, with half of respondents saying they plan to deploy excess capital in 2023 – up from 29% in Moody’s previous survey -, which reflects improved solvency as a result of rising rates.
“CFOs’ preference is to channel the surplus into new business or distribution capabilities, rather than M&A, and/or to return capital to investors,” said Moody’s.
“Respondents plan no debt issuance in excess of refinancing needs, reflecting higher rates and a big rise in leverage metrics in 2022. Around 64% expect IFRS 17 to reduce shareholder’s equity in their life insurance businesses, with 27% citing this as a top three risk in 2023.”
