Despite seeing a drop, inflation is expected to impact European non-life insurers, yet S&P Global Ratings believe they will continue to perform robustly.
European insurers are facing numerous challenges linked to economic growth, inflation, interest rates, and investment. However, their capital strength, liquidity, and rising re-investment rates counterbalance these obstacles, according to the rating agency.
The effects of muted economic growth, S&P analysts added, will materialise on insurers’ top lines, but we regard this as neutral to our ratings.
“We remain cautious over life insurers’ illiquid investments in real estate, private credit, and private equity, which may take their toll over 2023-2025,” said Volker Kudszus, S&P Global Ratings’ sector lead for insurance ratings.
Adding: “Meanwhile, most non-life insurers we rate adjusted their pricing and reserving practices to the ongoing high inflation, but some are lagging behind.”
Analysts expect non-life insurers to continue performing robustly, as seen so far this year. Despite muted GDP growth and exposure growth, as Kudszus noted, many non-life insurers successfully implemented premium rate increases to offset inflation.
S&P expects inflation in the eurozone to drop to 2.7% in 2024 from 5.8% in 2023, and in the U.K. to fall to 2.4% from 7.0%.
The rating agency added: “Following premium rate increases by primary insurers in 2021, 2022, and 2023, re-insurers benefit from a hard market and display successful renewals with two- digit premium rate increases.
“Higher attachment points and increased re- insurance premium rates might weaken primary insurers’ results, while we understand this is a normalisation. We regard reserve strengthening to mirror inflation as limited; only a higher-for-longer inflation environment might increase the need to materially build up reserves.”
Regarding life insurance, analysts remain cautious as there are investment concerns, according to the report.
S&P said: “Life insurers face competition from banks offering attractive deposit rates.
This could hamper potential new business but should not materially affect the existing book of business, as life and annuity product lapses often come with a market value reduction.
“Tax benefits and terminal bonus rates – benefits only available at contract maturity – also limit lapse rates. All EMEA life insurers we rate display at least adequate liquidity, but we continue to monitor insurers’ liquidity positions closely.”
