In a recent report by S&P Global Ratings, European insurers are navigating a challenging landscape marked by rapidly soaring interest rates in 2022, resulting in substantial unrealized losses on fixed-income investments exceeding €500 billion.
Despite this, the insurance sector remains resilient, displaying a slow but sturdy journey to recovery, the report noted.
The report highlights the significant impact of soaring interest rates, leading to double-digit negative returns on investments, particularly in high-quality fixed-income assets.
However, S&P Global Ratings estimates a gradual recovery, with the pull to par for such investments expected to take a decade or more.
The report urges caution regarding illiquid investments, real estate, private equity, and private debt, which insurers added during the lower-for-longer yield environment. However, it notes that forced asset selling due to hypothetical scenarios or catastrophic events is not foreseen.
European insurers maintain a key strength in their capital surplus, providing a cushion above minimum capital adequacy requirements to support current ratings.
Although the value of investments eroded capital surpluses by about €30 billion in 2022, S&P Global Ratings anticipates a gradual recovery.
Despite challenges, non-life insurers are expected to perform robustly, with many raising premium rates to offset inflation. Reinsurers are anticipated to benefit from a hard market, continuing to post renewals with material premium rate increases.
Life insurers face competition from banks offering attractive deposit rates, potentially affecting new business growth.
However, the report suggests that this competition is unlikely to materially impact existing books of business, given market value reduction during lapses and the presence of tax benefits and terminal bonus rates.
Despite competition from banks, there is no expectation of a significant rise in lapse ratios in 2024. The structural differences between the banking and insurance sectors are believed to persist, preventing a material “Insurance Run.”
