@Pixabay.
Two of Europe’s largest insurance markets have poor signs of market growth and stability over the next twelve months, says a new analysis from Fitch Ratings.
The credit rating agency has released its 2023 outlooks for the two markets, which showed that the economic conditions will add pressure to insurers.
“Credit fundamentals will worsen in the French non-life insurance sector while remaining broadly unchanged in life in the next 12 months, as insurers adapt to new market and macroeconomic regimes,” said Fitch. “As a result, our sector outlooks are deteriorating for non-life and neutral for life.”
“French insurers typically have a higher risk asset ratio than their European
peers, which makes them vulnerable to [certain] conditions.”
The likely reduction in spending power by the insurers for the coming year could affect their appetite for more investment, and the continued bite of inflation will have some present challenges and opportunities. “French insurers typically have a higher risk asset ratio than their European peers which makes them vulnerable to deterioration in credit and equity market conditions,” said the report. Fitch listed ‘pockets of vulnerability’ that include exposure to ‘BBB’ credits (exposed to rating migration), high yield (exposed to rising defaults rates) and alternative assets (subject to mark-to market volatility and liquidity squeeze in a stress market). “Allocation to these asset classes increased in recent years to counter low yields,” it said.
However, it isn’t all bad for French insurers as they could make some profits in other areas – in the non-life market, Fitch said that it expects lower earnings, driven by lower technical profitability, but that this will be partly offset by better investment income.
“In life and savings, rising rates are supportive of technical margins on general accounts reserves but will not lead to a meaningful improvement in profitability for several years,” said the outlook.
“Recessionary risks will pressure sales volumes and will lead to
rising albeit manageable surrenders on traditional products.”
It added that lower assets under management could also reduce unit-linked management fees. “Recessionary risks will pressure sales volumes and combined with higher rates, will lead to rising albeit manageable surrenders on traditional products,” said Fitch.
It also listed regulatory pressures as a key concern for next year, as it could create a large administration burden and increase costs.
For the Italian market, signs were more mixed. Most signs still pointed toward a downward trend in spending rates with on-life lines making smaller profits, which could affect businesses as a whole. “We expect investment yields to significantly improve, supporting life insurers’ asset-liability management,” said the report.
“The deteriorating non-life sector outlook, which considers underlying fundamentals expected in 2023 relative to actual fundamentals in 2022, reflects Fitch’s expectation that the inflation-related increase in claims cost will hit non-life insurers’ profitability, especially in motor insurance,” the outlook said.
Away from this line, Fitch said it still expected growth in several major non-life lines to continue in 2023, but “at a slower pace due to deterioration of the macro-economic environment, reducing disposable income for consumers.”
This is likely to be copied across the board for many other European markets especially in the south with similar spending patterns.
“Profitability should remain strong and resilient in 2023, fuelled by
higher investment margins. Capitalisation will also remain strong.”
The ratings agency said the neutral life sector outlook for the Italian insurance market reflected its expectation that rising interest rates will persist in 2023. “[The outlooks] are on balance positive for life insurers but offset by heightened sensitivity to government credit spreads resulting from the current macroeconomic environment,” they added. “Profitability should remain strong and resilient in 2023, fuelled by higher investment margins. Capitalisation will also remain very strong, supported by strong earnings.”
The European Central Bank’s movement in 2023 on rate rises has been keenly watched over the past few months with most market observers saying its upward trend on rates will slow next year.
