Moody’s has said that prolonged low interest rates and the economic shock from the COVID-19 pandemic underpin its negative outlook on the European insurance sector.
Interest rates have declined further in 2020 and Moody’s expects them to remain low for some time to come.
Low rates will reduce P&C insurers’ investment income and weigh on overall results next year, analysts said, as well as putting pressure on life insurers’ future profits.
Rising unemployment in many European countries could also negatively affect life insurers’ activity in 2021, while the 2020 contraction in GDP may continue to constrain P&C volumes next year.
“Our negative outlook for the European insurance sector is driven by the persistence of ultra-low rates and the backdrop of a sharp economic contraction in 2020, both of which will continue to impact insurers’ revenues and profits next year,” said Benjamin Serra, Senior Vice President at Moody’s Investors Service.
“The macro-economic shock this year will also pose a downside risk to asset quality and solvency in tails scenarios,” he added.
Moody’s reported that commercial insurers will benefit from the strong price increases implemented in 2020, a trend that will likely continue into next year.
On the other hand, competition will intensify for retail insurers, as the one-off profits generated this year will limit scope for rate hikes.
Additionally, Moody’s warned that insurers increasingly face greater social risks and challenges to meet customers’ needs. Political scrutiny will, for example, remain high for P&C insurers due to ongoing disputes over business interruption claims.
And life insurers will also look for ways to address policyholders’ needs after their retreat from traditional products, amid the risk of losing market share in the savings market to banks or asset managers.