Slow growth and Brexit combine to threaten insurers: Moody’s

Moody’s has held its annual insurance summit, where a poll of respondents claimed that slow economic growth could impact insurers in the future.

The summit took place in London in June, with around 150 professional market participants taking part. They stated that an anemic economic environment will be the biggest impact on the insurance sector over the next five years, followed by the impact of regulation.

“Economic growth in Europe remains slow and fragile with a number of risk potentially raising market volatility, as it has been the case with the UK’s referendum vote to leave the EU,” said Helena Kingsley-Tomkins, assistant vice president analyst of Moody’s.

“While concerns about Greece leaving the euro area have receded, it also remains a downside risk. Furthermore we maintain a negative outlook on the UK life sector to reflect the risk arising as a result of the UK’s decision to leave the EU.”

Moody’s claims that the slow and unstable economic growth, especially in Europe, and consistently low interest rates, continue to pressure insurers’ earnings.

According to Moody’s analysis, the European sector’s return on equity, whilst it improved since the 2008 financial crisis, is still far below the 2007 level and is only just covering the industry’s cost of equity.

Therefore, the agency’s expectation of gradually decreasing reserve releases is set to lower underwriting profitability for European property and casualty insurers.

As the macro-economic environment continues to be undesirable, insurers are finding ways to adapt, with mixed credit implications. This includes continuous and modest changes to the asset mix in the search for yield, a shift towards lower investment grade credit risk and a focus on cost reductions rather than top line growth, Moody’s says.

“Following the UK’s EU referendum “leave” vote, we believe there is an elevated risk of capital, growth and profit deterioration,” added Kingsley-Tomkins.

The most affected insurance groups are UK domestic life insurers as a result of their high asset leverage; their significant exposure to UK investments (given their policy to match sterling-denominated liabilities with sterling-denominated assets); and the discretionary nature of some life insurance products, whose sales are correlated to the economic cycle, according to the rating agency.