Western European insurers are adapting to an adverse environment: S&P

Western European insurers are exploring changes to their investment mixes, but strategic asset allocations have remained broadly stable in the past years, according to an analysis of 40 rated insurance groups by S&P Global Ratings.

The report, ‘How West European Insurers Are Scrutinizing Asset Allocations And Business Models In Today's Adverse Environment’, suggests this comes on the back of record-low, even negative interest rates, which are continuing to weigh on the capital adequacy and earnings potential of insurers in Western Europe.

With regard to high-yielding investments, S&P suggests that while insurers do look at returns, they also weigh the risks, as they aim at matching the profile of their liabilities, the insurance policies and products that they sell.

Furthermore, all insurers still have to abide by regulation, and in Europe, SolvencyII, which requires them to back up investments into riskier asset classes with more capital.

Lotfi Elbarhdadi, S&P Global Ratings analyst and author of the report, said: "What's in flux are product features such as the duration of liabilities, guarantees, liquidity, and the extent of risk transfer to policyholders.”

The sample of 40 insurers includes the largest S&P rate in the UK, France, the Netherlands, Germany, Nordic countries, Belgium, Spain, and Italy. This included life, property/casualty, composite, global multiline insurers, and global reinsurers.

S&P observed that most insurers are generally reluctant to significantly add more asset risk, as it could lead to punitive capital charges under Solvency II.

S&P believes that most insurers in Europe will continue to act on product structures and pricing, and take management actions on in-force liabilities, such as closing books of business or externalising more risk to enhance balance sheet resilience for the years to come.

Insurers will also look at reducing management and acquisition costs through tighter network specialisation and digitalisation.

Elbarhdadi added: "Yet, we believe that it would be an exaggeration to talk about a sudden transformation of business models. Constraints such as the highly competitive environment across Europe, increasing consumer protection mechanisms, evolving regulation, and higher scrutiny from local regulators are likely to result in rather gradual changes."