Fitch warns: entrenched inflation can knock down insurer credit ratings

The  Fitch ratings agency has given warning: negative ratings action on a full swathe of European insurers looks likely if mid- to high-single-digit inflation holds for the mid-term through 2023.

Such a scenario with both entrenched inflation and a three-percentage point spike in 10-year yields “would likely trigger deteriorating insurance sector outlooks as well as potentially negative issuer rating actions,” Fitch analysts have warned.

Inflation will be a hit to the financial performance and the reserve adequacy elements of the Fitch ratings model, analysts warned. Capital adequacy could be hit in the most severe cases.

Repricing cannot solve the full problem, analysts warned. Affordability becomes an issue and competition looks strong enough to keep pricing at least partially in check.

“Price levels that adequately reflect claims trends may not be achievable due to competitive pressures or because they are socially unacceptable,” they said. Customers may also reduce coverage.

The hardening market in commercial looks more viable than trends in retail. Self-adjusting commercial lines could be the sweet spot. Highly regulated retail motor is proving exceptionally tricky for would-be repricers.

The upshot: “Underwriting margins may therefore remain under pressure for a longer period of time and reserve adequacy may not be re-established quickly.”

Underwriting margins could fall about 3 percentage points on average, assuming non-life carriers can only pass on 80% of claims inflation. The capacity cuts needed to balance the price creation scales would take three to four years, analysts believe.

Italy and the UK will likely be under the greatest pressure amongst the European names. French insurers will also be negatively affected due to the relative inability of insurers to raise prices to keep pace with claims.

Rising interest rates are a double-edged sword at best. While CFOs are countering H1 investment losses with word of much-improved reinvestment rates, the hit to asset values also includes capital and financing rates are also higher.

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.