Insurers warned of ‘deteriorating’ sector outlook in 2023 as inflation spikes

High inflation and rising interest rates would likely trigger a ‘deteriorating’ sector outlooks for many insurance markets in 2023, with some weaker insurers facing negative rating actions, analysts at  Fitch Ratings have warned.

According to Fitch’s recent analysis, the non-life insurance sectors could face margin pressure and reserve deficiencies, particularly those with a high proportion of long-tail business, if inflation and rising interest rates persist beyond its latest forecasts.

Fitch has analysed the potential impact of a “conservative economic scenario” with “mid-to-high single-digit inflation throughout 2023” in most regions, together with escalating US and European interest rates.

“High inflation could also lead to margin pressure for short-tail business in markets where strong competition or societal pressure limit insurers’ ability to increase prices,” analysts said in the report.

“Non-life insurance companies that already have weak reserving levels or lack pricing power would be most at risk of negative rating action due to the adverse impact of claims inflation on margins and capital,” analysts wrote.

In the Asia Pacific markets, this would push up claims costs, squeezing non-life insurers’ underwriting margins and exerting pressure on their reserves. Companies with weaker risk management practices could be particularly affected, Fitch has warned.

Fitch expects to change several European insurance sector outlooks to ‘deteriorating’ under the “conservative economic scenario”. In Europe, the most under pressure would be the non-life sectors in Italy and France, it noted.

However, in North America, non-life insurers are generally “well-positioned” to deal with high inflation, due to favourable pricing conditions for commercial insurance lines, prudent reserves and very strong statutory capitalisation, according to Fitch.

On the contrary, Fitch believes life sectors with large books of spread-based business backed by assets of shorter duration than liabilities would be net beneficiaries from rising interest rates.

“We would expect the positive effects on capital and medium-term earnings to offset the negative short-term effects of increased investment volatility, higher lapse rates and lower new business volumes,” analysts said.

“However, financial market volatility and lower asset values would be detrimental to margins in life sectors with a high proportion of fee-based business, such as unit-linked savings.”

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