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With interest rates expected to remain lower for longer, Moody's says European non-life insurers will continue to focus on their underwriting income – premiums minus claims and expenses – to boost bottom line profitability as investment income falters.
“We foresee Europe's non-life insurance sector's underwriting performance to remain broadly stable in 2016 as on-going operating expense reductions and modest price increases offset the expected decline in reserve releases”, said Helena Kingsley-Tomkins, Moody's Assistant Vice President. “However, the risk of a gradual deterioration in profitability over the next 18-24 months is increasing as market competition intensifies”, added Ms. Kingsley-Tomkins.
Moody's report titled “European Non-Life Insurance: Risk of Gradual Deterioration in Underwriting Profitability is Increasing ” is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
Moody's believes that the magnitude of reserve releases, which have been a meaningful contributor to insurers pre-tax profits, accounting for around 20% for our rated insurance cohort over the last five years, will decline in 2016 and beyond. However, Moody's expects insurers' on-going expense reduction initiatives together with premium rate rises, which the agency says will persist into 2016 at a slower pace than witnessed over the last two years, to compensate for the fall in reserve releases in 2016.
Beyond 2016, the risk of a gradual deterioration in combined ratios is increasing. In fact, Moody's notes that cost- cutting cannot be used indefinitely to offset diminishing reserve releases, particularly as insurers look to increase investments in new technologies. Furthermore, subdued organic growth prospects across the most mature European markets coupled with tech-savvy market entrants will continue to fuel market competition over the next 18-24 months.
On-going political and regulatory developments will be one of the key factors influencing underwriting profits over the next 18-24 months. “We expect the ultimate effects of recently implemented and proposed reforms across Europe to be credit negative for the sector, although the timing and degree of impact on insurers' underwriting profits remains uncertain” explained Ms. Kingsley-Tomkins.
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