Persistently low yields will erode the investment returns of property and casualty (P&C) insurers, weighing on their profitability
P&C insurers have responded to low interest rates by cutting costs and raising prices, but claims inflation is holding back earnings improvement
The profitability of European property and casualty (P&C) insurers will come under increasing pressure as interest rates are likely to stay low for longer than previously expected amid the slowdown in global growth, and with government bond yields falling in 2020, Moody's Investors Service said in a report today.
"Persistently low yields will erode the investment returns of P&C insurers, weighing on their profitability and, to a lesser extent, their solvency." said Dominic Simpson, VP-Senior Credit Officer at Moody's. "At the same time, claims inflation has largely offset the P&C sector's efforts to raise prices, casting doubt over the sustainability of current reserve releases, a key contributor to earnings."
Falling bond yields force P&C insurers to reinvest maturing assets at rates below their current investment yield, pressuring their investment income in 2020 and beyond. The impact of falling yields on their investment income is more immediate than for life insurers, as P&C insurers have shorter asset duration, and are unable to share losses with policyholders. Investment returns account for about 50% of European P&C insurers' profits on average.
Falling interest rates also lower the discount rate for reserves in long-tail lines of business such as motor annuities, thereby increasing the present value of insurers' future liabilities. European P&C insurers have responded to low interest rates by assuming more investment risk. The quality of their corporate bond portfolios has deteriorated as the sector seeks out higher-yielding investment assets.
P&C insurers will try to counter the negative impact of low interest rates on earnings by increasing prices for policy renewals. However, raising prices further is difficult in mature, highly competitive western European markets. Also, reduced motor claims as a result of the coronavirus outbreak will make it harder to justify price increases.