Articles - Solvency II plus low interest rates put pressure on Insurers

As Solvency II Looms, Low Interest Rates Increase The Heat On European Insurers

  •   Implementation of Solvency II is little more than a year away, and therecent European Insurance and Occupational Pensions Authority (EIOPA) stress test demonstrates that much preparatory work remains for the industry. 
  •   "Lower for even longer" interest rates prolong the pain for Europe's insurers. Regulators and insurers have responded in many different ways to mitigate the impact.
  •   Compounding the challenges is a heightened focus on conduct-of-business regulation.
  •   Some life insurance and reinsurance business models are threatened. Non-life insurance remains a relative safe haven.
  •   Near-term negative rating actions will likely outweigh positive rating actions for Europe's life insurers and reinsurers. 
  •   In Central and Eastern Europe, the Middle East, and Africa (CEEMEA), volatile oil prices and local currencies are the two main risks for insurers in 2015.

 Significant change lies ahead for Europe's insurers in 2015. After 15 years in development, the industry faces an intensive--and critical--period of final preparations for Solvency II implementation on Jan. 1, 2016. At the same time, life insurers face unprecedented low interest rates that could threaten some business models.

 Compounding the challenge is a heightened focus on conduct-of-business regulation that is likely to increasingly shape insurance markets and competitive dynamics during the second half of this decade. In this environment, Standard & Poor's Ratings Services said in a report published today that it believes negative rating actions will likely outweigh positive rating actions over the next year for Europe's life insurers and reinsurers.

 European insurers are suffering the collateral damage from policymakers' actions to support the eurozone economy. Long-term government bond yields have declined to--or near--historical lows in recent months, contributing to our view that business conditions are weak for life insurers in markets with high interest rate sensitivity. Compared with our expectations earlier in 2014, we now expect eurozone 10-year government bond yields to remain lower for longer.

 Furthermore, we see no easing up in the pressure on yields, with the European Central Bank having recently embarked on its asset-purchase program. We think the combination of low rates and tight credit spreads will continue squeezing Continental European life insurers, adding incremental downside risk to ratings over the next 12 months for insurers unable to mitigate the capital and earnings impact. As a result, we have changed our Western Europe life sector outlook to "stable to negative" from "stable".

 Among rated insurers, we believe a number of mitigating features have, to date, dampened the effect of low yields on ratings. Diversification is one key mitigating factor. Insurers that have strategic options to deploy capital to products, business lines, or geographies that are less sensitive to low interest rates are likely to exhibit greater stability in their rating profile. We have seen ample evidence of insurers shifting their strategic focus in response to external conditions.

 Against this backdrop, there is also continued regulatory uncertainty. Solvency II implementation will be here in barely more than a year and, although we believe the impact on rated insurers will be more benign, the combination of low yields and regulatory change will increasingly challenge some business models. Moreover, as Solvency II uncertainties diminish, we
 believe conduct regulation will increasingly come to the fore as the key theme shaping insurance markets and competitive dynamics.

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