19 April 2018

Commercial Risk Europe: S&P analysts foresee slight improvements in insurers’ credit quality

Analysts from Standard & Poor’s Global Ratings around the world have been surveyed by the ratings agency looking at credit trends and risks, the macroeconomic and competitive environment, financial expectations, and accounting changes for the year ahead.

The report states: “While we expect interest rates to remain low in many developed markets, we are beginning to see a gradual global reversion to more normalised rates over the longer term. Our analysts believe insurers have taken appropriate measures to protect themselves from low rates and are now well placed to benefit from improvements, although rapid increases could cause unwanted volatility for insurers.”

According to the report, the record catastrophe losses in 2017 will lead to earnings pressure for non-life insurers. “Our analysts anticipate price improvements in regions that experienced the most significant catastrophe losses in 2017, particularly for global reinsurers, and primary insurers in North America, LATAM, and APAC. Non-loss-affected regions such as Europe are expected to see continued rate declines,” it adds.

The analysts foresee a range of profit drivers in 2018, with profits expected to improve modestly for primary insurers, and improve more significantly for reinsurers. The report explains:

“We expect to see modest profit improvements across all sectors with key upside drivers for profit coming from an improved investment environment, as well as continued efforts to tighten the belt with expenses, though more-so for P/C and reinsurers. Downside risk remains, however, with key risks to profit likely to stem from growth in technical provisions, as well as continued catastrophe exposure for non-life players.”

The S&P report notes that there are a number of emerging risks during the next five years that analysts believe will require significant attention and investment from insurers. For non-life insurers, nat cat risk and cyber risk are the two key risks, followed by corporate governance, and political and regulatory risk, particularly for emerging market insurers, where instability can affect growth and profitability. But the analysts add that they expect insurers to look more to the future, with risks such as cyber and disruption from insurtech more likely to impact credit quality than more traditional risks such as low rates.

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