Non-life insurance sectors would typically be most exposed under the scenario, particularly those with a high proportion of long-tail business where higher-than-anticipated claims inflation could lead to reserve deficiencies
London:
Insurance sector outlooks in several markets around the world could move to ‘deteriorating’ if high inflation and rising interest rates persist beyond our latest forecasts, Fitch Ratings says in a new report.
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.
The scenario, which is more adverse than Fitch’s base-case economic forecast, would be likely to trigger deteriorating sector outlooks for many insurance markets in 2023, and some weaker insurers could face negative rating actions.
Non-life insurance sectors would typically be most exposed under the scenario, particularly those with a high proportion of long-tail business where higher-than-anticipated claims inflation could lead to reserve deficiencies.
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.
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.
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.”
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.