Fitch reveals global insurance outlook

The global insurance industry is currently experiencing a “neutral” outlook, although several key non-life insurance sectors in developed markets show signs of deterioration, despite improved credit drivers for global reinsurance and the UK London market, according to Fitch Ratings. In light of Guatemala's sovereign upgrade and an expected moderation in sector growth, Fitch Ratings has shifted its outlook for Guatemala to “neutral” from “improving.”

Non-life insurance lines face significant challenges as premium growth may not adequately compensate for inflationary cost pressures, and the normalisation of claims frequency will further strain earnings, Fitch reported.

“There are more headwinds for non-life insurers where inflation and normalising claims pressure underwriting margins in some key markets,” said Cynthia Chan, global head of insurance at Fitch. “Higher investment yields are supportive of life insurer earnings, although with a rise in credit costs and surrender risk. Global reinsurers and the UK London market benefit from strong pricing and investment yields balanced by rising claims inflation and financial market volatility.”

The ability of non-life insurers to adjust pricing to mitigate inflation pressures will be a critical factor to monitor, according to the report. Global reinsurance and the UK London market have witnessed improved underwriting margins and higher investment portfolio yields. However, claims inflation remains high, and financial market volatility could potentially lead to investment losses.

Life insurers, on the other hand, benefit from higher interest rates, which increase investment yields. However, any decline in the market value of fixed-income assets can reduce capital and non-technical earnings under certain accounting regimes, and credit costs are likely to increase, according to Fitch. The recent surge in interest rates and the turmoil in the banking sector in March have also heightened surrender pressures. Nevertheless, strong liquidity profiles have kept most life markets in a “neutral” position.

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Here are some sub-sectors that merit close attention due to a deteriorating outlook:

• Non-life sectors – general: The trend of headline inflation in various markets and its impact on claims inflation. The ability of insurers in specific markets to pass on higher costs through premium increases. The potential to capitalise on higher yields to offset increased costs.
• Dutch insurance: Insurers would benefit from a rapid recovery in financial asset prices, leading to increased investment returns through realised and unrealized revaluation gains.
• French non-life Insurance: Higher inflation rates or above-average natural catastrophe losses could exacerbate pressure on non-life margins and reserves.
• German non-life insurance: Premium growth that surpasses expectations and higher investment income compensating for reduced underwriting margins.
• US mortgage insurance: A slowing US economy and declining home prices pose challenges. Uncertainty surrounding loss trends, particularly for recent large vintages. The availability of reinsurance to limit volatility and provide capital support is crucial.
• US title insurance: Maintaining low claims costs and effectively managing operating expenses are key to preserving margins. Volatility in commercial lending volumes could lead to lower-than-expected earnings for national insurers. The long-term impact of volatility in macroeconomic assumptions is also worth monitoring.
• Chile non-life insurance: Adverse movements in inflation and exchange rates, primarily impacting property and auto lines, despite rates being automatically adjusted for inflation.

As the insurance industry navigates these challenges, close monitoring of these sub-sectors will be essential for industry participants and investors.

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