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Coronavirus: The risk for European insurers is increasing

The stock market turmoil caused by the coronavirus is threatening the credit quality of European insurers, according to analysts at Fitch Ratings. A persistent and serious market disruption could result in insurers being downgraded. While most insurers have leeway to protect their ratings from temporary market volatility, they are threatened by continued market disruption.

The decline in the stock markets hit insurers negatively, although the effects in Europe are rather minor. Most equity investments in the European life sector, particularly in the UK, have been in unit-linked or for-profit savings products, where all or most of the investment losses would be borne by policyholders. Nonetheless, losses in market value reduced insurers' earnings from these products. This in turn reduces the expected value of future profits, which is part of the capital position of life insurers. Some, but not all, insurers had protection in place to offset this capital impact.

The widening of credit spreads and bond downgrades will also weaken insurers' capital, especially life insurers who have savings businesses with built-in investment guarantees or large bond portfolios. The government bond portfolios of European insurers are mostly highly valued, but widespread downgrades could deplete their capital significantly.

Downgraded from "stable" to "negative"

A further decline in interest rates is said to be negative for European insurers. The coronavirus outbreak triggered a flight of investors into quality and depressed the yields of highly rated government bonds. This increases the pressure on capital, earnings and the business models of insurers, which are already struggling with very low returns. Savings contracts with guarantees are hardest hit by low returns. These are particularly problems in Germany, where guarantees run for many years, and in France, where insurers have difficulties in attracting customers for alternative products without guarantees.

The raters have therefore recently changed their industry outlook for French and German life insurers from "stable" to "negative".

Author (s): Versicherungsmagazin.de

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