Coronavirus outbreak will erode insurers capital in short-term, warns Moody's

Low interest rates and significant coronavirus-induced volatility in financial markets will pressure European insurers' profitability and economic solvency over the coming quarters, according to Moody's Investors Service.

Moody's has outlined key risks for EMEA insurers over the next 12 to 18 months. These include low rates, market turbulence, environmental, social and governance (ESG) risks, and the impact of disruptive technologies.

According to the report, the most vulnerable insurers will be those with high dependence on savings policies that offer high guaranteed return. While the sector continues to respond by refocusing on less interest rate-sensitive products, sluggish growth and market volatility will make this more challenging.

"Recent significant financial market fluctuation driven by the coronavirus outbreak will erode insurers capital in the short-term," said Helena Kingsley-Tomkins, an AVP analyst at Moody's Investors Service. "Low interest rates, with bond yields dropping to record lows in March, will further pressure European insurers' profitability and economic solvency over the coming quarters."

Moody's noted that while the credit quality of EMEA insurers' investment portfolios remains good, they are seeking to boost returns by investing in riskier assets. In the short-term, insurers may turn to cash as macroeconomic uncertainty increases investment risks, including the risk of a rise in European corporate default rates. Higher default rates would affect insurers solvency ratios, although the industry has the capacity to absorb moderate shocks.

In the long term, Moody's expects a slow and steady migration towards lower quality assets, as well as moderate growth in illiquid assets in insurers' investment portfolios, as insurers seek to boost returns by investing in riskier assets.

Additionally, insurers are also dealing with the impact of disruptive technologies and environmental, social and governance (ESG) risks. While they have been limited to date, they are set to be more important drivers of credit risk in the medium term.