European insurance outlook negative as COVID-19 further exacerbates financial challenges

As the coronavirus (COVID-19) outbreak continues to exacerbate existing solvency and profitability pressures, Moody's Investors Service has downgraded the outlook on the UK life and Italian life insurance sectors to negative from stable, while keeping an overall negative outlook on the European insurance industry.

"Volatility in financial markets has reduced solvency levels by 20 percentage points on average so far, and downside risks are high," said Benjamin Serra, a senior vice president at Moody's. "Interest rates will stay lower for longer, weighing on the solvency and profits of both life and P&C insurers."

Moody's stated that market volatility will also hinder insurers' efforts to change their product mix towards unit-linked products. Delayed premiums payments and slower economic activity will reduce inflows for insurers in the short term, particularly those with a mainly corporate customer base, however Moody's does not anticipate liquidity pressures for insurers.

Moody's expects coronavirus-related claims, in both life and non-life segments, to remain "manageable" but insurers face the risk that governments will exert pressure to make ex gratia payments to their clients or to make some other form of financial contribution to the resolution of the crisis.

The revised outlook on the Italian life insurance sector to negative from stable reflects its view that the coronavirus outbreak will pressure Italian life insurers' capitalisation and top line growth.

The changed outlook on the UK life insurance industry to negative from stable is due to increased solvency pressure resulting from financial market volatility. This effect will be compounded by the likelihood of reduced earnings from lower sales and asset impairments, it noted.

Additionally, Moody's believes that the coronavirus will also curtail growth opportunities in the UK bulk annuity and pensions market, which has already been facing margin pressure due to intense competition, regulatory headwinds, and low interest rates.