European insurers modify products to cope with lower rates

European insurers are modifying their product structures to take account of lower rate expectations, according to a report from S&P Global Ratings.

S&P expects that European insurers will continue to adjust product structures, for example, altering the duration of liabilities and guarantees, and take management actions on in-force liabilities, such as closing books of business or externalising more risk to enhance balance-sheet resilience.

Providers of savings and annuity products are likely to increasingly favor loss-sharing mechanisms with policyholders, and more-flexible pricing for longevity, mortality, and long-term care covers. Fee-based and unit-linked lines will also continue to gain importance in insurers' offers.

In property/casualty (P/C) lines, S&P anticipates that insurers will place greater emphasis on underwriting quality and prudent reserving, and try to raise prices to soften the impact of lower investment returns. Insurers are also likely to look at reducing management and acquisition costs through tighter network specialisation and digitalisation.

At the same time, S&P has not seen significant shifts in insurers’ investment mixes, despite the current low interest rate environment.

Economic obstacles are, however, likely to curb premium growth in the European insurance sector in 2016-2017, the ratings agency suggested.

Diversification will help the largest global providers fare better than their smaller rivals.

S&P believes reinsurers in particular will find it difficult to sustain current levels of profitability, however cheap and ample capital will support their ratings.

Declining rates are one of the key risks facing insurers, and S&P factors this into its ratings throughout its insurance industry and country risk assessments and forecast earnings and capital.

Further mergers and acquisitions activity in the insurance space is expected under these conditions, as European insurers explore new options, such as Restricted Tier 1 issues.

S&P does not expect to see any European insurer’s ratings affected by Brexit.