Low interest rates could hurt profits of European P&C insurers, warns Moody's

European property and casualty (P&C) insurers will face increasing pressure on profitability as interest rates stay lower for longer, warns Moody's Investors Service.

A new report suggests that interest rates are likely to stay low for longer than previously expected amid the slowdown in global growth, and with government bond yields falling in 2020. This will erode the investment returns of property and casualty (P&C) insurers, weighing on their profitability.

Moody's highlighted that P&C insurers have responded to low interest rates by cutting costs and raising prices for policy renewals, but claims inflation as a result of the coronavirus outbreak is holding back earnings improvement. It added that raising prices further and justify price increases will be difficult in highly competitive western European markets.

According to the report, in Germany, UK, France and the Netherlands – the largest European non-life insurance markets - 10 year government bond yields have fallen on average by around 35 basis points during 2020 from already historically low levels. The decline has been especially marked in the UK, where 10 year gilt yields have fallen by 65 bps during 2020 to a near record low of 0.17 percent as at 26 June, 2020.

"Persistently low yields will erode the investment returns of P&C insurers, weighing on their profitability and, to a lesser extent, their solvency," said Dominic Simpson, VP-senior credit officer at Moody's. "At the same time, claims inflation has largely offset the P&C sector's efforts to raise prices, casting doubt over the sustainability of current reserve releases, a key contributor to earnings."