10 main risks of the insurance sector in Europe
Risks in the European insurance sector remain stable at an average level, although there are some “vulnerabilities” due to market volatility and real estate prices, the EIOPA report said.
The European Insurance and Occupational Pensions Authority Insurance Risk Dashboard, based on Solvency II data, summarizes the main risks and vulnerabilities in the European Union insurance sector using a set of risk indicators. The data is based on financial stability and prudential reporting collected from insurance groups and individual insurance companies.
Market risks remain elevated due to high volatility and vulnerability in the Eurozone real estate sector. The latest data shows a continued decline in property prices, albeit at a slower pace than in previous quarters. All other risk categories of the insurance industry remain at an average level.
Macroeconomic risks – projected GDP growth remains stable, inflation forecasts have declined slightly, and fiscal balances at the end of September 2024 have even improved compared to the previous quarter.
Credit risks – Credit default swap (CDS) spreads for government and corporate bonds remained largely unchanged, with the exception of spreads for unsecured financial corporate bonds, which narrowed.
Liquidity and Funding – Funding conditions in the distressed bond market improved compared to the previous quarter, while other liquidity indicators remained largely unchanged.
Solvency and profitability risks – Solvency ratios of insurance groups and individual life insurance companies decreased slightly in the second quarter, but remained largely unchanged for companies with risks in the non-life sector.
ESG-related risks, as well as digitalization and cybersecurity risks, show a worsening outlook for the next 12 months, according to national supervisors’ assessments.
The latest data on return on assets, the ratio of income to premiums and income on excess of assets over liabilities indicate a stable profitability outlook for insurers, says the Insurance Risk Dashboard. Market perception of the insurance sector remains stable but is on the upswing as valuation ratios have increased for some groups. During this period, shares of life and non-life insurance companies outperformed the market.
10 main risks of the insurance sector in Europe
- Macroeconomic risks
Macroeconomic risks remain stable at an average level. Forecasts for GDP growth in major geographies remain around 1.3% over the next four quarters, while global inflation forecasts eased slightly to an average of 2.1% from 2.2% in the previous quarter.
Average monetary policy rates in major currencies declined marginally, and the reduction of major central banks’ balance sheets slowed somewhat compared to previous periods
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The weighted average of 10-year swap rates for key currencies also declined slightly from the previous quarter. Fiscal balances in major economies improved, narrowing from -4.4% to -3.7% in the first quarter of 2024, while the credit-to-GDP gap remained stable at around -18.2%. The unemployment rate is also stable based on the latest data for Q2 2024.
- Credit risks
Credit risks remain at an average level. In the third quarter of 2024, credit default swap (CDS) spreads for government, financial secured and non-financial corporate bonds remained stable, while spreads for financial unsecured corporate bonds narrowed.
In the second quarter of 2024, insurers’ average exposure to financial unsecured, government and non-financial bonds increased slightly, while their exposure to financial covered bonds remained broadly unchanged from the previous quarter.
The average size of insurers’ investments as a share of total assets was approximately 25% in government bonds, 9.7% in financial unsecured bonds (up from 9.1%), 1.4% in financially secured bonds and 10.3% in unsecured financial bonds (from 9.8%).
The indicator of fundamental credit risk in the non-financial companies sector remained stable, based on data for the first quarter of 2024. Insurers’ exposure to mortgages and loans remains low, except for the upper tail of the distribution, which increased slightly (median at 0.3% of total assets, with the 75th percentile rising from 2.5% to 3.4% in the second quarter of 2024).
Meanwhile, the household debt-to-income ratio in the euro area fell by 2 percentage points to 86%, based on data for the first quarter of 2024.
Overall, the credit quality of insurers’ investments remains strong, with an average credit quality score (CQS) of around 2, which is equivalent but AA rating from S&P. The average share of investments with a low rating (CQS > 3) was 1.2% in the second quarter of 2024.
- Market risks
Market risks remain high. While bond market volatility eased in late September, it remains high by historical standards. Market turmoil was brief in August, with stock volatility quickly returning to levels seen in previous quarters.
The average share of investments in insurers’ bonds and stocks remained stable at 51% and 6% of total assets, respectively.
Meanwhile, property prices continued to decline, albeit at a slower pace compared to the previous quarter, and insurers’ exposure to property remained generally limited at an average of 3.2% of total assets.
Asset concentration, as measured by the Herfindahl-Hirschman index, increased slightly in the second quarter of 2024. Recent data suggests that the spread of investment income over guaranteed interest rates for life insurance companies has turned positive thanks to favorable market conditions. The average duration mismatch remained broadly stable compared to the previous year, accounting for both the modified duration of assets and liabilities.
- Liquidity and financing
Liquidity and funding risks remain stable at an average level. In the second quarter of 2024, the average amount of cash held by insurers remained stable at around 0.7% of total assets, and the average ratio of liquid assets was unchanged from the previous quarter at 45% of total assets. In contrast, insurance denial rates increased in 2023, reaching an average of approximately 5% (4% in 2022).
The most recent annual data indicates overall positive cash flow, as measured by the ratio of net cash flow to liquid assets.
Meanwhile, funding conditions in the distressed bond market have improved, with issuance increasing in Q2 2024 and the multiplier (spread/expected annual loss) declining. The insurer’s bond issuance volume is around 5.5 million and the average coupon-to-maturity ratio is around 0.3 in Q3 2024.
- Profitability and solvency of insurers
Solvency and profitability risks remain stable at medium levels, although solvency indicators for both insurance groups and life insurance companies deteriorated slightly in Q2 2024.
The average solvency ratio for insurance groups decreased from 214% in Q1 2024 to 200% in Q2 2024, while risk insurance liability ratios remained stable (down 7 percentage points to 231% for life and up 3 percentage points up to 212% for risk insurance).
The average unprofitability ratio of risk insurance remained stable at the level of 97%.
According to the latest available data, profitability measures such as return on assets, return on premiums and return on excess of assets over liabilities remain largely unchanged compared to the previous estimate of average values.
- Risks of relationships and imbalances
The risks of interconnections and imbalances remained stable at an average level. The median exposure of insurers to banks increased by 2 percentage points to 16% of total assets, while exposures to other insurers (1.2%) and financial activities other than banking and insurance (23%) remained almost unchanged from the previous quarter .
The average share of domestic sovereign debt and insurer derivatives also remained stable at around 8% and 0.3% of total assets, respectively. The share of premiums ceded to reinsurers was broadly stable, averaging 4.4% in the second quarter of 2024, compared with 4.8% in the previous quarter.
- Insurance risks
Insurance risks remain stable at an average level. In the second quarter of 2024, premium growth for life insurance and non-life insurance remained positive (with average growth of 6% and 9% respectively). The distribution of the loss ratio increased with a median of 64% in 2024.
- Perception of the market
Market perception remains at an average level, but with an upward trend. Life and other insurance stocks outperformed the market at the end of September. While the average price-to-earnings ratio for insurance groups remained stable over the same period, the upper tail of the distribution shifted upward. The distribution of insurer CDS spreads remained largely unchanged from the previous quarter, while there were two positive changes in the external ratings of insurance groups.
- ESG risks associated with
ESG (Environmental, Social and Corporate Governance) risks remain stable at a medium level, although the outlook for the next 12 months indicates an increase in risk. Average ESG rating for fear of the sample remained unchanged, with positive changes in environmental ratings and an overall unchanged picture for social and governance ratings.
In the second quarter of 2024, the average exposure of green bond insurers as a percentage of total corporate bonds was 6.4%, unchanged from the previous quarter. Similarly, the average exposure to climate-related assets remained stable at 3.6% of total assets in the second quarter of 2024.
In terms of climate physical risk indicators, flood and storm risk remained unchanged, with storm risk significantly higher.
- Digitization and cyber risks
Digitization and cyber risks remain at a medium level, risk forecast to increase over the next 12 months. The perception of these risks for the insurance sector, according to the supervisory authorities, has decreased slightly in the 3rd quarter of 2024 due to a decrease in the perceived probability of the risk.
Cyber-negative sentiment rose slightly, reflecting rising concern among insurers during the same quarter. In addition, the number of global cyberattacks affecting all sectors, according to publicly available data, decreased in the fourth quarter compared to the previous quarter.