Moody's advises European insurers to maintain rate scrutiny as outlook stabilises
(The Insurer) - European insurers must continue to scrutinise rate adequacy throughout “mini cycles”, Moody’s has warned after recently revising its outlook to stable for the continent's P&C and life insurance sectors.
Speaking at a media briefing on Tuesday, Helena Kingsley-Tomkins, vice president and senior credit officer at Moody’s, said that the stable outlook was driven by insurers’ robust capitalisation.
“The headline here is stability, but I think the real story behind it is about insurers continuing to adapt to a landscape of very persistent and evolving risks,” she said.
“We know that earnings and the interest rate environment have been supportive of strong solvency ratios. Actually, many groups have been operating well above their internal targets for quite some time.
“Having said that, we don't necessarily expect further improvements. On one hand, insurers have relatively high shareholder payout ratios, some have commitments to share buybacks. On the other hand, we're also seeing insurers looking to redeploy some of that excess to support revenue and earnings growth, which may well include bolt-on acquisitions and M&A.”
Kingsley-Tomkins added that financial market volatility due to the rapidly shifting geopolitical landscape could have an immediate effect on solvency ratios, which may act as a drag on further capital expansion.
“From an income perspective, the macro environment clearly has its challenges, but typically we would say that European insurers have been relatively resilient, and so far the effects on revenue and earnings have been relatively muted,” she continued.
“That's not to say that downside risks are not real, and that indeed they could be growing.”
‘MINI CYCLES’ IN COMMERCIAL LINES
Salman Siddiqui, head of the EMEA insurance team at Moody’s Ratings, said at the media briefing that commercial lines have reached the peak of the rating cycle, with some risk-adjusted softening.
This was the focus of Moody’s recent insurance conference, where Axa XL CEO Scott Gunter outlined current market conditions in commercial lines during a keynote fireside chat.
“The hard cycle/soft cycle nomenclature is useful, but the more important topic was around rate adequacy. The view was that while there might be some softening in different pockets of commercial insurance, overall rate adequacy is very strong,” said Siddiqui.
“One of the other things (Gunter) mentioned was the idea of mini cycles. Just saying hard market or soft market is probably quite passé now. This idea (is) that in different lines of business and different geographies, as well as different clients, you will see a better bifurcation of premium changes.”
This level of granularity is enabled by the greater volume and detail of data that insurers now have at their disposal to “slice and dice” portfolios according to line of business, product, geography and risk types.
“There was a big conversation around U.S. casualty and whether or not rates are adequate. The view is that we still don't know because it's still very hard to model some of the latent exposures with regards to, say, PFAS, forever chemicals, or anything else that could attract litigation,” Siddiqui continued.
“European casualty has not yet been affected by some of the trends we've seen in the U.S. I think Europe will still be driven by statute rather than litigation financing and jury awards, but some of the practices from the legal firms could still translate over.”
