On 5 October, the European Insurance and Occupational Pensions Authority (EIOPA) published a report on how the current inflationary environment impacts insurers in Europe. The analysis covers the impact of unexpectedly high inflation and interest rates on the insurance sector thus far, and also looks ahead to potential future risks and vulnerabilities.
The report notes that this shift away from a prolonged period of low inflation and interest rates has significant implications, notably for insurers’ capital, profitability and liquidity, and for their consumers. The impact varies based on factors like exposure to interest-sensitive assets and the sensitivity of claims to inflation. Specifically, the paper highlights the following:
- Capital Position: inflation and rising interest rates affect insurers’ capital levels; for non-life insurers, this is mainly the result of increased costs, whereas for life insurers the concern is rather around lower new business.
- Profitability: in the short-term, claims and expense inflation negatively affects non-life insurers, necessitating increased reserves and gradual premium adjustments, while life insurers face reduced profits due to higher expenses caused by inflation. Non-life underwriting profitability worsened in 2022.
- Liquidity: a number of insurers’ liquidity is strained due to falling fixed rate asset values (as a result of interest rates going up) and potential losses from asset sales. Data shows a dip in liquidity in 2022, but projections suggest insurers can meet future margin requirements.
Insurance Europe