Insurers and reinsurers alike could see some adverse affects from financial and social instability in the European Union, A.M. Best said in a new report.
Points of concern range from quantitative easing to Europe-wide weak economic growth, foreign exchange developments, friction with Russia, the Greek anti-austerity movement and Spain’s separatist movements, the report said.
In particular, however, A.M. Best said it is troubled by low interest rates in Europe and perpetuated around the world, and how it will affect the well-being of insurers who do business in the European Union. Quantitative easing is making this worse, where central banks buy government bonds to spur economic growth, which can make interest rates drop in the short-term, A.M. Best added.
“The actions by central bankers are causing depressed operating returns and returns on equity,” A.M. Best said. “Quantitative easing aims to spark economic growth in the EU, but it will also promote a continuation of the period of low interest rates.”
A.M. Best explained that global interest rates should remain at historic lows through 2015 because of related policies from the European Central Bank and Bank of Japan, the latter of which has broadened its asset purchases beyond bonds into areas such as real estate, exchange-traded funds, equities and longer dated assets.
These conditions are dire, A.M. Best said, when considered in context of a global market already challenged by reduced demand in global oil, low inflation, sluggish growth, and the need for government to shore up economies. Another mitigating factor: the investment practices of European insurers themselves.
“A.M. Best considers the low interest rate environment to be among the biggest challenges facing European insurers,” the ratings entity said. “The artificially low interest rates from other central banks around the world challenge insurers ability to generate investment income, as European insurers hold the majority of their invested assets in fixed-income securities.”
All of these factors are at play as European insurers deal with a highly competitive market heightened by slim underwriting margins and weak economic conditions that hamper growth, A.M. Best said.
“For non-life insurers, prolonged interest rates will keep returns at low levels,” A.M. Best added.
Low interest rates have boosted the market value of bonds, which are reinvested into lower yielding securities after the bonds mature. Insurance companies will see initial gains from a boost in the value of those bond portfolios, but the low interest rates will chip away at investment returns on their bond holdings, the ratings entity explained.
Still, as A.M. Best sees it, there are some positives in the current environment, with expectations that a weaker euro won’t cause substantial revenue problems for non-life insurers.
“The demand for general insurance products is unlikely to change in a meaningful way,” A.M. Best said. “The financial health and spending power of policyholders will continue to drive insurance buying decisions.”
A.M. Best added that low currency values in the European Union could help make their exports more attractive, which would grow businesses and could ultimately benefit insurance revenues.
Source: A.M. Best