Harish Gohil, head of EMEA insurance at Fitch Ratings, spoke about the current microeconomic environment, highlighting the concern that inflation is prompting global monetary policy normalization.
Prior to the pandemic, economic recovery was expected across all countries, but Fitch reported that as 2020 progressed, GDP took a huge hit. In 2021 there was a strong bounce back and there is continued growth anticipated for the next two years.
While interest rates also fell dramatically in 2020 for both the US and UK, Fitch’s team forecasts that rates are anticipated to follow the same recovery trend in 2022 and 2023 despite the ongoing stress of inflation.
The pandemic placed a negative lens on market outlooks in 2020 but in the first half of 2021 there was a sharp recovery as most segments revised their economic strategy and began to stabilize. By Q4 2021, Fitch’s data revealed that there was a more positive outlook as credit profiles remained robust and improved despite the pandemic.
“The Fitch economic scheme expects inflation to peak in the first quarter of this year and then start to fall back,” Gohil noted. “Such a short-term spike in inflation would be manageable for insurers. But if, contrary to this base case, CPI inflation remains unexpectedly high for a prolonged period, which could then affect the credit profiles of insurers in some sectors.”
Across most insurance sectors and countries, low interest rates will continue to be a challenge despite some relief, according to Gohil.
“Then, of course, there’s climate change and ESG factors that are rightly, very high on the agenda,” Gohil added.
Willem Loots, senior director in Fitch Ratings EMEA insurance group, touched on sectors that have an improving outlook in 2022, such as the UK life insurance space.
“UK life insurers have emerged from the pandemic on a relatively strong footing, but it’s not the first time the sector managed to weather substantial changes well,” Loot explained. “Over the past several years, we’ve witnessed sustained low interest rates, and investigations into past conduct retail annuity reforms.
“You can now add these to the financial market dislocation and mortality losses associated with the pandemic. This resilience is a large attribute to favorable structural factors, credible risk management and a sound prudential framework.”
Growing front books and resilient balance sheets is the beginning to the story of stabilization for global insurers moving forward.
“If you’re ensuring growth in index overtime, that means more fee revenues and widening margins,” Loot continued.
In 2022, it is clear that economic changes are affecting demand for more annual savings.
“All across Europe, workers are realizing that governments and defined benefit pension funds aren’t going to adequately provide for retirement, and policymakers are focused on stimulating personal retirement savings,” Loot mentioned. “This suits insurers nicely, as clients have lower capital intensity, therefore higher return on capital business. The downside is insurers are competing with other savings providers in a cost sensitive environment.”
The growing importance of credit risk exposure has become a key element for insurers to keep an eye on given the global economic landscape.
Keynote speaker, Matt Brewis, director of insurance and conduct specialist at the FCA concluded the webinar, explaining that the insurance market has not only dealt with rate and pricing challenges but been forced to adapt to evolving customer expectations.
“It is now about how insurers assess products, how they meet the demands and needs from customers and remain valuable given the current conditions,” Brewis said. “The last two years have presented risks and opportunities for firms, and we’ve been really interested at looking at how firms have adapted to changing customer needs, where potential harm can develop, and how it’s been mitigated.”