High inflation and rising interest rates could hit insurers’ ratings: Fitch

Persistent high inflation and rising interest rates could lead to Fitch Ratings moving insurance sector outlooks in several markets around the world to “deteriorating”. Non-life insurance sectors would typically be most exposed under the scenario, with the Italian and French markets most under pressure, while the US and Asia-Pacific (APAC) remain more resilient, it added. Fitch analysed the potential impact of a conservative economic scenario with mid-to-high single-digit inflation throughout 2023 in most regions, together with escalating US and European interest rates. This would be likely to trigger deteriorating sector outlooks for many insurance markets in 2023, and some weaker insurers could face negative rating actions, said the rating agency. Non-life insurance sectors with a high proportion of long-tail business would be particularly affected because higher-than-anticipated claims inflation could lead to reserve deficiencies. Fitch said high inflation could also lead to margin pressure for short-tail business in markets where strong competition or societal pressure limit insurers’ ability to increase prices. In North America, Fitch’s conservative economic scenario entails mid-to-high single-digit inflation throughout 2023 and ten-year interest rates increasing by a combined 225 basis points in 2022 and 2023. Fitch said the negative effects for insurers from inflationary pressures and a potential modest recession would outweigh the benefit of increased investment income from higher interest rates. “Persistent high inflation pushes up the cost of insurance claims for property repairs and medical care, as well as the litigation costs associated with disputed claims. Uncertainty over high inflation creates challenges for non-life insurers in pricing business adequately for the risks covered, and in setting reserves. However, North American non-life insurers are generally well positioned to deal with high inflation, due to favourable pricing conditions for commercial insurance lines, prudent reserves and very strong statutory capitalisation,” said Fitch. In Europe, the conservative economic scenario sees mid-to-high single-digit inflation throughout 2023 and ten-year interest rates increasing by a combined 300 basis points in 2022 and 2023, higher than Fitch’s current base-case forecast. Non-life sectors in Italy and France would be most under pressure, according to Fitch. The Italian non-life sector has a high proportion of long-tail motor third-party liability insurance, where higher-than-anticipated claims inflation could lead to reserve deficiencies. French non-life insurers’ margins are particularly exposed to high inflation. “We do not believe companies would be able to increase premium rates to keep pace with rising claims costs under the scenario. Prices are constrained by societal pressure, and insurers already face government demands to give rebates to customers struggling with inflation. Non-life insurers in the UK are also exposed to high inflation as the local market is particularly competitive,” said Fitch. In APAC, the conservative economic scenario entails inflation remaining materially above the 2017-2021 average throughout 2023. Fitch said the sector outlooks in China and Japan would be more resilient to this scenario. It added that the Chinese and Japanese authorities have not tightened monetary policy, unlike other APAC countries. “The short-tail nature of non-life products in most APAC markets mitigates the risks, as premiums can be adjusted regularly. However, customer affordability could constrain insurers’ ability to increase prices in line with inflation,” said Fitch.

High inflation and rising interest rates could hit insurers’ ratings: Fitch

US and APAC markets more resilient

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