Underwriting margins of APAC non-life insurers to be hit by inflation, says Fitch

Asia-Pacific (APAC) non-life insurers will find their underwriting margins squeezed by persistent inflation, according to Fitch Ratings, especially in South Korea and Australia, but there will be less vulnerability in China and Japan. But it said the ability to reprice policies will diminish due to increased competition, falling insurance coverage affordability and political headwinds. Fitch said it expects insurers’ capital positions to be affected in the short term as unrealised losses are likely to dominate investment results. “We believe an economic scenario of mid- to high-single-digit inflation enduring over 2023 and rising interest rates would weigh on insurers’ earnings and capital buffers, which could result in a revision to deteriorating insurance sector outlooks from neutral for many APAC markets.” It added: “Persistent inflation will squeeze non-life insurers’ underwriting margins and exert pressure on reserves, while highlighting the importance of adequate risk management practices. Offsetting these risks, to some extent, is the short-tailed nature of insurance products in most APAC markets. However, insurers’ ability to reprice will be influenced by affordability issues.” Fitch said it believes the sector outlooks for China and Japan will be more resilient to a conservative economic scenario where inflation persists around the 2022 peak levels. It noted that inflation currently remains relatively benign in China and Japan, and unlike their APAC counterparts, authorities have yet to tighten monetary policy. In contrast, the underwriting performance of non-life insurers in Australia and Korea is likely to deteriorate in the face of faster inflation, said Fitch, although it expects insurers in these two markets to be able to pass on the higher claim and expense costs without a material loss in business volume. Persistent mid- to high-single-digit inflation during 2023-2024 is likely to turn a notable cross-section of rating outlooks negative and may also lead to rating downgrades. In general, Fitch said it expects APAC insurers to be less stressed by inflationary pressure than insurers in some developed markets, such as the US, UK and Germany, which have seen a sharp acceleration in inflation. It expects inflation in most APAC jurisdictions to stay at low-single-digit levels in the near term. Fitch said it expects inflation in most countries to remain elevated in 2022 before dropping in 2023 and further moderating in 2024. On the non-life side, Fitch said the ability to reprice policies appropriately will diminish due to increased competition, falling insurance coverage affordability and political headwinds. It added that lower economic activity in a high inflation or interest rate scenario will lead to lower claim frequency, but this will be partially offset by an increase in fraud. “Our economic scenario assumes that non-life insurers and reinsurers will only be able to pass on 80% of claims inflation to their clients during 2022-2024. As a result, underwriting margins will deteriorate by approximately 2pp-3pp on average in China and Japan, and 4pp-5pp in other markets such as South Korea and Australia,” said Fitch.

Underwriting margins of APAC non-life insurers to be hit by inflation, says Fitch

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