Moody's Ratings has reaffirmed a stable outlook on Europe's life and non-life insurance sectors but warned that softer pricing, weak economic growth and geopolitical risks could cap further earnings improvement and test capital strength over the medium term.
In a sector outlook published on May 6, the agency said property and casualty (P&C) insurers have broadly restored profitability to pre‑pandemic levels after successive rounds of rate increases, while life insurers are benefiting from renewed demand for savings and retirement products. However, Moody’s expects profitability to level off as competition intensifies and investment returns stabilise.
Moody’s noted that in most major European markets, P&C combined ratios are now at or below pre‑COVID levels, reflecting sizeable price increases in motor and property that have offset elevated claims inflation and a run of costly weather events.
Some carriers will continue to benefit this year from rate rises implemented in 2025, but the pricing cycle is starting to turn.
In motor and household business, premium growth is now broadly tracking claims inflation, limiting further margin expansion, and in the UK motor market signs of rate softening are already emerging. With economic growth expected to remain subdued, Moody’s anticipates tougher competition for new business and pressure on underwriting results. It also expects investment income, which has supported P&C earnings as interest rates rose, to flatten rather than continue to improve.
Primary carriers are likely to receive modest support from an easing of reinsurance prices after several years of hardening. Recent renewals have allowed some large diversified groups to buy broader catastrophe programmes, increasing the share of probable maximum loss ceded to reinsurers for a range of natural peril scenarios.
However, the improvement is not evenly spread. Smaller or more exposed firms may have seen less meaningful relief, leaving them more vulnerable to another year of severe weather. With convective storms and floods driving elevated catastrophe losses in parts of Europe in recent seasons, the extent and quality of protection are likely to remain key differentiators for investors and rating agencies.
On the life side, Moody’s sees continued growth opportunities in pension risk transfer, particularly in the UK and the Netherlands, where bulk purchase annuity activity has been strong as defined benefit schemes lock in funding gains and transfer liabilities to insurers.
In savings‑focused markets such as France and Italy, the current rate environment is also favourable. Short‑term rates have eased from recent peaks while long‑term swap rates remain above pre‑2022 levels, improving the appeal of long‑dated contracts versus bank deposits and helping to slow lapse rates. Net inflows into life products have strengthened in both markets, and unit‑linked business has regained share in Italy.
Even so, life margins are under pressure. Competition for bulk annuity deals and for the illiquid assets used to back them is compressing returns in the UK, while regulators in continental Europe continue to focus on value for money in retail products. Moody’s expects this supervisory pressure on fees and commissions to weigh on profitability, even as progress on the EU’s Retail Investment Strategy remains slow.
European insurers’ Solvency II ratios improved again in 2025, supported by higher interest rates and solid earnings. Average regulatory capital coverage across the European Union is now well above 200%, providing a substantial buffer at sector level.
Moody’s stressed, however, that those buffers remain sensitive to sharp falls in equity markets and sudden widening in sovereign and corporate bond spreads. Political developments, including France’s 2027 presidential election, could inject volatility into government bond markets and feed through to solvency metrics for domestically focused groups.
High shareholder distributions are another constraint on capital build‑up. Dividends and share buy‑backs absorbed close to 70% of large primary insurers’ profits in 2025, and many groups have progressive payout policies. Moody’s expects this to continue, supported by the forthcoming Solvency II review, which is set to reduce risk margins and lower capital charges for some long‑term and structured assets from 2027, assuming interest rates do not fall sharply.
The agency expects insurers’ overall investment strategies to remain conservative but sees a gradual rise in allocations to illiquid assets, particularly private credit and securitised structures, as firms seek additional yield and better duration matching. Supervisors including the European Insurance and Occupational Pensions Authority, have flagged the build‑up in private credit as a potential stability risk and are monitoring concentrations and valuation practices.
Geopolitical risk remains an important external threat. Moody’s base case assumes only a limited direct impact from the conflict in the Middle East, mainly via higher specialty and marine claims. It warned, however, that a prolonged escalation which drives up energy prices, reignites inflation and depresses growth would quickly erode recent underwriting gains and put pressure on solvency through equity market falls and wider credit spreads.
For now, the combination of rebuilt margins, solid capitalisation and more benign reinsurance pricing underpins Moody’s stable outlook. But with competitive pressure rising and geopolitical shocks an ever‑present risk, the agency suggests European insurers have little room for complacency.
