Deterioration of both capital and underwriting performance could make for a difficult year for the world’s insurance companies, an analysis released last week from Standard & Poor’s found.
The ratings agency suggested that downgrades for several insurers were likely in 2016 as companies face “tough going” in the global economy, combined with falling oil and commodity prices.
“For credit markets, worries about a debt overhang in emerging markets and the energy sector may undermine growth prospects and dim the outlook for both profit and ratings among global insurers,” S&P said in “Insurers Worldwide Confront an Interlocking Puzzle of Factors That Make Growth Tough to Find.”
The report also said that “while underwriting performance remains steady, it has seen some modest deterioration” and “although some insurers will manage because of sufficient capital headroom,” others are on the brink of some fallout.
This varies by region, of course. North American insurers are largely secure, although investment income remains a concern. Still, “a jittery start won’t make a year of jitters,” S&P wrote.
Elsewhere, Asia-Pacific insurers are expected to endure more volatile capital and investment earnings over the next two years, though premium growth is expected. Some insurers, however, have been seen to turn to “risky assets” in an attempt to increase returns, which “could lead to capital erosion in the event of market dislocation.”
Western European insurers will be particularly affected by consistent low interest rates, especially life insurers with diversified risk interest and relatively weak capital positions.
Central and Eastern European insurance companies, as well as those in the Middle East and Africa regions, will need to focus on the effects of regulation and oil price concerns, which “adds another wrinkle as capital and solvency requirements come into play.”
Latin America may prove the exception to the rule. Insurers in Mexico and Brazil in particular are expected to benefit from higher interest rates.
Although not included in the report, Standard & Poor’s has also commented recently on the American health insurance market. In a separate analysis, the agency suggests that it will take longer than anticipated for the individual health market to stabilize and for insurers to realize profits.
In fact, S&P does not expect a stable market until 2018 – two years longer than projected when the Affordable Care Act went into effect.
Deep Banerjee, an author on the report and the director of S&P Ratings Services, said insurers did not have enough data to properly set premium prices in 2014 and 2015, and the resulting high claims activity has set companies back. As these claims level off – and as the risk pool matures and demand wanes – insurers will be in a better position to make a profit.
Banerjee also said 2017 “is a key year because now insurers can price more accurately.”
