Gradual, global economic recovery and declining unemployment rates will support the growth of both property and casualty (P&C) premiums and life insurance sales next year, with Moody's Investors Service maintaining its stable outlooks for both sectors globally for 2015.
"We expect P&C premiums to keep pace with economic growth in advanced economies and to outpace economic growth in emerging economies, which supports our stable sector outlook," said Bruce Ballentine, a Moody's Senior Credit Officer. "We see P&C penetration rates holding steady in advanced markets and rising gradually in emerging markets."
Furthermore, low market interest rates, which constrain investment yields, have the offsetting benefit of promoting underwriting discipline, the rating agency said. Insurers' balance sheets are generally sound, characterised by high-quality investments, adequate reserves and good capitalisation. P&C insurers also benefit from the mandatory nature of major business lines, such as auto insurance to register a car and home insurance to finance a home.
Moody's said it expects P&C premiums to grow in the low single digits in North America and most of Europe, and considerably faster in emerging markets, which will provide attractive opportunities for growth in 2015, albeit at a slower pace than in recent years. It also expects that China's nominal P&C growth rate will ease to the mid-double digits; China ranks among the top three countries globally in P&C premium volume. In Latin America, P&C growth could ease with the slowdown in the region's economies, but nominal premium growth is likely to remain in the mid-single digits.
On the downside are a number of challenges: the risk of natural and man-made catastrophes, pricing/reserving for long-tail lines and an uncertain regulatory environment. P&C insurers have withstood the effects of several major catastrophes in the past decade, with capital levels holding up well, but they are closely tracking climate change and potential rising sea levels, which could result in more severe events.
Moody’s said that the Life Insurance sector will also benefit from the gradual, global economic recovery, as well as a declining emphasis on spread-based and guaranteed products, which will partly offset declining investment margins. In addition, rising equity markets in 2014 will support the performance of fee-based products into 2015.
"Most of our life insurance sector outlooks across the globe are stable, driven not just by the economic recovery and declining unemployment generally, but also by rising asset prices and an improved product mix, which will offset the effects of low interest rates," said Benjamin Serra, a Moody's Senior Credit Officer. "A few outlooks for Europe remain negative, notably for the UK, Germany, and the Netherlands."
Moody's expects that consumers' higher disposable income, thanks to global growth driven by the US and emerging markets, will support sales of life insurance savings and protection products. In Europe, however, challenges for life insurers persist owing to still-high unemployment in France and Italy, and uncertainty stemming from legislative changes, especially in the UK. Another key driver of the negative outlook for some European markets is the low interest rate environment, especially where the guaranteed rate to policyholders is high, as in the Netherlands and Germany.
Life insurers worldwide are increasingly diversifying into protection, fee-based products and asset management, Moody's said, adding that the ongoing recovery of equity markets in the US and Asia has diminished risk in the variable annuities business.
“Companies will start 2015 with a higher level of assets under management than in 2014 and will thus benefit from higher fees on their variable products and asset management businesses throughout the year,” the rating agency added.
Moody's expects that life insurers will continue to increase asset risk by investing in higher-yielding, less-liquid assets. However, this increase will not be substantial enough to affect insurers' credit profiles during the outlook period, it concluded.
