What is next for the insurance sector in 2022

Insurance Sector

Climate change and sustainability are at the core of the insurance sector, affecting both the asset and liability side of the balance sheet, and as such, these will be the main topics to watch in 2022. Also in focus: Re-risking portfolios with alternative asset classes and post-shocks Covid-19 in the Non-Life sector.

Re-risk portfolios amid market volatility and low interest rates

The continuing environment of low rates has been weighing on the profitability of insurance companies, especially life insurance companies, where warranty products suffer the most. But under the second solvency framework, return on capital is not the only consideration. In portfolio allocation strategies, insurers have to find a balance between higher returns on capital, lower solvency capital requirements (SCR) and longer term.

In order to boost returns, insurers have been vocal about their continued shift toward higher-risk, less-liquid assets, while at the same time recognizing the capital fees that these investments attract. We expect the following alternative asset classes to be a top choice of insurance companies for the purpose of optimizing their investment portfolio:

Mortgages Without attracting the term factor, these limited-risk investments attract relatively low capital fees, providing insurance companies with an opportunity to invest in the amortized asset class with a natural interest rate hedge.
Private Placements – Products tailored to the exact needs of both the issuer and the investor are relatively low risk and can provide insurers a perfect match with their portfolio on relatively attractive terms.

Infrastructure debt

An asset class that has a very long term, and the favorable treatment of selective credit compensates investors for the lack of a secondary market with a large premium to illiquidity, and can also offer something of a sustainability factor.
Some companies will also choose to cautiously expand a portfolio of stocks that are more expensive to capitalize and invest in lower-rated companies.

The initial shock to the capital market triggered by the Covid-19 pandemic revealed that insurance companies’ asset portfolios are vulnerable to such extreme volatility, however, they have weathered it and rebounded quickly. Equity risk, spreads and rating changes were among the main factors that led to a significant decline in the value of assets at the start of the pandemic. Despite this, insurers are still looking to the rerisk their portfolios.

Resilience in the face of COVID-19 and post-crisis shocks

Insurers have shown remarkable resilience in the face of the Covid19 pandemic. The life sector suffered the most because of the negative mortality outcomes. The non-life business showed strong performance.

Life outcomes are significantly affected by the following factors:

  • Insurance companies have reported losses in this sector on the back of mortality outcomes;
  • The pandemic had a major impact on the value of new business;
  • Low interest rates and market volatility had a negative impact on investment results in the life sector.
  • Non-life businesses have shown better results, despite the additional pressure on the health sector.
  • Fewer claims (for example, since people were working from home and traveling less, there were fewer claims in P&C (property and accident insurance));
  • Decreased demand for elective health care (due to postponing non-emergency medical treatment);

In some countries, as in the Netherlands, the injections are from the government.
Overall, insurers quickly adapted to the new operating environment and we saw the impact of Covid-19 becoming less significant over time. The crisis had little impact on the capitalization of insurers, with the European Insurance and Occupational Pensions Authority (EIOPA) reporting an average second solvency ratio of 235% for the end of 2020, just seven percentage points lower than in 2019.

Closed life books continue to be sold

Insurance companies deal with many market challenges (eg low interest rates, solvency II fees, constantly changing regulatory framework, etc.) and seek to create value through new business as well as through improvement of already existing books. Closed books can be managed in many different ways, whether that is through internal optimization within the insurance company, running it in-house or outsourcing some lines of business to an outside company, or eliminating balance sheet presentation altogether. In order to release capital and shift focus to new business, many insurance companies have been vocal about their intention to sell closed life books which poses a major challenge to profitability.

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