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European Insurers Maintain Strong Solvency Ratios Despite Large Unrealised Losses and Enhanced Lapse Risk

DBRS Morningstar has released a commentary discussing the impact of unrealised losses on European insurance companies.

Key highlights include:

• We consider that the chances of European insurers facing challenges similar to those which led to the failure of the U.S. bank SVB Financial Group are limited.

• Notwithstanding the significant reduction of the shareholders' equity due to high unrealised losses, the overall capitalisation of the insurance companies in the euro-area remains robust.

• In the current operating environment, the likelihood of anticipated withdrawals and surrenders of insurance policies (lapse risk) has increased although disincentives and penalties embedded in life insurance contracts mitigate the risk.

“Even if European insurance companies are set to benefit from increasing interest rates in the longer term, the large markdown of fixed income securities in their investment portfolios led insurers to report sizeable unrealised losses in 2022, which mostly translated into a reduction of the companies' shareholders' equity,“ said Mario De Cicco, Vice President, Global Financial Institutions at DBRS Morningstar. “However, we note that, although equity levels generally decreased significantly from 2021 to 2022, this only translated into a minor reduction of the Solvency II capital ratios which, overall, remained solid for insurance companies in the euro-area.”