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Ukraine Conflict Adds Uncertainty to Otherwise Supportive Interest Rate Outlook for Euro Area Insurers

DBRS Morningstar published a commentary assessing the potential impact on Euro Area (EA) insurers of rising interest rates and of the economic shock caused by the Russian invasion of Ukraine.

Key highlights include:
-- Higher interest rates will provide relief to EA insurers, which have been facing a challenging yield environment for years.
-- Geopolitical tensions add uncertainty to the economic outlook with lower growth ultimately hurting investment returns of insurers.
-- Large EA insurers are positioned to improve their solvency ratios with higher interest rates.

“While higher interest rates will have an immediate negative impact on the fair value of the fixed-income portfolios of insurers, this is typically offset by a corresponding change in insurance liabilities. Over the longer term, rising yields will support the profitability of the industry as higher investment returns allow additional margins to offset inflationary pressures on expenses and to support legacy fixed-rate product liabilities,” said Patrick Douville, Vice President, Insurance. He also noted, “With rising inflation largely driven by higher commodity prices rather than by strong growth, a "stagflation" scenario where investment returns remain weak is plausible.”