One year can make a huge difference, a recent report by S&P Global Ratings, subsidiary of the rating agency Standard and Poor’s, argues. Twelve months ago, S&P and a host of industry actors expressed cautious optimism amidst the flurry of timid rises in long-term interest rates, notably in the United States. They would later realize how off target they were.

The report EMEA Insurers Buckle Down as Low Interest Rates Make an Unwelcome Return belies the many reassuring comments about the Canadian economy made at year-end. It does not review the Canadian insurance market specifically but does examine 13 other markets distributed across Europe, the Middle East and Africa.

The global rating agency insurance demonstrates that these markets are far from being immune to the Fed’s three rate cuts. In short, S&P expects that the fall of long-term interest rates to record low levels will drag the global economy. Insurers will also suffer.    

Recession unlikely, but…

S&P Global Rating anticipates that monetary policy stimulus in the US and Europe, combined with accommodative policy in US and Japan, will likely prevent a global recession. “But the risk is on the rise,” S&P Global cautions.

“We now estimate the likelihood of a U.S. recession at 35%, up from 20% in 2018,” S&P Global continues. The agency projects that markets that rely heavily on trade with the US, such as the UK, other European countries and several emerging markets, will suffer.

Factors that eat into insurers earnings

Slower global GDP growth, inverted yield curves and the low interest rate outlook for the foreseeable future are sowing the seeds of the next financial crisis as investors hunt for yield, S&P Global adds. Credit spreads may poorly reflect the true risk of assets, leading many to overvalue them. This situation will intensify debt accumulation.

Among insurers, low interest rates, tight spreads and inverted yield curves will erode profitability. These factors also increase asset-liability mismatches, particularly in life insurance. Insurers’ financial ratings suffer in volatile markets: a recession can impair their balance sheets.

What’s more, low interest rates are eating into insurers’ returns. S&P Global says that the average coupon rates on bond are still declining by about 20 basis points (0.2%) per year in many markets.

P&C insurance less affected 

On the bright side, S&P Global predicts that P&C insurers will remain profitable despite low interest rates owing to their underwriting discipline that has dampened the impact of lower returns   

Combined ratio of 95% in 2020

The agency notes that P&C insurers raised their prices in most business lines in 2019, a trend that it expects to continue in 2020.

“We forecast that in many markets, combined ratios will be about 95%, or even lower, in 2020.” S&P Global Ratings also predicts that technical margins will remain very healthy in 2020, except for in the extremely competitive UK P&C market.