Both the life and property/casualty (P&C) insurance industries will be challenged in 2013 by slow economic growth that dampens sales and by evolving regulatory frameworks, says Moody's Investors Service in two new global outlooks "Global Life Insurance Outlook - 2013," and "Global P&C Insurance Outlook - 2013."
Although the industry sectors share some challenges, including the continuing weak global recovery, Moody's says life insurers will be the most impacted by a slow growth environment, given that their products are often discretionary purchases. Low interest rates will also weigh on life insurers' margins.
Ongoing low interest rates and volatile equity markets will also accelerate life insurers' retreat from guaranteed investment products, reducing sales in the short-term. But this retreat will result in improvements to the overall risk profile of the life industry in the years to come, says Moody's.
P&C insurers are better positioned to withstand a slow growth environment, as many P&C products remain mandatory for buyers, and certain P&C risks are uncorrelated with economic conditions. In addition, in many markets and business lines P&C insurers are responding to these pressures by increasing premium rates.
For those P&C insurers exposed to the US, losses from Superstorm Sandy will dominate fourth quarter earnings, although most residential-focused companies will still show a profit for the period, while those covering commercial or industrial risks could lose up to two quarters worth of earnings, says Moody's. The rating agency expects firms to react by augmenting catastrophe-modeling efforts with additional scenario analysis and stress testing.
Both sectors are also closely following solvency modernization initiatives that will have mixed implications for insurers, as regimes move toward more principles-based approaches with incentives for improved risk management. While broader risk management is positive for both life and P&C insurers, future solvency frameworks remain under construction. 2013 should see progress on key calibrations for EU insurers as regulators contemplate increasing capital requirements under Solvency II, and efforts in the US gain momentum.