European life insurers could see solvency ratios fall by 10 ppts in adverse scenario

Written by Adam Cadle

11/01/2021

European life insurers’ solvency ratios are expected to fall by around five percentage points (ppts) and by close to 10 ppts in an adverse scenario similar to the credit crisis of 2000-2001, thus leading to an increase in capital requirements, Moody’s has said.

In an extreme scenario where all bonds are downgraded by three notches, solvency ratios could fall by more than 30 ppts, Moody’s added.

Moody’s stated that UK life insurers are more vulnerable than continental peers to credit risk, because they have larger corporate bond holdings than their European counterparts which, in contract, have a relatively larger sovereign exposure.

The shift to working from home during the pandemic could erode commercial real estate values, Moody’s stated.

However, the risk from commercial real estate exposure is limited during this economic environment, given that European insurers typically invest around 5% of their portfolio in real estate and this also includes a significant portion of residential real estate.

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