A survey conducted by AlphaReal has identified inflation as the principal macroeconomic challenge confronting European life insurers, who collectively manage assets worth €2.73 trillion.
Amid sustained high inflation rates in the Eurozone and the UK, which are well above the respective central banks’ targets, the sector grapples with the implications of inflation-linked liabilities.
The survey indicates that a significant portion of these insurers—21%—have over 60% of their liabilities tied to inflation, and another 73% have 30% to 60% exposure.
With two-thirds of life insurers anchoring their liabilities to domestic inflation indices and the remainder to Eurozone rates, the risk of future inflationary spikes is a key concern.
Respondents also pointed to other critical risks, such as domestic and geopolitical politics, which rank as the second highest concern.
Close behind are the potential impacts of monetary tightening and higher interest rates. Moreover, the looming threat of recession and market volatility in equities and credit are also high on the list of risks that could impact the industry.
Shajahan Alam, director of strategic investment solutions at AlphaReal, said: “Insurers face a double jeopardy; higher inflation not only means higher claims outgo than those originally priced into policies, but insurers with fixed rate bonds will also suffer from lower asset values.
“The long-term nature of life insurer balance sheets amplifies this dynamic. As a result, increasing holdings in long-term inflation-linked assets are likely to be a priority for insurers.”
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