Fitch Ratings has warned that the eurozone crisis – despite showing signs of stabilisation – will continue to threaten Italian insurers’ ratings in 2013.
This is largely because Italian insurers hold significant amounts of government and corporate debt in their investment portfolios, said Fitch.
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Given these factors, the ratings agency said it is maintaining its negative rating outlook on the Italian insurance sector, indicating an elevated risk of rating downgrades for Italian insurers over the next 12-24 months.
Sales decline
In terms of life insurance, Fitch said life sales volumes have been in decline since 2011, and Fitch believes that prospects for 2013 are poor.
The latest Fitch outlook report said: "Consumers have less money to spend on insurance products, as the adverse macroeconomic environment and austerity measures constrain households’ available income, and competition from banks is intensifying in the savings market."
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By GlobalDataA major challenge facing life insurers in Italy is elevated surrender risk, said Fitch. The ratings agency noted that life insurers suffered from higher surrender rates in 2011 as customers cashed in their policies to invest in high-yielding government debt.
Although surrender rates reduced in H1 2012, Fitch said the risk remains that they could rise in the event of a further decline in asset values, triggering realised losses as assets are sold to meet surrender payments.
While insurers are generally able to impose surrender charges to mitigate this, some products have guaranteed surrender values that have to be satisfied on early redemption.
Fitch added that Italian life insurers are exposed to credit and interest rate risks through their traditional with-profits business, known as segregated accounts, known as gestioni separate.
Credit spreads are an important driver of profits because changes in the market value of securities largely flow straight through into reported profit.
However, Fitch analysts believe that as long as the eurozone crisis continues and spreads on Italian sovereign debt remain volatile, life insurers’ profitability will also be volatile.
Regulatory changes
Fitch also noted that ISVAP, the Italian insurance regulator, will be soon replaced by a new regulator, IVASS.
IVASS will take over the functions currently carried out by ISVAP, but it will be granted additional powers over the control of intermediaries and the distribution of insurance products. IVASS will be a division of the Bank of Italy. The new supervisory structure is expected to be in place by end-November 2012.
Furthermore, given the increasing expectations across the European insurance industry that Solvency II will be delayed by at least a year, Fitch said everal Italian insurers would welcome a delay, given their lack of readiness for Solvency II implementation.
