Life insurance premiums in Italy are rising driven by strong demand for guaranteed products and unit-linked wrappers, according to Fitch Ratings.
In a report published in early February 2015, Italian Insurers Resilient Amid Challenging Operating Conditions, Fitch said the strong demand for guaranteed products and unit-linked wrappers is because of demand for protection and higher expected returns.
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It added that lower yields on government bonds are contributing to the reallocation of financial resources from these instruments to life products with financial content.
According to the ratings agency, if the above mentioned conditions persist, life sales are likely to continue to rise in 2015.
The report said: "Sales are driven by single premiums, which can be volatile, but Fitch expects regular premiums to show increases in the low single digits in 2015, and positive net inflows."
With rising sales and falling interest rates on Italian bonds boosting net profitability, Fitch said it expects Italian life insurers to have achieved strong profitability in 2014 as a result of higher premiums and realised gains on their bond portfolio.
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By GlobalDataItalian insurers’ life earnings are sensitive to changes in interest rates and credit spreads through their traditional with-profits business, known as segregated accounts.
Fitch expects interest-rate risk to slowly decline, reflecting the lower guarantees on new business and the run-down of older business with higher guarantees. The assets backing the life business carry unrealised gains, due to spread tightening on Italian government bonds.
Fitch also noted that changes to Italy’s tax regime are unlikely to have a major impact on the country’s life market.
From 1 July 2014, tax rates on returns offered by investment products were raised to 26% from 20%. However, government bonds and life insurance products are not affected and these products are also exempt from the 0.2% estate tax on total invested assets.
Fitch said this creates a competitive advantage for life wrapper business over the medium term.
However, the ratings agency said the budget law 2015, approved in December 2014, has reduced tax advantages for individual personal plans, as well as the saving part of life policies subject to inheritance tax, thus reducing the tax appeal of these products.
Fitch expects the changes to the tax regime in Italy to be neutral for the sales of life products.
Overall, Fitch Ratings said the rating and sector outlooks for the Italian insurance market are stable, reflecting its expectations that insurers’ profit and capital adequacy will be resilient amid challenging operating conditions in Italy.
