A recent report by Moody’s Investors Service stated that the outlook for the life insurance sector in Belgium remains stable. The report indicates that higher interest rates will support the returns on investments of insurance companies while the risk profile of the industry will continue to improve. This could offset weak demand for life products amid lower economic growth.
In 2023, Belgian life insurance companies will benefit from better investment margins thanks to higher interest rates, continued lower guaranteed rates of return on savings policies, and good asset-liability management. The segment will also continue to boost unit-linked policy sales, despite slowing demand in 2022 due to volatile markets.” Benjamin Serra, senior vice president of Moody’s Investors Services, said in the report.
These factors will play a role in mitigating the negative effects of slowing GDP growth and geopolitical uncertainty on the demand for life insurance in addition to the negative effects of inflation on insurance companies’ expenditures.
The report found that higher rates will gradually increase investment returns for Belgian life insurers while the average guaranteed rate of return on life savings products will continue to decline. The insurance sector will continue to actively promote unit-linked savings policies, despite the weak customer appetite for these products due to volatile financial markets. These factors will help offset the negative impact of slowing economic growth and geopolitical uncertainty on insurance demand.
In 2021, lower interest rates and higher valuations across most asset classes led to strong sales of unit-linked products (“Branch 23”), these rose 17% to €4.2 billion (single and group contracts). High market volatility in 2022 led to lower inflows on Branch 23, down 10% to €3.4bn, while Branch 21 (Guaranteed Price Contracts) continued to grow (+5% to €6bn). However, since 2020, unit-related revenue has been more resilient to market volatility than it has been in the past, and Moody’s expects its share of total life revenue to remain strong in 2023.
The report indicates that Belgian life premiums (excluding health) recovered well from the pandemic in 2021 with a growth of 4%, exceeding the annual average for the period 2014-2020. Although it remained below 2019 levels of approximately €16 billion, which were the highest since 2016. Demand for life insurance slowed in 2022. Premiums were down 0.9% compared to 2021, and are likely to remain low in 2020. 2023 due to the expected slowdown. GDP growth and macroeconomic uncertainty, according to the report.
The report provides insight into how, over the past decade, Belgian insurers have steadily reduced the guaranteed rates they offer to customers with savings policies. Moody’s concluded that it achieved this in part by buying back older contracts that offered the highest guaranteed rates. This limited the Belgian insurers’ exposure to interest rate risk.
According to the data provided by the report, in 2021 the average guaranteed rate for life insurance companies in Belgium is around 1.9%. While the gap between the guaranteed price and the average sector return on invested assets (excluding unrealized gains) has been stable at around 100 basis points. The reason for this, as the report states, is that this gap widened slightly in 2022 as average guaranteed prices continued to decline and with interest rates rising, or at least reducing the pace of decline in returns on financial assets. And this trend will continue in 2023. The size of the gap varies between individual and group products, with average guaranteed rates in 2021 around 1.8% and 2.1%, respectively.
This growing gap between insurance companies’ investment returns and their guaranteed rate contributes to an improvement in the industry’s risk profile, which according to the report is a major driver of a stable outlook for the Belgian life market.
Besides, higher investment returns will also help insurance companies offset the negative effects of inflation on their expenses.
