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INSURANCE | 02.26.2024

What fears does the insurance industry lose sleep over?

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Risks external to the company can destroy an income statement, break down the projections prepared with caution and threaten the quote of any company. They can be macroeconomic risks, market risks or something as notorious and dangerous as cyber risks. These are some of the challenges the insurance industry faces in the immediate future, according to EIOPA, the European Insurance and Occupational Pensions Authority.

Market risk, or in other words, the negative impact on results is the industry’s main concern right now. The causes are varied and EIOPA points out the high volatility of the fixed income market and a lower return on real estate investments in the insurance industry.

“There is great uncertainty about when central banks will begin to relax monetary policy and it is not helping in this regard. This also means that credit risk remains at a yellow level in the EIOPA classification, due to the possible credit impairment that may occur by maintaining hardened financing conditions,” says Ricardo González García, Director of Analysis, Sectorial Research and Regulation at MAPFRE Economics.

The still moderate outlook for GDP growth and, above all, the downward trend in inflation in recent months has led to a decrease in the macroeconomic impact, despite remaining one of the sector’s concerns. In recent quarters, we have seen how high inflation rates triggered costs and impacted industry results. Therefore, inflation is one of the variables that should be taken into account, due to the impact it may have on the income statement and on an indicator as relevant for the insurance industry as the combined ratio.

Digitalization and cyber risks, with all their consequences, are still relevant, but they seem to have moved to a lower level in terms of concerns, although the prospects imply that this relaxation is temporary. According to the assessment made by the national insurance supervisors grouped into EIOPA, the forecasts point to an increase in this risk in the next 12 months.

Sustainability is increasingly immersed in all businesses and, logically, also in the insurance industry, both directly (it will be difficult —if not impossible— to find an insurance company that does not include sustainable aspects in its business plan) and indirectly (through investments in other companies. In fact, around 7 percent of green bonds currently in circulation are held by the insurance industry).

Other risks inherent to the business, such as those related to the financing, liquidity, profitability and solvency of companies, are constant concerns in the industry and remain over time. In fact, they are constantly in the spotlight of managers and supervisors. These are essential ratios to understand the evolution and health of the business.

These are the risks and vulnerabilities that the insurance industry in Europe loses sleep over right now… but the accredited professionalism, solvency and response that the sector has given in the most difficult times generate peace of mind and trust in customers. And precisely, trust is the basis of this industry.