Insurance companies in Europe face an
increased lapse rate risk as surrender penalties reduce and
households’ disposable income is squeezed by the tough
macroeconomic environment, according to Fitch Ratings.
Federico Faccio, senior director for insurance
at Fitch Ratings, explained that if European households, stretched
by cuts to public expenditure, increased tax rates and low growth,
demand their money back on life insurance products, insurers may
have to sell assets to fund that repayment.
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In many cases, Faccio said these assets are bank and sovereign
bonds of peripheral eurozone countries, whose prices have declined
since June 2011 and which may be trading well below their book
value.
Penalties
Faccio said: “The problem is becoming more pressing because
penalties for redeeming life insurance products early are falling.
In recent years, life insurance companies have reduced early
redemption penalties to make their savings products more attractive
to customers.
“Guaranteed interest products in the 1990s paid much higher
guaranteed returns and as a result could include less favourable
redemption terms without reducing demand for such products.”
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By GlobalDataFaccio added that the impact of large-scale redemptions is
reduced if a life insurer has its own agency network because the
agent will often move the client into a new more suitable product.
This leaves the capital with the life insurance company and removes
the need to sell assets.
In addition to the risk of increasing lapse rates, Faccio said
life insurers are seeing subdued growth in life insurance product
sales because of the limited attractiveness of savings products in
the current low interest rate environment.
