Viewpoint: New Year, Old Challenges for European Insurers

The European insurance sector saw high levels of claims inflation in 2024. In motor-related material damage in particular, claims inflation is still outpacing the Consumer Price Index, and we could see primary insurers continuously increasing premium rates in 2025.

While European life insurers continue to benefit from higher reinvestment rates, the direction of travel is clear, as central banks have been cutting short-term rates since the summer of 2024. Another year of significant natural catastrophes has taken its toll, with primary insurers sharing the burden with reinsurers.

Reinsurers have continued to benefit from a hard market environment in short-tail lines of business, but natural catastrophes may remain a challenge, judging by the massive floods across Europe in the last few years.

In addition, 2025 will also bring some additional layers of regulation and reporting obligations, namely, the Digital Operational Resilience Act (DORA) and Financial Data Access (FIDA) in the EU and the Corporate Sustainability Reporting Directive (CSRD).

Robust Capitalization

S&P Global Ratings has a stable view on the European primary insurance and reinsurance sectors, and they remain among the highest-rated sectors we cover. Despite multiple external challenges, the insurers and reinsurers we rate in Europe demonstrated robust capitalization and liquidity in 2024, and we expect this to continue in 2025.

However, many insurance markets in Europe are still very fragmented, and not all insurers display the same balance-sheet strength. We do not foresee 2025 as being an easy year for the insurers and reinsurers we rate. External challenges loom large and range from geopolitical risks stemming from the two ongoing wars in EMEA–which mainly pose a threat to insurers’ investment valuations–to structural risks like climate change and the ongoing threat of cyberattacks. While reinsurers typically take on less financial market risk, their increasing involvement in the cyber sector is driving the growth of the cyber insurance market.

Claims Inflation

Elevated inflation in 2022-2023 resulted in significant claims inflation, particularly in motor-related material damage, prompting premium rate increases. Since then, we have seen further inflation in the cost of car parts, which has been disproportionately high compared to most other goods.

Insurers’ level of sophistication varies significantly, and while some insurers anticipated this trend early on and implemented premium rate increases, others still need to make major adjustments. In countries where bodily injuries represent a high share of claims, such as Italy, France, or Spain, a slower revaluation of morbidity tables has mitigated the rise in the cost of car parts.

From a ratings perspective, the key consideration is not so much the impact on earnings, but rather the careful monitoring and strengthening of reserve adequacy when needed. It is also essential that insurers and reinsurers have a robust actuarial, risk management, and reserving framework. A hiccup in annual profit, or even losses, may not undermine financial soundness, but an overly aggressive pricing strategy could raise concerns about future financial strength.

Strong Partners

Reinsurers remain strong partners for primary insurers facing significant regional losses due to floods, wildfires, storms, and hailstorms. Such events have created volatility for many regional primary insurers that rely on reinsurers pooling such risks on a much wider basis. Reinsurers should continue to enjoy favorable business conditions in 2025, with selected rate increases in claims-affected lines. However, we expect to see rates fall back in 2025 in some lines and regions that did not see large claims in 2023 and 2024.

We expect attachment points to remain high, ensuring that reinsurers’ exposure to frequency losses is limited. While reinsurance rates often overshoot market conditions in periods of rate hardening, prior softness has taught reinsurers the importance of ensuring sufficient returns to maintain a sustainable business model.

Reinsurers will continue to play a central role for insurers covering natural perils, as both face higher claims volatility in the context of climate change. Aside from offering pure capacity, the major reinsurers are among the leading experts on climate change and have warned for many decades about higher claims costs and volatility.

The European insurers and reinsurers we rate are rarely monoline businesses. Many cover one or more insurance lines, namely, primary life savings, health and protection, property and casualty, and sometimes reinsurance. European insurers seem to favor a diversified business model, and solvency regulation plays a role in this, as it offers a material diversification benefit through lower capital requirements, as does our risk-based capital model. The life insurers S&P rates reported stable earnings in 2024, with top-line growth diverging between countries.

Life Insurance

Competition from banks is likely to hit insurance markets that suffered less when rates rose by 300 basis points in 2022-2023. Since then, banks have been able to offer attractive deposit yields of 3% and more, surpassing life insurance yield prospects.

Consequently, fresh money entering the market often flows into bank deposits rather than low-yield life insurance products, which typically lack attractive guaranteed returns. Life insurance products remain attractive when it comes to financial protection against death or disability, or when they provide a tax incentive.

In 2025, new business volumes in single-premium life insurance are likely to keep diverging, with continuing growth in France and Southern Europe on the back of rising bonus rates. Other countries will see volumes remain volatile.

Some life insurers in Continental Europe still need to update their business models following the move away from traditional guaranteed life savings products when it became clear that ultra-low, or even negative, yields could persist, along with the associated solvency costs. The U.K. appears to be a step ahead here, with many life insurers shifting toward asset management products or focusing on corporate pensions.

A revival of traditional life insurance is unlikely; instead, we expect Continental European insurers to increasingly push new hybrid products in 2025, giving both insurers and policyholders a wider range of product features. Marketing-wise, there is some way to go in terms of better differentiating life insurance products from banking products.

As for client retention, lapses in life insurance in most European markets are in the low-single-digit percentage range, since lapsing clients face reductions in market value and lose terminal bonuses, tax incentives, and insurance cover. Italy consistently displays a higher lapse ratio due to limited tax and withdrawal penalties, as well as competition from Italian government bonds placed directly with households.

Robust Solvency Regulation

Solvency regulation might be one reason that the European insurance sector is in good shape. The insurers and reinsurers we rate have a good grip on understanding risk, reserving, and pricing. There are always new lessons of course, such as COVID-19 and business interruption, or the negative yields that persisted in Denmark, Germany, and Switzerland in 2020 and 2021.

However, processes have proved robust and risk identification seems stronger than in the past. Solvency II updates will bring more regulatory changes, and with the EU’s focus on the Capital Markets Union, some alternative assets might become more popular for insurers.

Investment Risk

We do not expect insurers and reinsurers to materially increase their investment risk alongside this process. However, close monitoring of the situation will be key, as investments in unlisted equity and unrated debt carry higher risk than plain vanilla investments.

Over the past two years, we have largely observed the insurers and reinsurers we rate reinvesting in less risky assets and only making selective additions to illiquid investments. The latter are small but numerous and a challenge for external parties to keep track of. However, impairments and the associated IFRS expected credit losses were limited in 2024 and easily manageable in the wider earnings context.

We have seen primary and reinsurers increasing their profit expectations and investors in listed insurers and reinsurers increasing their dividend expectations for 2025 and beyond.

EU Regulations

However, several EU regulations will bring additional layers of compliance and reporting obligations that could prove onerous to some companies. These are DORA (cyber regulations for the financial sector), FIDA (financial data access regulations), and CSRD (sustainability reporting regulations). We believe that large, complex groups should be well prepared to handle this additional burden, but smaller, less complex insurers might find DORA, FIDA, and CSRD more of a burden in 2025.

As users of insurers’ and reinsurers’ external reporting, S&P looks forward to the disclosure of new information with the introduction of CSRD. This year will reveal whether insurers and reinsurers make good use of this opportunity to increase transparency in corporate sustainability. External stakeholders like credit rating agencies, investors, and regulators should find CSRD disclosures more accessible than the initial rounds of IFRS 17 disclosures. CSRD will offer additional information and complement corporate reporting, in contrast to IFRS 17, which replaced IFRS 4 metrics and required external stakeholders to absorb a completely new set of insurance reporting metrics.

The European insurance industry faces a complex combination of headwinds and tailwinds in 2025. Headwinds include claims inflation, higher risks, and an increasing number of regulations. Tailwinds include hard rates and a determination to maintain rates at risk-adjusted levels. In our view, the European insurers we rate are in a good position to navigate this difficult environment.

Topics Carriers Europe