Higher government bond yields driven by increased defence spending benefit most European insurers, according to Fitch Ratings.
Higher yields improve investment returns on premiums, while a steeper yield curve may raise customer demand for some life insurance products, lifting new business volumes.
Life insurers selling annuities or long-term savings with investment guarantees gain the most. These products rely on the yield available for investing premiums, which affects both their appeal and profitability.
In contrast, unit-linked savings and short-tail non-life products show limited sensitivity to bond yields.
The main risk for insurers is higher refinancing costs. However, this is unlikely to reduce profitability for rated firms.
Refinancing needs remain limited due to staggered debt maturities, regulatory limits on leverage, and credit rating factors.
Solvency II ratios are exposed to bond yield movements and volatility. Still, most European insurers reduce this risk by aligning asset and liability durations or using hedges.
The effect on accounting is also limited. Under IFRS 17, which replaced IFRS 4 in January 2023, shifts in bond yields affect both assets and liabilities, largely cancelling each other out.
Rising bond yields may also raise lapse risk. Customers could surrender old contracts to buy new ones with higher returns. Though the historical link between yields and lapse rates has been weak due to inertia, insurers may still need to hold more capital under Solvency II to cover the risk of mass lapses.
This could pressure weaker insurers, as seen in 2023 when Eurovita, an Italian life insurer, faced a capital shortfall and regulatory intervention. However, rated insurers usually have broad business mixes and strong capital positions, limiting their exposure.
