Italian life insurers are likely to experience a dent to their profitability in 2023 due to an increase in policyholder surrenders as a result of higher interest rates, but their liquidity should remain ‘ample’, according to analysis by Fitch Ratings.

The ratings agency’s analysis was based on recent data from ANIA, Italy’s insurance trade body, which found the sector’s average monthly surrender rate (surrender payouts/prior-year reserves) “rose modestly” in 2022.

Fitch said this was consistent with its expectations but argued the average monthly rate in 2022 “masks a large increase towards the end of the year, with materially higher surrenders in November and December 2022”. 

“This persisted in January 2023, when total payouts were €5.6bn (£4.95bn), 55% more than in January 2022, highlighting a significant change in customer behaviour,” the agency added. 

Fitch believes the rapid rise in interest rates since mid-2022 has led some customers to cash in their old life insurance savings contracts and to seek new contracts offering better returns. 

The agency said: “The yields offered by alternative forms of investment – typically 10-year Italian government bonds, which are marketed to retail customers – have increased substantially and are likely to remain above the average return on Italian life savings products with investment guarantee.”

It said higher surrenders will dent Italian life insurers’ profitability primarily because of the loss of profits that would have been made on the surrendered policies had they remained in force. 

In addition, profits could also be affected if insurers have to liquidate assets at a loss to meet increased surrender payouts. 

Rising interest rates have generated unrealised losses on some of the fixed income assets that back life savings products, but Fitch said firms have “ample liquidity, supported by cash-generative business, which should limit the need to liquidate assets at a loss barring a dramatic increase in surrender rates”.

Fitch said other major European life markets, including France, Germany, the Netherlands and the UK, are also likely to see increasing surrender rates but, as with Italy, there are mitigating factors that should prevent widespread credit implications. 

In most cases, the agency said surrender payouts are reduced by a penalty, which deters surrenders even if better returns are available elsewhere. 

“The loss of built-in tax advantages on early surrender is another important deterrent, particularly in France,” it said. “Finally, there is often a lack of attractive alternatives to long-term savings products. The returns on shorter-term deposits or savings, although rising, are often still below the investment guarantees that customers have locked into – an important factor in Germany.”

Fitch is holding a videoconference on European life insurers’ liquidity and surrender risks on Tuesday, 18 April at 1pm BST/2pm CEST. To register, click here or visit www.fitchratings.com/events.