Life Insurance In Europe: What You Need To Know

Life insurance is a product available in the European market, with the European life insurance sector representing €668 billion in gross premiums in Europe by 2020. The market is active, with insurers focusing on their core markets, capital deployment, and simplifying operations. Life insurance is also a growing sector in Luxembourg, with inflows of €23.1 billion in 2022. The profitability of European life insurers is under pressure due to shrinking investment returns and increased capital requirements. As a result, some insurers are considering structural changes, such as run-off deals, to address these challenges.

Life insurance in Europe: a growing sector

Life insurance is a well-established industry in Europe, with a long history and a significant impact on the economy. The sector has been facing challenges in recent years due to low-interest rates and the COVID-19 pandemic, but it remains a growing industry with strong premium inflows.

In 2022, the life insurance sector in Europe saw inflows of EUR 23.1 billion, a decrease of 11% from the record-high inflows of EUR 25.6 billion in 2021. Despite this slight decline, the sector remains a significant part of the European financial landscape, with gross premiums of EUR 668 billion in 2020. France, the United Kingdom, Italy, and Germany are the largest markets, accounting for 70% of global inflows.

European life insurers face substantial challenges due to low-interest rates in the euro area. Insurers, particularly in Germany and Sweden, offer long-term policies of over 30 years without holding assets of a corresponding duration. Additionally, many policies offer generous return guarantees that are unsustainable in the current low-interest-rate environment. Stress tests conducted in 2014 revealed that nearly a quarter of European life insurers would be unable to meet their regulatory requirements under prolonged low-interest rates.

The life insurance sector in Europe is highly interconnected with the wider financial system, with an exposure of €4.4 trillion to the European private sector. This interconnectedness can lead to potential spillover effects, where difficulties in one insurance company can trigger fire sales and impact the entire financial system. As a result, regulators are working to address the challenges faced by life insurers and improve transparency and public disclosure to increase the industry's resilience.

Despite the challenges, the life insurance sector in Europe remains a growing industry with strong premium inflows. The sector is an essential contributor to economic growth, stable savings, and pension provisions. With its global reach and impact, the European life insurance industry is an integral part of the financial landscape.

The profitability of European life insurance companies

Interest Rates and Investment Returns

European life insurers have traditionally relied on fixed-income investments, and nearly two decades of low interest rates have impacted profits. This has resulted in flat overall gross written product (GWP) growth, with new business shrinking and stabilizing at low levels in most markets. Low investment returns due to low interest rates strain life insurers' balance sheets as investment income declines.

Product Offerings and Customer Expectations

The industry's focus on serving affluent individuals has also stymied growth. Life insurers must adapt their product offerings to capture the mass and middle markets. Additionally, increasing customer expectations for service quality and channel availability have created pressure, with digital players in the B2C arena raising the bar.

Expenses and Competition

The life insurance industry in Europe has not structurally addressed its operating costs, resulting in high expenses compared to other industries. At the same time, life insurers face intensifying competition from asset managers and digital attackers, who have more customer touchpoints and are building stronger relationships.

Regulatory Environment

The introduction of the Solvency II Directive has negatively impacted the solvency ratio and the return on equity for life insurers in Europe. The current low-interest-rate environment further compounds this issue, making insurers vulnerable to changes in rates.

Business Model and Distribution

The traditional business model of European life insurers, selling outdated products through conventional channels, has hindered their ability to generate market growth and shareholder returns. New competitors in wealth and asset management have rapidly grown, capturing the most profitable customers.

Conglomerate Structure

Many life and pension companies are conglomerates with diverse businesses, making it challenging for shareholders to assess their value. Insurers need to simplify their structures or provide more transparent reporting to enhance their value proposition.

Customer-Centric Approach

Adopting a customer-centric approach is crucial for the long-term success of life insurers. Shifting from selling products to solving customers' problems can unlock growth. Understanding customers' priorities and building services around their needs can improve proposition attractiveness and reduce delivery costs.

Opportunities for Growth

Despite the challenges, there are opportunities for European life insurers to drive transformative growth and create new value. The retirement savings and income market presents a significant opportunity, but insurers must address the competition from disruptors and focus on profitable propositions.

In summary, European life insurance companies can improve their profitability by addressing interest rate challenges, adapting to customer expectations, streamlining expenses, navigating regulatory requirements, reinventing their business models, restructuring conglomerate organizations, and embracing a customer-centric approach.

Interest rates and their impact on life insurance

Interest rates and insurance are deeply linked, and interest rate risk for insurance companies is a significant factor in determining profitability. When interest rates increase, the value of a bond or other fixed-income investments typically decreases. This negatively impacts insurance companies that hold assets such as long-term bonds, as the opportunity cost of holding these bonds at a lower rate over time also increases.

However, insurance companies are constantly receiving premiums and therefore investing new money. Even though the market value of bonds already held decreases with rising rates, insurance companies can simply hold on to them and collect the payments. At the same time, when they purchase more bonds and other fixed-income investments, these new investments will yield more than the previous ones. This raises the average yield of their holdings, and increases their interest income. Thus, rising rates tend to mean rising profits for insurers as they can add higher-yielding assets to their portfolios.

On the other hand, when interest rates decrease, insurance companies can benefit from having locked in higher coupon rates. Drops in interest rates can also decrease an insurance company's liabilities by reducing its future obligations to policyholders. However, lower interest rates can also make the insurance company's products less attractive, resulting in lower sales and, thus, lower income in the form of premiums that the insurance company has available to invest. The net impact on the company's profitability is determined by whether the decrease in liabilities is greater or less than any reduction in assets that is experienced.

In the context of Europe, low interest rates in the euro area have posed substantial challenges to the life insurance industry. Insurers in Germany and Sweden, in particular, offer their clients long-term policies, sometimes exceeding 30 years, without holding assets of a correspondingly long duration. Additionally, many policies contain generous return guarantees that are unsustainable in today's low-interest-rate environment. Stress tests conducted by the European Insurance and Occupational Pensions Authority revealed that under a prolonged period of low-interest rates, nearly a quarter of insurers would not be able to meet their regulatory requirements.

Life insurance in Europe: M&A and restructuring

Life insurance is available across Europe, and the market remains active despite economic uncertainty. France, Germany, Italy, and the UK have been identified as key markets for greater activity in the near term.

M&A and Restructuring Activity

M&A activity is expected to continue across all core markets in Europe as insurers focus on their core markets, examine capital deployment, and simplify operations. Survey participants suggest they are more likely to engage in M&A activity than any other restructuring activity over the next 18 months, with the majority expecting to be involved in acquisitions.

Drivers of Deal Activity

Economies of scale were identified as the most important driver of deal activity, followed by capital release and strengthening of competitive position. This is not surprising given the current macroeconomic environment.

Transaction Challenges

The success of a transaction is linked to the ability of a management team to execute it. Participants rank operational and technological complexity as their top challenge when completing a transaction, with achieving price expectations and a competitive landscape also being factors. ESG is a new area of focus as part of any diligence exercise for life insurance transactions due to the long-term nature of investments.

Life insurance products in the EU

Life insurance is a cornerstone of the European savings and retirement ecosystem, with €6 trillion in assets as of 2016. However, the industry has been facing challenges due to low-interest rates, unsustainable business models, and changing customer expectations.

The life insurance industry in Europe offers a range of products to meet the diverse needs of its customers. Here are some common types of life insurance products available in the EU:

• Traditional Life Insurance: This is the most basic form of life insurance, where the policyholder pays regular premiums to the insurer. In return, the insurer provides a death benefit to the beneficiary upon the insured person's death. Traditional life insurance can be further categorized into term life insurance and whole life insurance. Term life insurance provides coverage for a specified period, while whole life insurance offers lifetime coverage.
• Unit-Linked Policies: These policies combine investment and insurance, offering both a life cover and an opportunity for the policyholder to invest in various funds. The performance of these investments determines the returns, and the risk is borne by the policyholder. Unit-linked policies have gained popularity in recent years, with almost 74% of life insurance inflows in 2021 falling into this category.
• Capitalisation Policies: While information is scarce regarding this type of policy, it appears to be a form of savings plan where the policyholder pays regular premiums, and the insurance company guarantees a minimum return on the investment.
• International Mobility and Portability: Life insurance policies in the EU can offer portability, allowing policyholders to maintain their coverage when moving between EU countries. This feature is particularly relevant for individuals who frequently travel or relocate within the EU.
• Estate Planning: Life insurance can be utilised as a tool for estate planning, providing financial security for beneficiaries and helping to distribute assets according to the insured person's wishes.
• Pension Products: The European Insurance and Occupational Pensions Authority (EIOPA) has introduced the Pan-European Personal Pension Product (PEPP). This product is portable across borders and available to employed, self-employed, and unemployed individuals in the EU's 28 member states. PEPP is expected to impact the traditional life insurance market by limiting inflows and exerting pressure on profitability.

It is important to note that the specific life insurance products available can vary between countries within the EU, and individuals should carefully review the terms and conditions before purchasing any insurance product.

Frequently asked questions