Gallagher Re has warned a recession could impact the European life industry in many ways, such as affecting the new business growth trajectory or reducing investment returns earned on asset portfolios. 

Another key risk is that recession could focus customers’ minds on whether they can afford insurance, and if too many allow their policies to lapse at once, it could create acute financial problems for carriers, the reinsurance broker says in a report. 

The Gallagher Re report comes after the International Monetary Fund said in July the global economy is experiencing peaking inflation and low growth. The institution estimated growth will decline from 3.5% last year to 3% this year and growth in Europe is set to be even more muted, with growth tipped to slow to 0.9% in the euro-zone area. 

“Many consumers are still struggling with a cost-of-living crisis,” the Gallagher Re report says. 

“Inflation has driven up the cost of goods, services and, crucially, borrowing, with the cost of debt typically rising faster than any increase in investment returns. 

“Some life insurance customers may have to make tough choices about discretionary purchases of financial products. But a potentially even larger lapse risk could arise if a lot of existing customers simply take their money elsewhere.” 

Rising interest rates could also force consumers to review their existing policies with less-than-desired outcomes for the life industry. 

New investment and savings products will likely be introduced that offer higher rates and the report says this “increases the risk that customers will begin to view existing, in-force life policies as less attractive, having seen better returns on offer from banks and other providers”. 

Gallagher Re says it is “never comfortable” to lose business but if it happens at scale during a period of rising interest rates, that brings further difficulties for life insurers. 

“It is a particular worry for life insurers in continental Europe, where rising interest rates have also driven down the market value of the fixed-income assets in their portfolios,” the report says. 

The report says rising lapse risk for European life insurers has recently been highlighted by ratings agencies such as Moody’s and Fitch Ratings. 

It says lapse risk has been formally recognised by European regulators for some time, with a mass lapse event defined under Solvency II as a one-off first-year shock where 40% of life policies immediately lapse. 

“With the recent changes in the economic environment, insurers’ thinking on mass lapse risk has evolved as they become more aware that not only is the risk far more tangible than previously thought, but that the economic consequences could be highly significant if the risk were to materialise,” the report says. 

Click here for the report.