European life insurers face shrinking business volumes and profitability, according to a new report from Chinese research house Dagong Europe Credit Rating.

Implementation of the new Solvency II prudential regulation regime is also affecting products offered.

There are also rising compliance costs associated with higher capital requirements, and issues with low investment returns, according to the report, obtained by insuranceNEWS.com.au.

“We expect life insurers to shift product portfolios to more capital-efficient products,” it says.

“However, growth and profitability is expected to weaken and to depend on changes in interest rates, behaviour of financial markets and any regulatory changes.”

The report says Solvency II is expected to reduce risk and improve the management of life companies’ investment portfolios. But low returns from bonds and other fixed-interest investments could push portfolio managers to take more risks.

“We also expect some insurers will increase asset risk in search of higher yields by venturing to higher-risk and more complex asset classes such as real estate, infrastructure and speculative grade credit.

“In addition, we expect investment choices [will] continue to be reduced by the European Central Bank’s quantitative easing program, which absorbs a large amount of high-quality assets.”

Premium growth is expected to vary significantly across European countries in the next year. The report says the UK, Italy and France should see growth, but Germany and the Netherlands should drop slightly.  

“We expect competition to intensify and put pressure on pricing, partially offset by the industry’s increased focus on underwriting profitability, improving efficiency and effectiveness of distribution channels, claims handling and reducing operating costs.”

Dagong also expects merger and acquisition activity to increase, driven by a lack of organic growth in the most mature European markets.