(Finance) – The interventions by IVASS that have taken place Eurolife under interim management and blocked early redemptions to customers show “i risks that the interest rates rapidly increasing may lead to the weaker life insurers“. This was stated by Fitch Ratings in a report on the story of the Italian insurance company.
The rating agency notes that higher interest rates are generally good for life insurers, as premiums can be invested at higher yields. However, a sudden rate hike could lead to a increase in prepayments as customers collect their old contracts to reinvest the proceeds in new contracts which offer better yields.
The rapid rise in interest rates in recent months has forced European life insurers to increase capital which they are required to hold pursuant to Solvency II (S2) to hedge this so-called “mass lapse” risk. In the case of Eurovita, this led to a capital shortfall, the intervention of IVASS and a capital injection of €100 million by Cinven, the private equity firm that owns Eurovita.
“We believe Eurovita’s circumstances are different from those of the life insurers we evaluate in Italy and elsewhere in Europe – says Fitch – Even in late 2021, before interest rates started to rise, the Eurovita’s S2 ratio of 134% was significantly lower than average of Italian life insurers (about 230%)”.
The report also highlights that most life insurers have a diversified business mix, much of which is not exposed to the risk of a surge in prepayments. “Contrary to Eurovita, that is heavily biased towards traditional savings productsmany Life companies have a more uniform spread of traditional savings, unit-linked and protection products”, it is underlined.