Fitch Ratings’ Analysis
On March 14, 2025, Fitch Ratings indicated that the increase in government bond yields, driven by elevated defence spending, is likely to positively impact most European insurers.
The rise in yields typically enhances profitability by allowing insurers to invest premiums at higher rates, while the steepening yield curve could make certain life insurance products more attractive, thereby boosting new business volumes.
Beneficiaries of Higher Bond Yields
According to Fitch Ratings, life insurers with a focus on annuities or long-term savings products that include investment guarantees are expected to gain the most from higher bond yields. The rate at which premiums are invested significantly influences the appeal and profitability of these products.
In contrast, the sales and profitability of other types of insurance, such as unit-linked savings and short-tail non-life business, are less sensitive to fluctuations in bond yields.
Refinancing Costs and Profitability
While the higher bond yields could lead to increased refinancing costs for many European insurers, Fitch does not foresee a major negative impact on the profitability of the insurers it rates. This is due to insurers’ generally well-spread debt maturity profiles and the limited levels of debt dictated by regulatory considerations.
Additionally, credit ratings and other factors further help to mitigate the downside risks associated with rising refinancing costs.
Solvency II and IFRS 17 Impacts
Fitch Ratings also pointed out that the rise in bond yields, alongside greater yield volatility, will directly affect insurers’ Solvency II positions. However, the agency expects the impact to be limited, as most European insurers have effectively managed their assets and liabilities through duration-matching or hedging strategies to minimise their capital sensitivity to bond yield changes.
Similarly, the potential accounting effects under the new IFRS 17, which took effect on January 1, 2023, are expected to be minimal. This new standard causes changes in bond yields to have largely offsetting effects on both asset and liability values, unlike the mismatches that often occurred under the previous IFRS 4 standard.
Lapse Risk in Life Insurance
Fitch also highlighted the potential for higher lapse risk in the life insurance sector, as rising bond yields may encourage policyholders to cash in older contracts and reinvest in new policies offering better returns.
Despite the historical weakness in the correlation between bond yields and early redemption rates, increased yields could lead some insurers to boost their capital reserves under Solvency II to address potential “mass lapse” risks.
This could create pressure for weaker companies, as demonstrated in 2023 when Italian life insurer Eurovita (not rated by Fitch) faced a capital shortfall and subsequent regulatory intervention.
However, Fitch Ratings emphasised that the insurers it rates generally have diversified business models and robust capital positions, which greatly reduces their exposure to such risks.
