Commentary

2024 Italian Insurance Outlook: Improving Trends in the Life

Business and Resilience in Nonlife

DBRS Morningstar DBRS Morningstar considers the Italian insurance sector to be on an improving trend, notwithstanding
November 29, 2023
the challenging operating environment in 2022 and 2023, especially in the life insurance sector. This is
mostly supported by the increasing dynamic of traditional life insurance products’ premiums registered
Mario De Cicco in 2023 and the persistent good performance of the nonlife business. Sector-wide performance, which
Vice President, Insurance
Global Financial Institutions Group took a significant dent in 2022, is expected to improve in the short to medium term as both companies
+34 919 03 65 12 and policyholders have learnt to navigate the higher interest rates environment while inflationary
[Link]@[Link]
pressures have receded. As such, the high level of surrenders in the life segment is expected to
Marcos Alvarez normalise while the nonlife segment will continue to benefit from repricing initiatives implemented this
SVP, Global Head of Insurance year and higher market penetration within the nonmotor insurance segments. We also note that the
Global Financial Institutions Group
Italian insurance companies’ average capitalisation remained robust, notwithstanding the higher capital
+ 34 919 03 65 29
[Link]@[Link] requirements related to mass lapse risk and higher interest rates. Finally, we take a first look at the
recent regulatory measures included in the Italian draft budget law 2024, which will directly affect the
Italian insurance sector.

Key Highlights Exhibit 1 Total Premiums Evolution: Life/Nonlife (EUR Millions, 2016 – H1 2023)

• The positive performance of traditional

Life Non-Life
life products is expected to drive the
70,000
recovery of total Italian life insurance
premiums in 2024. 60,000

50,000
• In 2024, nonlife insurance premiums
will likely continue to increase, 40,000
supported by a further expansion of
the nonmotor business. 30,000

20,000
• We believe that Italian insurance
companies’ profitability will recover in 10,000
2024, supported by further growth of
-
traditional life insurance premiums H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1
and the sustained growth in the
2016 2017 2018 2019 2020 2021 2022 2023
nonlife segment.

Source: DBRS Morningstar, IVASS.

Page 2 of 8 2024 Italian Insurance Outlook: Improving Trends in the Life Business and Resilience in Nonlife | November 29, 2023

Life Insurance Premiums Still Down but on a Recovery Path

As reported by the Italian Institute for the Supervision of Insurance companies (IVASS), total life
insurance premiums were EUR 49.9 billion in the first half of 2023 (H1 2023). Life premiums remained on
a decreasing trend, declining by around 6% year-over-year (YOY) in H1 2023, albeit at a slower pace
compared with the same time a year before (-9% YOY). The reduction was attributable to products
belonging to Class III (unit and index linked), whose premiums decreased by 36% YOY, mostly affected
by the higher expected return on traditional insurance products and other financial instruments, which
made unit and index linked products less appetible for risk-adverse Italian retail customers. On the other
hand, traditional life insurance products belonging to Class I inverted the negative trend registered in H1
2022 with total premiums increasing by 10% YOY in H1 2023 (-9% YOY in H1 2022). The positive
performance of traditional life product premiums is expected to persist in H2 2023, driving the recovery
of total life premiums in 2023 and 2024.

Exhibit 2 Surrenders Evolution by Quarter (%, Q3 2012 – 2023)

Surrenders/ Total Life Reserves

9%
7.8%
8%

7%
5.8%
6%
4.8% 5.0% 5.0%
4.5% 4.5% 4.7%
5%
3.8%
4%

3%

2%

1%

0%
Q3 2015 Q3 2016 Q3 2017 Q3 2018 Q3 2019 Q3 2020 Q3 2021 Q3 2022 Q3 2023

Source: DBRS Morningstar, ANIA.

Page 3 of 8 2024 Italian Insurance Outlook: Improving Trends in the Life Business and Resilience in Nonlife | November 29, 2023

We also note that the first three quarters of 2023 have been characterised by a significant increase in
surrenders (lapse risk). Total surrenders increased to 7.8% of total life reserves in Q3 2023 as reported by
the Italian Association of Insurance Companies (ANIA), a significantly higher value compared to 4.7% in
Q3 2022 (Exhibit 2). The increase of surrenders was mostly attributable to higher liquidity needs from
policyholders in the current macroeconomic environment as well as their decision to reinvest their
liquidity in alternative financial and insurance products which became more remunerative after the
interest rates increase. We note that this risk is more significant in the Italian life insurance market
compared to other European peers, where life insurance policies often benefit from more strict
disincentives or penalties for early surrender or withdrawal (see: European Insurers Maintain Strong
Solvency Ratios Despite Large Unrealised Losses and Enhanced Lapse Risk, March 21, 2023).
On the other hand, in our view, larger and more established Italian insurance companies have been able
to successfully manage their exposure to lapse risk. In addition, a relevant portion of life premiums in
Italy are sourced through the postal and banking channels, providing a significant competitive
advantage to companies that can benefit from a strong and integrated banking network which gives
them access to a solid retail customer base.

On the other hand, the increase in surrenders could place weaker companies under pressure as it was
the case for Eurovita S.p.a. (Eurovita, not rated by DBRS Morningstar) which was placed under
temporary administration by the IVASS on January 31, 2023. The successful bail out of Eurovita by a pool
of five large insurance companies helped restore confidence in the sector. Surrenders would likely return
to more normalised levels in 2024 as monetary policy stabilises and both companies and policyholders
have absorbed the shock of rapidly increasing interest rates.

Increasing Premiums Partially Offset by High Catastrophe Losses in the Nonlife Business
In contrast with the life segment, total premiums in the nonlife business increased by 8% YOY in H1
2023 to EUR 22.3 billion. In particular, the motor sector’s premiums slightly increased to EUR 6.6 billion
in H1 2023, +5% YOY, mostly affected by a general upward adjustment of prices in the first half of the
year. Motor insurance premiums accounted for 30% of total non-life premiums in H1 2023. Nonmotor
insurance premiums increased by 9% YOY in H1 2023 with the best performance attributable to the
health insurance segment (+15% YOY), as well as credit (+22% YOY) and cargo (+17% YOY). We expect
that, in 2024, nonlife insurance premiums will continue an upward trajectory, supported by a further
increment of nonmotor premiums in sectors where the Italian insurance market remains relatively
underpenetrated.

According to the European Insurance and Occupational Pensions Authority (EIOPA) statistics, the
system-wide net combined ratio of the nonlife Italian insurance sector slightly increased to 94% in H1
2023, compared with 93% in H1 2022 (Exhibit 3). However, we expect the combined ratio to increase at
the end of 2023 as per the effect of the impact of natural catastrophes, which affected the Italian
territory in the second part of the year. In particular, severe convective storms, which affected northern
Italy in July 2023, are expected to generate an estimated industry-wide loss of around EUR 2.4 billion,
according to CRESTA Industry Loss Index’s estimates.
Page 4 of 8 2024 Italian Insurance Outlook: Improving Trends in the Life Business and Resilience in Nonlife | November 29, 2023

Exhibit 3 Net Combined Ratio in the Italian Insurance Sector Evolution (%, 2017 — H1 2023)

Combined Ratio
96%

94%

92%

90%

88%

86%

84%

82%

80%
H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1
2017 2018 2019 2020 2021 2022 2023

Source: DBRS Morningstar, EIOPA Insurance Statistics.

Sector-wide Profitability Impacted by the Negative Performance of the Life Sector

The profitability of the Italian insurance sector declined materially in 2022 as the sector-wide return-on-
equity (ROE) stood at 3.3% in 2022 versus 9.9% and 13.5% in 2021 and 2020, respectively (Exhibit 4). The
result was mostly driven by a net loss in the life segment of EUR 0.4 billion vs. EUR 4.3 billion net profit
in 2021. Conversely, the nonlife sector registered a net profit of EUR 2.7 billion in 2022 versus EUR 2.4
billion in 2021. The performance of the Italian insurance sector continued to be affected by the buildup
of unrealised losses on investments due to the interest rate increase, which mostly affected life insurers.
In December 2022, the net balance between unrealised gains and losses amounted to EUR -52 billion.
The same value decreased to EUR -45 billion in Q3 2023.

Exhibit 4 ROE Evolution (%, 2018—23)

ROE
16%
14.1%
13.5%
14%

12%
9.9%
10%

8% 6.8%

6%

4% 3.3%

2%

0%
2018 2019 2020 2021 2022

Source: DBRS Morningstar, ANIA.

Page 5 of 8 2024 Italian Insurance Outlook: Improving Trends in the Life Business and Resilience in Nonlife | November 29, 2023

As reported by the Bank of Italy’s Financial Stability Report, the ROE of the Italian insurance sector
improved in H1 2023, although the life insurance segment ROE remained negative on the back of the
persistent reduction of premiums income. We believe that Italian insurance market performance will
continue to improve in 2024, supported by further growth of traditional life insurance premiums and the
sustained growth in the nonlife segment.

We also note that the Italian insurance sector remained well capitalised with an average Solvency II
ratio of 260% at the end of Q3 2023, well above the minimum requirement of 100%. The capital ratio
increased from 249% in Q4 2022, when it was mostly affected by an increase of solvency capital
requirement attributable to mass lapse risk and interest rate risk requirements (Exhibit 5).

Exhibit 5 Solvency Ratios Evolution (%, Q4 2018—Q3 2023)

Solvency II Ratio
270%
260% 260%
260%
249%
250%
243%
240% 235%

230%
224%

220%

210%

200%
Q4 2018 Q4 2019 Q4 2020 Q4 2021 Q4 2022 Q3 2023

Source: DBRS Morningstar, Financial Stability Reports – Bank of Italy.

Regulatory Measures Introduced by the Italian 2024 Draft Budget Law

The latest Italian 2024 draft budget law text includes two important measures for the Italian insurance
sector. However, the law remains under discussion in the parliament and the timing of its
implementation is uncertain.

The first measure is the creation of a life insurance guarantee fund to protect policyholders claims worth
up to EUR 100,000. The fund membership would be mandatory and the functioning would be similar to
the one already existing for customer deposits in the banking sector. Similarly to banks, the Italian
insurance companies will incur into additional costs in the following years until the guarantee fund
reaches the final amount equal to 0.5% of total existing life reserves (currently around EUR 4 billion) by
2033. Nevertheless, we consider that the cost for the Italian insurance companies would be manageable
and the creation of the fund provides a systemic solution to potential market disruptions. This would
strengthen the system credibility and contain situations similar to the one experienced with Eurovita.
Page 6 of 8 2024 Italian Insurance Outlook: Improving Trends in the Life Business and Resilience in Nonlife | November 29, 2023

The second measure is related to the implementation of a mandatory protection for Italian companies
against damages directly caused by natural catastrophic events occurring in the Italian territory,
including earthquakes, floods, landslides, inundations, and overflows. This is an important measure
aimed at reducing the gap between economic and insured losses following a natural catastrophe (the
insurance protection gap), which is among the highest in Italy compared with European peers. The
current version of the law defines that Italian companies which fail to acquire the mandatory protection
from the private insurance sector might not receive public support to compensate damages caused by
natural catastrophes.
Page 7 of 8 2024 Italian Insurance Outlook: Improving Trends in the Life Business and Resilience in Nonlife | November 29, 2023

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Page 8 of 8 2024 Italian Insurance Outlook: Improving Trends in the Life Business and Resilience in Nonlife | November 29, 2023

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