EMEA Outlook 2025: Europe's insurers to show resilience amid global uncertainty

Growth and profitability prospects for Europe's insurers remain strong in 2025 even in the face of a series of headwinds.

2024 was a challenging year, marked by a spate of natural catastrophes, heightened geopolitical tensions and macroeconomic uncertainty, which affected insurers directly and indirectly. 2025 is unlikely to offer much respite, with at least $100 billion of annual insured catastrophe losses seemingly the new norm and new governments in many countries trying to make their mark after 2024's swathe of elections.

Despite facing external pressures such as geopolitical and climate risk and demographic shifts, "there's a lot of optimism about the sector going into 2025," Philip Vermeulen, insurance leader for Europe, the Middle East, India and Africa at consulting firm EY, said in an interview. "There's a really nice growth opportunity in both [life and non-life] sectors," Vermeulen said. "But there's a lot of work to do in order to benefit from it."

Starting strong

Europe's insurance industry will start 2025 in a financially healthy position overall. Price hikes, slowing inflation and interest rate increases have boosted insurers' underwriting and investment results, which has in turn kept capital levels high. For life insurers, interest rate rises have "increased Solvency II coverage to close to record levels," Will Keen-Tomlinson, senior analyst at rating agency Moody's, said in an interview. "It has dropped slightly from a peak, but we still see most insurers with life business sitting comfortably above the top end of their Solvency II appetite."

Capital levels overall are robust. An insurance stress test conducted by the European Insurance and Occupational Pensions Authority found that although the industry's collective solvency ratio would take a big hit under the exercise's stress scenario — a resurgence of geopolitical tensions — it would remain above the 100% threshold for regulatory intervention, at 123.3%.

The positive trends are expected to continue in 2025. Amid rising inflation, non-life insurers had struggled to keep prices in line with claims costs, particularly in personal lines motor. But by abating increases and taking corrective pricing action, they were largely able to get on top of the situation in 2024.

"We think that price increases in motor and elsewhere will keep pace with loss trends," Manuel Arrive, a director in the insurance team at Fitch Ratings.

Prices in some non-life commercial and specialty lines of business started to fall in 2024. In commercial "we've seen a plateauing in prices in aggregate and also some reversals in specific lines," Keen-Tomlinson said, but noted that this was from a strong starting point. "We don't see any particular concerns for the next year or so that performance will start to deteriorate."

While interest rates have started to come down gradually, this does not bode ill for insurers' investment returns in the near term. Interest rates remain higher than the almost zero or even negative rates some countries saw in the years following the 2007–2009 global financial crisis and, because of the long duration of life insurers' investment portfolios, it will be some time before they feel any negative effects from recent decreases in interest rates.

"Although reinvestment yields will be lower in our base case in 2025, they will still remain above the average portfolio running yield," Arrive said.

Looming challenges

Insurers cannot afford to take their eyes off the ball, however. Inflation may be abating for now, but the uncertain geopolitical environment could reverse that. US President-elect Donald Trump, for example, has signaled he could impose tariffs on a range of trading partners, including China and the EU, when he takes office in January.

If further conflicts, tariffs or sanctions disrupt supply chains and fuel inflation, "that is something that I think could lead to threat within the [property and casualty] industry," Keen-Tomlinson said.

Even under current conditions, non-life insurers will need to continue to match prices to claims cost inflation if they are to maintain current profit levels.

"We believe there must be further premium rate increases across Europe," Volker Kudszus, sector lead for insurance ratings at S&P Global Ratings, said in an interview, adding that this would prevent profit margins from falling rather than widening.

Geopolitical upheaval could also trigger turmoil in the capital markets, which would hit insurers' investments. This is the industry's main vulnerability to geopolitical risks, according to Kudszus. "If you look back [at] the last few crises, it always has been via markets," Kudszus said.

Not all insurers are doing well as the industry average might suggest.

Europe-based multinational insurers Zurich Insurance Group AG, Allianz SE and AXA SA made "quite bold" commitments about their future earnings per share and return on equity growth at recent investor days, which might on the surface suggest a bright future for the industry as a whole, according to Davide Corradi, managing director and senior partner in Boston Consulting Group's insurance practice. However, while two-thirds of global listed insurers have produced a total shareholder return in excess of their cost of capital, one-third is below, Corradi said in an interview. "There is a bigger and bigger divide between the winners and the losers," Corradi said.

As a result, Corradi expects an increase in mergers and acquisitions over the next two to three years, bolder turnaround ambitions from management teams and greater mobility of talent, both between insurers and to insurance from other industries. "These are things that have not necessarily characterized the past, [but] could make the industry a bit more dynamic in the future," Corradi said.

Fuel for growth

Some of the industry's challenges could be turned into opportunities.

If newly elected governments become more protectionist and compete economically with other nations more, there would be greater complexity for multinational insurance groups to navigate, according to Vermeulen at EY. But governments shifting spending priorities toward areas such as defense in a more uncertain and polarized world could mean less spending on retirement provision and other social protections. "That then opens up the opportunity for life insurance companies," Vermeulen said.

Additionally, while the increasing frequency and severity of natural catastrophes is a persistent concern for non-life insurers, it also gives them scope to develop new solutions. The industry's approach to managing natural catastrophe risk by raising prices and restricting coverage can only go so far, according to Vermeulen.

"At some point, it starts to lead to degrowth or it starts to lead to customer sentiment that you're not playing your role, you're not living up to your expectations as an insurance company, etc.," Vermeulen said. "A lot of the focus going forward is on how do you innovate to lean into this." Examples include developing risk mitigation and prevention techniques and using data and artificial intelligence for more precise underwriting, Vermeulen said.

Whatever 2025 throws at the insurance industry, history provides confidence that it will be able to cope. "The industry has proven its ability to adapt to changes, to mitigate sharp shocks that we've seen lately: inflation, COVID, financial crisis, you name it," Fitch Ratings' Arrive said. "It's one of the sectors where the defaults are the lowest, so it's very resilient."