European insurers' investments are becoming riskier, and that could mean negative ratings implications for the carriers, Fitch Ratings says.

Fitch notes that the increase in risk is small so far, but outlines its concerns: “While there has not been a huge shift by insurers from bonds into riskier asset classes, credit-risk exposure within bond portfolios has materially increased,” the ratings agency says. “There has also been a tendency for insurers to invest for longer durations. Although the increase in risk within bond portfolios has not reached a level that would result in downgrades, Fitch views this development as potentially credit negative.”

Fitch says bond prices look high across the entire risk and duration spectrum. “If interest rates rise, credit spreads would likely also rise. Thus, the value of higher-risk bonds would suffer more than low-risk bonds, and that of longer-duration bonds would suffer more than shorter-duration bonds. Overall, the value of insurers' bond portfolios is now more vulnerable to interest-rate rises.”

Fitch says it believes generating sufficient investment yield in the current low interest rate environment is the biggest challenge currently facing the European insurance sector.

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