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Outlook for German life insurance sector remains 'negative'

Publication Date: 08 Aug 2018 - By ReachX Team By ReachX T.

Environmental, Social & Governance Equity Fundamental Equity EU Consumer Financial Services


The outlook for the German life insurance industry remains negative as a combination of low interest rates and high guaranteed returns attached to policies sold in the past pressure profitability, according to new research. 

In a recent note to its clients, Moody’s opined that while German insurance companies benefit from relatively strong economic conditions, as it expects the country’s economy to grow by 2.2% in 2018, this support is offset by the challenging operating environment they face.

In addition to stubbornly low interest rates, competition in both the life and P&C insurance markets remains stiff, the rating agency noted further. 

"For German life insurers, low interest rates remain a key credit challenge, as their investment portfolios consist largely of fixed income securities," says Dominic Simpson, Vice President and Senior Credit Officer at Moody's. 

"Even if interest rates continue to rise, a significant duration mismatch between their assets and liabilities will force them to continue to reinvest maturing assets at lower yields for some time."

Life insurance companies are accelerating the changes to their business mix, emphasizing sales of less interest-rate sensitive products, to tackle these issues. However, the positive effects will remain modest for some time and traditional life insurance savings products continue to dominate reserves.

Reported Solvency II ratios for the German life players are high but not especially economic. While the industry's average Solvency II ratio was a high 382% at YE17, this falls to 250% when excluding transitional measures designed to help phase in Solvency II, and will likely fall further as the ultimate forward rate reduces.

The industry supervisor continues to review solvency remediation plans submitted by one third of life insurers, highlighting its concerns.

Moody's outlook for the P&C sector remains stable, reflecting modest price increases that should help bolster insurers' profitability. Moody's expects the industry to report a combined ratio (claims and costs as a share of premium income) below 100%, absent any further outsized catastrophe losses.

From a capitalisation perspective, the German P&C industry is comfortably positioned and is also less vulnerable to the low interest rate-related issues affecting life insurers.


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