The low interest rate environment in Germany is creating challenges throughout the insurance market, with poorly performing life companies pressuring affiliated non-life insurers to focus on profitability and compensate for their life counterparts, according to a new report from A.M. Best Co.
“Non-life insurers are attempting to increase rates, as there is a heightened focus on technical income given challenges in their investment portfolios. However, strong competition has moderated these increases in previous years.”
The report, “German Life Insurance Challenges Put Pressure on Non-Life Sector to Deliver”, states that as the current low-yield environment places life companies under increasing strain to honour rich guarantees on in-force life books, non-life insurers are attempting to increase premiums and profit margins. However, cross-selling opportunities in lines of business such as motor and residential property insurance create a competitive market, which is further fuelled by the growth of aggregators. In 2012, total premiums in the German insurance sector increased 1.5% to E180.7bn, according to data from Gesamtverband der Deutschen Versicherungswirtschaft(GDV). The German insurance trade association expects similar growth in 2013.
German non-life premiums have grown largely as a consequence of rate increases implemented over the past two years, with insurance participants attributing the rise in business to a correction of insufficient premiums as opposed to increased exposure. Stefan Holzberger, managing director, analytics, said “Non-life insurers are attempting to increase rates, as there is a heightened focus on technical income given challenges in their investment portfolios. However, strong competition has moderated these increases in previous years.”
The report looks at the impact of the extensive rainfall in June 2013, which caused flooding in eastern and southern areas of Germany such as Bavaria, Saxony and Thuringia. The floods were the worst to hit Germany since 2002, and higher rates and deductibles are anticipated for flood coverage. However, for A.M. Best’s rated German companies, this is expected to be an earnings event rather than a hit to capital, given that 2013 was fairly benign for natural catastrophes and large losses before the floods
A.M. Best believes political developments could also have a major impact on the German insurance sector. Yvette Essen, director, industry research - Europe and emerging markets, and report author, said: “This year’s forthcoming elections may result in changes to the health market and potentially a review of the life sector. The insurance sector is braced for regulatory developments, with market participants expecting partial implementation of Solvency II in the next two years.”
Despite the challenges facing German insurers, A.M. Best expects ratings to remain stable over the near term, although in extreme scenarios, life companies already under strain from the prolonged period of low interest rates may see capital deteriorate, which would place pressure on ratings. Fortunately, the German insurers followed by A.M. Best benefit from a diversified book of both life and non-life businesses. These organisations are able to offset underperforming life operations with healthy profits from other lines of business.
To access a complimentary copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=216700.
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