Favourable pricing trends will prompt improvements in the profitability of German property and casualty insurers in 2014 and are the main driver of the stable outlook on this sector, says Moody's Investors Service in a new report published today. However, in the life segment, low interest rates will continue to pressurise insurers' margins and are the key reason for the negative outlook.
The new report, entitled "German Insurance: P&C Outlook Changed to Stable; Life Outlook Maintained at Negative", is now available here. Moody's subscribers can access this report via the link provided at the end of this press release.
Due to the high level of weather-related claims in 2013, German P&C insurers will report weak results and increasing combined ratios. However, Moody's says that these poor results will support the positive pricing momentum initiated in the German market since 2011, including in the motor segment. In particular, Moody's expects German motor insurers to report combined ratios close to or below 100% at year-end 2014, after several years of underwriting losses and peaks in the combined ratio at 107%.
In addition, several macro-economic factors will contribute to support P&C and life insurance activities in the next 12-18 months: (1) the German economy has been resilient in recent years and Moody's expects German GDP to grow from 2014 onwards, at a higher pace than in other European countries; and (2) the unemployment rate will likely remain at low levels.
Moody's says that low interest rates will continue to erode life insurers' margins. Insurers' earned investment yields (excluding realised gains) will continue to trend down in the next 12-18 months, as new investments yield returns below older maturing assets, and approach the level of the average guarantee. Moody's believes that life insurers thus have decreasing room for manoeuvre to reduce the rates credited to policyholders and their margins will continue to decline.
Regulatory developments could be supportive, but only to a limited extent in the short-term. Moody's says that the forthcoming Solvency II regime should contribute to foster risk management and to limit aggressive commercial practices in the German market. However, the long transition period that is likely to be agreed for the implementation of this regime means that Solvency II will not be a catalyst for short-term significant changes.
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