Proposals for a far-reaching reform of Germany's life insurance industry, signed off by the government earlier this month, could have both positive and negative long-term implications for the financial strength of rated German life insurers, says Standard & Poor's Ratings Services in a report: "German Life Insurance Reform Proposals Favour Policyholders."
"In our view, the proposed reform package would achieve its overarching goal of better supporting life insurers' ability to honour the long-term guarantees they offer to policyholders on traditional life insurance policies. We consider this generally positive," said Standard & Poor's credit analyst Ralf Bender. "Nevertheless, this comes at the expense of potentially lower earnings prospects and reduced financial flexibility, which could could put pressure on the financial risk profiles of German life insurers over time."
The rating agency added "Among the most significant aspects of the reform package, the government plans to change the rules governing the sharing of asset value reserves on bonds with clients whose policies are maturing or lapsing. Standard & Poor's has argued that the current rules provide a disproportionate advantage to policyholders whose policies are at maturity or who decide to cancel, and declining bond yields have highlighted this shortcoming. The Ministry of Finance was explicit that life insurance policyholders' long-term interests trump those of individual policyholders-a stance we share and which the proposed law aims to rebalance.
The government also plans to cut the guaranteed interest rate on life insurance savings policies that insurers will be allowed to offer to 1.25% from 1.75% as of 1st January 2015. This change, in our view, will help German life insurers meet their in-force guarantee commitments, although only over the longer term, and will also further encourage the development of new products with alternative guarantees."
"The proposed reform package would favour policyholders, in our view," said Bender. "Insurers will likely be able to reduce payouts on asset value reserves when interest rates remain low, but at the same time they will be restricted in their dividend distributions. In return, life insurers will be obliged to share larger proportions of the underwriting risk result with policyholders than previously."
Furthermore, the changes to acquisition expense accounting and price transparency will at the very least result in discussions with sales and distribution, and could also reduce profitability, the report says. German life insurers will find it more difficult to merely buy distribution power by offering high commissions.
"We believe that the pressure on the sector to further optimize costs will not subside, and that further innovation in developing new products will also be high on life insurers' agendas," said Bender. "We also believe that not all companies will be in favour of the reduced new business guarantee rate given the likely negative impact on growth and the only long-term upside on in-force guarantees, especially with regards to its targeted introduction."
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