2015 will be a challenging year for Germany's life insurance industry as insurers grapple with lower profitability on the back of record-low interest rates and quantitative easing, as well as additional headwinds from regulatory changes, according to Moody's Investors Service that maintains a negative outlook for the life sector.
For the property & casualty (P&C) sector Moody's expects a slowdown in price increases but still good combined ratios and, as a result, maintains its stable outlook.
"2015 will be a pivotal year for German life insurers as the key changes from the 2014 life insurance reform take effect, forcing insurers to review their business model. While the reform will ultimately be credit positive for the industry, it will initially cut sales and profits", said Benjamin Serra, VP-Senior Credit Officer at Moody's.
The preparation for the forthcoming Solvency II regime is an additional headache for the sector. The rating agency believes that the move will be credit positive for German life insurers in the long term, but some smaller providers are currently too thinly capitalised to comply and these companies and/or the regulator may have to solve this situation before the implementation of the new regulatory regime. Any failure of one or several players in the German market could have reputational costs for the entire sector.
Moreover, interest rates have reached historically low levels and on January 22 the European Central Bank (ECB) decided on large-scale asset purchases under its first ever quantitative easing (QE) programme, sending down bond yields and insurers' investment returns.
"Low interest rates and the ECB's decision to introduce quantitative easing will put further pressure on insurers' profitability and solvency in the coming months. Many life insurers reduce the rates they credit to policyholders to protect their financial strength, but this is becoming less and less effective as they are increasingly constrained by the high level of guarantees sold in the past", said Serra.
For the P&C sector, Moody's expects combined ratios to stabilise at good levels, despite a slowdown in price increases. The rating agency estimates that P&C insurers will report a combined ratio for 2014 of 96%, significantly down from 103% in the previous year, due to lower level of natural catastrophy losses and continued price hardening. Moderate price increases and the recent low level of claims inflation will support the profitability of the sector over the next 12-18 months.
Moody's also notes that Germany's economic outlook will support insurers' activity, particularly in P&C where growth in insured sums correlates to GDP growth. The rating agency forecasts Germany's GDP to grow by 1% in 2015 after a 1.5% expansion in 2014. However, in the life sector, ongoing macro-economic uncertainties in the euro area and the associated low returns from long-term investments may hamper insurers' ability to sell savings and retirement products.
