Conservative investment portfolios helping to keep Germany’s non-life sector outlook stable

Written by Adam Cadle

10/07/2020

Germany’s non-life insurance sector has had its outlook maintained at stable by AM Best, partly due to the industry’s conservative investment portfolios limiting exposure to COVID-19-driven financial market volatility.

Bonds and debentures account for approximately 72% of the German non-life sector’s total investments, according to latest GDV figures, providing insurers with adequate liquidity, in AM Best’s opinion.

“In order to enhance yield, some insurers have modestly increased the credit risk in their investment portfolios through higher exposure to corporate bonds and non-European sovereign bonds, which have experienced a widening in spreads during the outbreak of the COVID-19 pandemic,” AM Best added. “The move into riskier and less liquid asset classes by some insurers is expected to slow as increased financial market volatility and economic uncertainty increase the focus on maintaining strong liquidity levels.”

As at year-end 2018, the market’s aggregate SCR under the Solvency II regulatory regime was 290%. However, AM Best noted that there remains a significant variance in the ratios of individual insurers.

Profit margins of German non-life insurers are expected to remain healthy, supported by stable to positive rate adjustments in most business classes. Investment returns are not expected to contribute significantly to earnings due to further pressure on interest rate levels and an increase in financial market volatility. Growth in the non-life insurance market is expected to be subdued in 2020 and 2021, due to the COVID-19-driven economic decline.

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