Negative outlook assigned for German life insurers

Written by Adam Cadle

03/11/2020

The outlook for German life insurers for 2021 is negative, reflecting the pressure low-interest rates exert on earnings and solvency, Moody’s Investors Service said in a report published today.

The outlook for the country's property and casualty (P&C) insurers is stable as the sector benefits from healthy underwriting margins and strong capital adequacy.

While the immediate effect of the coronavirus outbreak on both German life and P&C insurers will be manageable, lower economic growth and low-for-longer interest rates will have a negative longer term impact, for life insurers especially.

“German life insurers’ earnings have been under pressure for several years due to low interest rates reducing ordinary investment returns,” Christian Badorff, vice-president, senior analyst at Moody’s Investors Service said.

“This dynamic has been compounded by the coronavirus economic slump, with rates not forecast to climb in the near future.”

German life insurers’ capital adequacy is also highly sensitive to low-for-longer rates and the
potential regulatory changes to the Solvency II capital regime currently under discussion.

P&C insurers’ underwriting profitability was fundamentally strong at the start of the pandemic, and Moody’s expects no meaningful decline in earnings for 2020. However, low yields will further erode investment returns beyond 2020. Weaker business volumes are expected due to slower economic activity, higher unemployment, and lower disposable incomes.

Lockdowns and social distancing measures will also obstruct the industry’s personal distribution channels, which accounted for about 90% of new business pre-crisis.

Overall, the quality of German insurers’ investment portfolios remains sound, with exposure to risky asset classes and moderate credit risk remaining limited.

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