Moody's: Flood-hit England's house prices and mortgage borrowers will benefit from Flood Re

The outlook for Germany's life insurance sector remains negative as persistent low interest rates will continue to weaken insurers' profits and solvency in the next 12-18 months, says Moody's Investors Service today in a new report. Conversely, the outlook for the P&C sector remains stable on continued pricing discipline and expectation that insurers will report combined ratios below 100% in 2016.

Moody's report, titled "Insurance -- Germany: Low Interest Rates Accelerate Changes in Weakening Life Sector, P&C Remains Stable", is available on www.moodys.com.

"While anticipated economic growth in Germany in 2016 and continued low unemployment are positive for German insurers, persistently low interest rates will negate these benefits and continue to weaken life insurers' profits," says Benjamin Serra, a Moody's Vice President -- Senior Credit Officer and author of the report.

In 2016, Moody's expects that more German insurers will move away from the sale of traditional life products to focus on alternative products that are less interest rate sensitive. This long-term shift will be credit positive for the industry. According to Moody's, these changes in business mix are also driven by solvency pressures.

"Around 50% of German life insurers are able to formally comply with Solvency II requirements only thanks to transitional measures. We expect the regulator to incentivise these insurers to change their business mix to improve their solvency position and ensure they comply with the new regime at the end of the transitional period," adds Mr. Serra.

Insurers' ability to sell alternative products and meet Solvency II requirements remains uncertain and Moody's envisages various scenarios for the future of the German life sector. In a best case scenario sales will hold up well, insurers' risk profiles will gradually improve and most insurers will meet Solvency II requirements within 16 years. However, Moody's points to downside risks, including potential failures in the German life market which would weaken the reputation of the sector. In a worst case scenario, many insurers will struggle to sell alternative products and meet regulatory requirements. Moody's base case scenario is currently closer to the best case scenario than to the worst case scenario.
Homeowners in parts of England at high risk of flooding could benefit from more affordable insurance premiums and from lower policy excesses over time following the introduction of the Flood Reinsurance Scheme in April, says Moody's Investors Service. 

"For people living in high-flood-risk zones, it has become harder to shop for insurance. Flood Re will make it easier for potential homeowners in these zones to get insurance and a mortgage," says Gaby Trinkaus, an Assistant Vice President and Analyst at Moody's. 

"Flood Re will help improve the saleability of properties, and lighten the impact on property prices in areas such as southeast England or Yorkshire, which have the highest concentration of high-risk zones," observes Carole Bernard, a Vice President and Senior Analyst at Moody's. 

Moody's report, entitled "Flood Re Will Have Limited Impact on UK RMBS Collateral in England" is available on www.moodys.com. The rating agency's report does not constitute a rating action. 

The rating agency says the scheme will make the flood-related portion of insurance premiums, and subsequently mortgage payments, more affordable for eligible households. The cost of flood insurance, included in building or contents insurance, can affect mortgage affordability and the amount a lender might lend. Flood Re is subject to certain eligibility criteria and will exclude residential buy-to-let landlords, or homeowners with properties built after January 2009. 

Moody's says that the exposure of UK residential mortgage-backed securities to areas with greater risk of flooding is minimal, averaging 50bps across pools, indicating good geographical diversification. Moody's loan-by-loan analysis shows that, on average, 0.5% of securitised mortgage loans are located in high-risk areas. On average, 1.5% of the pools are located in medium-to-high risk areas, and are concentrated in southeast England -- where securitised mortgage pools are coincidentally also highly concentrated. However, Moody's calculations show that the maximum exposure of the UK RMBS that it rates to areas in southeast England with medium-to-high risk of flooding is limited to a maximum of 0.7%. Using data from the Environment Agency, Moody's identified those areas in which 1) more than 1% of properties have a high risk of flooding; and 2) more than 1.5% of properties have a medium-to-high risk of flooding. Using these criteria, Moody's identified the 10 top high-risk areas and 31 top medium-to-high risk areas. Moody's calculated that only 0.2% of the UK RMBS it rates is exposed to medium-to-high risk flood zones in Yorkshire. Moody's research does not show material differences in terms of exposure to risk areas across UK RMBS pools and by pool types. 
lso have a negative impact on German P&C insurers' profits, Moody's expect P&C insurance prices to continue to increase moderately, and the industry's overall combined ratio to remain adequate at below 100%, absent any significant climatic events.