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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.
"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.
While low interest rates will also 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.
