German life insurer ratings remain unaffected by reductions in Solvency II (S2) transitional measures, despite higher bond yields. The Fitch Ratings focuses on fundamental S2 metrics that exclude transitional boosts and also uses the Prism Global model to assess insurers’ capital strength. Beinsure analyzed the report and highlighted the key points. Beinsure analyzed the report and highlighted the key points.
Since the launch of Solvency II in 2016, transitional measures on technical provisions (TMTPs) allowed insurers up to 16 years to adjust to the new requirements.
These provisions, which accounted for the cost of long-term investment guarantees in traditional life insurance contracts, were necessary when bond yields were low. The cost of these guarantees led to large TMTPs, offering insurers relief from immediate capital pressure (see Life Insurance & Retirement Savings. Forecast for the U.S. & Europe).
The European Union’s ongoing review of Solvency II regulations is expected to influence the German life insurance market. Proposed reforms aim to boost investments in long-duration assets and alleviate capital strain, potentially enhancing insurers’ solvency ratios. These changes are anticipated to be implemented by the end of 2024.
German Life Sector Weighted Average Solvency II Ratios
The recent increase in bond yields prompted BaFin, the German financial regulator, to order life insurers to recalculate TMTPs. Most have found that current yields, now higher than the average investment guarantees, have reduced TMTPs to zero. As a result, headline S2 metrics now align closely with the underlying ones Fitch relies on.
As of the end of 2023, all Fitch-rated German life insurance groups maintained S2 ratios with TMTP well above the 210% threshold needed for an ‘aaa’ Insurer Financial Strength rating.
Even without TMTP recalculations, these ratios remained robust. Additionally, Fitch’s Prism scores for capital strength rated all insurers as either ‘Extremely Strong’ or ‘Very Strong.’
Overall, the German life sector is well-capitalized, with a weighted average S2 ratio of 479% including TMTP and 305% excluding it. Yet, this average masks the reliance some companies have on TMTP, especially when yields were near zero. BaFin has indicated flexibility, suggesting it may allow TMTP recalculations if yields drop significantly again.
Economic Environment and Interest Rates
The rise in bond yields has prompted the German financial regulator, BaFin, to require life insurers to recalculate Transitional Measures on Technical Provisions (TMTPs).
This recalibration has led to a reduction or elimination of TMTPs for many insurers, aligning headline Solvency II metrics more closely with underlying figures.
Despite these adjustments, Fitch Ratings reports that German life insurers maintain strong capital positions, with Solvency II ratios comfortably exceeding the 210% threshold for an ‘aaa’ Insurer Financial Strength rating.
Profitability is improving as well, with greater room for margins in new spread-based products and opportunity to reinvest assets backing legacy liabilities at a higher rate, according to Swiss Re sigma. This is possible when the duration of assets is shorter than liabilities, as is the case for the industry in general.
Higher rates also raise risks, by creating incentives for policyholders to shop around for new policies at the same time that rising rates reduce the asset values.
The combination of lapse risk and asset risk can create liquidity or solvency concerns. With a few exceptions, these risks are contained. On net, life insurers materially benefit from the current rate environment as demand and profitability rise in tandem.
Market Performance and Premium Income
The German Insurance Association (GDV) has revised its forecast for premium income growth in 2024, now anticipating a 2.8% year-on-year increase, down from the previously projected 3.8%.
This adjustment reflects challenges in the life insurance sector, particularly the delayed impact of interest rate changes. However, the GDV remains optimistic about future growth, expecting premium income to rise between 3.1% and 5.5% in 2025.
The sector is experiencing a digital transformation, with insurers adopting technologies such as artificial intelligence and data analytics to enhance customer experiences and streamline operations. This shift aims to meet evolving consumer expectations for personalized and efficient services.
FAQ
German life insurer ratings have stayed strong despite reductions in TMTPs because Fitch focuses on fundamental S2 metrics, excluding transitional measures, and assesses capital strength using the Prism Global model.
TMTPs were introduced in 2016, allowing insurers up to 16 years to transition smoothly to Solvency II requirements. These measures accounted for the cost of long-term investment guarantees, which were significant when bond yields were low.
The rise in bond yields led BaFin, the German financial regulator, to order insurers to recalculate TMTPs. With current yields surpassing average investment guarantees, many TMTPs have now been reduced to zero.
All Fitch-rated German life insurers had S2 ratios with TMTP well above 210%, the threshold for an ‘aaa’ rating. Even without TMTP adjustments, their capital strength remains robust, rated as ‘Extremely Strong’ or ‘Very Strong’ by Fitch.
The EU’s review aims to encourage investments in long-duration assets and reduce capital strain. These reforms could improve solvency ratios for German insurers and are expected to take effect by the end of 2024.
Higher rates have improved profitability, allowing insurers to increase margins on new products and reinvest assets at higher rates. However, they also raise risks, such as policyholder lapse risk and asset value declines, which could lead to liquidity or solvency concerns.
The GDV has revised its 2024 premium income growth forecast to 2.8%, down from 3.8%, due to ongoing challenges. Nevertheless, they project growth between 3.1% and 5.5% in 2025, with a focus on digital transformation and customer-centric innovations.
