AM Best is revising its outlook for the German non-life insurance market to Negative from Stable, mainly driven by uncertainty and significant changes in the operating environment.
- German non-life segment to maintain marginal overall technical profitability over the next 12 months
- The German property market is subject to volatility in its results due to its exposure to potentially large weather losses
- Pricing developments and momentum across the non-life segment are likely to remain mixed
- Germany’s economic trajectory is being influenced by a number of headwinds
Factors that support the Negative outlook according to the rating agency, include growth prospects challenged by economic uncertainty and rising inflation and vehicle use have put pressure on margins.
As well as natural catastrophe losses that can lead to volatility in results, and investment volatility may pressure non-technical earnings. Underwriting discipline likely to be maintained in most segments.
Germany’s economic trajectory is being influenced by a number of headwinds, including continuous supply chain disruptions, and both the direct and indirect effects of the conflict in Ukraine.
A potential return of lockdown measures in response to an emergence of new COVID-19 variants later in 2022 could exacerbate economic pressures, the agency noted.
As premium growth in Germany’s non-life insurance segment has historically been closely correlated with the state of the economy, this is being impacted by the current estate of the country’s economy.
This continued economic uncertainty is likely to constrain inflation-adjusted premium growth of the German non-life insurance market over the next 12 months. Continued positive rate movements in most segments act as partly moderating factors to the weak economic outlook and its related pressure on the segment’s top line growth.
German non-life segment to maintain marginal overall technical profitability over the next 12 months. This is largely dependent on the materialisation of rate increases, especially in motor and property lines, as rising claims inflation is notably weighing on margins.
While German non-life insurers have the flexibility to manage temporary increases in prices, extended periods of higher inflation could become a challenge for them, creating further pressure on profitability.
Increasing general inflation, particularly the rising labour costs, is likely to lead to increasing claims inflation in property and industrial lines. Motor will be influenced by the same issues, together with higher prices for repair, parts and vehicle replacement.
The German property market is subject to volatility in its results due to its exposure to potentially large weather losses.
Last year’s severe weather events – which included severe flooding and hail – resulted in an estimated claims bill at around €12.6 billion. And the country’s third-largest winter storms in 2022 recorded an overall claims impact of around €3 billion by half year 2022.
Those severe weather events weigh on claims experience. Natural catastrophe claims experience in Germany has been relatively benign over the last decade, but the fact that 2021 produced record high claims bills illustrates the potential exposure for the segment.
Natural catastrophe events have caused earnings volatility in the past, as the product risk in the property segment is dominated by severe weather events. However, the impact of natural catastrophe events on the market’s capitalisation has proven to be low.
The majority of German non-life insurers are well positioned to manage the financial impact of weather-related catastrophes, as most carriers benefit from adequate access to reinsurance capacity and comprehensive aggregate reinsurance covers.
Additionally, the penetration of comprehensive natural catastrophe insurance cover remains relatively modest in Germany, despite an increase in recent years.
Another factor that has led to revise its outlook for the German non-life insurance segment to Negative is that investment volatility may pressure non-technical earnings.
Many German insurers have reported in the 2022 mid-year results large unrealised losses on their investment portfolios due to the combined effects of rising interest rates, widening credit spreads, and volatile equity market performance.
It warned that if economic conditions continue to deteriorate, insurers’ investment portfolios may see further losses, which could potentially result from an energy supply crisis.
A clear, economic view on the magnitude of the impact the unrealised losses have had on capital bases is obscured by how unrealised losses are presented within the different accounting practices (German GAAP and IFRS).
Despite differences in presentation, a consistent trend of falling shareholders’ equity over the last half-year provides a measure of the impact. It is also expected that higher reinvestment yields, driven by the change in the interest rate environment, will help earnings generation over the medium term.
German insurers are likely to continue to aim for overall pricing discipline in their quest to maintain underwriting profitability. Although, competitive pressure in an environment of rising claims inflation will make it more difficult, the rating agency warned.
A greater focus on prudent risk assessment and selection by most carriers, in addition to the strong price momentum, are positive drivers to support profitable technical results for the industrial and commercial sub-segment this year, barring an abnormally large number of high severity claims.
Pricing developments and momentum across the non-life segment are likely to remain mixed, with the industrial and large commercial segment benefiting the most. Yet, for the motor market the adequacy of current pricing is less clear.
The private property segment has experienced a significant increase in claims in 2021, amid the highest natural catastrophe losses since reporting began. Those losses, according to the agency, are expected to somewhat support rate adjustments in 2022.
German non-life segment benefits from good diversification, which is expected to support the segments’ results, as weaker levels of performance in some lines are offset by stronger levels in others
German non-life insurers to face challenges stemming from uncertain economic conditions and increased volatility.
Heightened geopolitical tensions and increased inflation risks will likely pressure German non-life insurer’s profitability over the next year, supporting the Negative outlook for the segment.
Insurers will be able to withstand those challenges. It concluded that it could revise the outlook to Stable if technical profitability is maintained despite inflationary pressures and if economic conditions improve.
by Yana Keller