The sector outlook for the German life insurance sector in 2024 is neutral, Fitch Ratings says, reflecting expectation of a mixed operating environment, with improving investment yields and strong capital positions, but also declining new business and a generally uncertain investment environment.
The impact of current high inflation on German insurance market profitability in 2023 should be limited due to their ability to adjust prices. Europe’s largest economy will likely take a hit from global market conditions in 2023.
Increased market interest rates are generally positive for the sector, as they lower the reinvestment risk for German life companies, but they created unrealised capital losses in the fixed-income portfolio.
In absolute terms, insurers’ net underwriting result to deteriorate to EUR1.5 billion in 2023 from an estimated EUR2.7 billion in 2022 (2021: EUR3.9 billion), before the change in the claims equalisation reserve.
Rates in buildings, property and motor lines will continue to increase in 2023, albeit not sufficiently to cover the rise in claims driven by claims inflation.
Higher volatility in financial markets make it more difficult to make investment decisions. In addition, the strong increase in consumer inflation has reduced consumers’ disposable income, which we expect to further dampen demand for life insurance products in 2024.
Positive factors are insurers’ diverse business mix, significant earnings from sources that are not interest sensitive, and strong capital positions.
Fitch expects the average Solvency II coverage ratio, excluding transitional measures on technical provisions, to remain above 300% after it had increased to 312%, supported by the strong rise in market interest rates.
The multi-year reviews of Solvency II in the EU and the UK are approaching completion, despite the very different macroeconomic environment since these reviews began in 2020 and 2021.
The reforms fundamentally aim to boost investments in long-duration assets or businesses. The proposed reforms are expected to alleviate capital strain and enhance Solvency II ratios for these insurers.
The timeline for implementation is notably short, with new rules for a lower Risk Margin potentially in place by the end of 2023 and further updates, including a more flexible Matching Adjustment, anticipated by the end of 2024.
The EU’s revision of the risk margin formula, a key quantitative item in the review, aims to reduce its size for long-duration insurance business and lower sensitivity to interest rate movements. Changes in interest rates have mitigated the impact of these reforms.
While the EU also proposed increasing the volatility adjuster, this change is expected to have limited impact, as it has generally improved insurers’ solvency ratios in the past
Another notable proposal is to widen eligibility criteria for long-term equity assets, potentially reducing capital requirements for equity risk for insurers using the standard formula. However, this is not expected to lead to a significant increase in risky asset allocation.
by Yana Keller
