German public-sector insurers’ non-life underwriting profitability will likely weaken in 2023, driven by higher reinsurance prices and claims inflation, Fitch Ratings says.
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.
The German non-life insurance market is likely to experience a difficult financial year in 2023 due to several macroeconomic factors, such as the current inflation trend that has hit markets across the continent. This reflecting expectation that inflationary pressure on property and liability claims will overweigh higher fixed-income investment yields.
Reinvestment yields are likely to exceed maturing fixed-income investment coupons until 2024 and we expect return rates to increase to 2.8% for 2023 and 3% for 2024.
Increasing investment income helps insurers to mitigate the negative impact from claims inflation, but we believe that the additional investment income will be smaller than the decline in underwriting income.
A sustainable investment income increases compensation for the lower underwriting profitability and would support a revision of the sector outlook to stable.
Fitch forecast a net combined ratio of 98% for 2022 and 99% for 2023, compared with a five-year average of 93% between 2017 to 2021.
Public-sector insurers have large exposure to the harder-hit buildings insurance market (29% of non-life premiums compared with a market average of 10%).
The consolidation of German public-sector insurers
We expect consolidation of public-sector insurers to continue as many of them are of small operating scale. The most recent merger was that of Provinzial NordWest and Provinzial Rheinland in 2020.
Public-sector insurers represent a third type of insurer in Germany alongside stock companies and mutual insurers. Public-sector insurers are part of the German public-sector financial group Sparkassen-Finanzgruppe (Sparkassen) (A+/Stable).
Public-sector insurers’ strong market position is reflected in an aggregated market share of 10% in the German primary insurance market. Viewed together this group would rank second in Germany’s primary insurance market.
Fitch Ratings grants a one-notch uplift due to ownership, and, as a result, the insurers’ implied IDRs are the same as SFG’s.
Pressure on Profitability in German Non-Life Insurance
We expect premium growth in the buildings and property lines to be insufficient to compensate for the increase in reinsurance costs and claims inflation until at least 2024. As a result, the sector’s combined ratio could weaken to 99% in 2023.
Strong Market Position and Capitalisation We expect public-sector insurers to maintain their strong market position.
Their aggregated reported total assets of EUR180 billion and equity of EUR9.6 billion imply a favourable operating scale assessment.
Measured in 2021 gross written premiums (GWP), public-sector insurers have a 10.4% share of Germany’s primary insurance market.
Fitch regards most public-sector insurers as strongly capitalised – reflected in their Solvency II (S2) ratios, excluding transitional measures, all exceeding 200% at end-2021.