Neutral Fitch Ratings’ sector outlook for German non-life insurance reflects its expectation that inflationary pressure on motor and property claims will reduce while higher fixed-income investment yields will help improving insurers’ investment income.
Fitch anticipates a stable trajectory for German non-life insurance in 2024. German insurers are also likely to suffer from negative credit migration
Fitch expect underwriting profitability to be maintained in 2024 and forecast a stable net combined ratio of 99% (2023: 99%; 2022: 95.4%).
However, with net combined ratios of more than 100%, analytics forecast the motor and buildings line to report underwriting losses for 2024, although the losses will be smaller than in 2023.
The sector’s historical resilience in maintaining high reserve adequacy levels is also emphasised.
The net underwriting result should be stable at EUR500 mn in 2024 after weakening to that level in 2023 from an estimated EUR2.7 bn in 2022 (before the change in the claims equalisation reserve).
Premium adjustments in motor and property lines are expected to cover rising costs driven by claims inflation and higher reinsurance expenses.
Rates in the motor and property insurance lines should increase in 2024. In analytics view, the motor and buildings line are the hardest hit by claims inflation and rising reinsurance costs, and we forecast both lines net combined ratios to remain above 100% in 2025.
Fitch believe the premium adjustments will be sufficient to cover the rise in costs driven by claims inflation and higher reinsurance expenses.
The analysis highlights key factors contributing to this outlook, including expectations of reduced inflationary pressure on motor and property claims, improved investment income due to higher fixed-income yields, and the maintenance of underwriting profitability.
The report forecasts a stable net combined ratio of 99%, reflecting Fitch’s confidence in insurers’ ability to navigate challenges.
Fitch emphasised the expectation that rate increases will align with claims inflation in 2024. Analytics anticipates a significant improvement in investment income once low-yielding fixed-income bonds mature out of insurers’ portfolios.
Fitch projects a 6% stable premium growth in 2024, primarily fueled by rate increases in buildings and motor insurance. Despite challenges posed by claims inflation, the sector’s strong reserve adequacy is expected to persist.
What to Watch Claims Inflation Supports Premium Growth Fitch expects the German non-life market to achieve premium growth of 6% in 2023, up from an estimated 5% in 2022 (2021: 4.6%), due to rate increases in commercial, buildings and motor insurance.
Fitch expect commercial and buildings insurance to report annual premiums growth of at least 6% until 2024.
If premium growth would strongly outperform our expectations, the sector outlook could be revised to ‘neutral’.
Prerequisite would be that embedded rate rises are sufficient to compensate for the negative impact from claims inflation.
The report acknowledges challenges faced by the buildings and property lines, citing the impact of higher net retentions and reinsurance costs, particularly following the 2021 Ahrtal floods.
Fitch forecasts a slight increase in 2024 and 2025, contributing to the mitigation of the negative impact from lower underwriting profitability.
Fitch expects the German non-life insurance sector to maintain strong profitability, capitalization, and underwriting discipline through 2025.
Fitch believe that claims inflation and the increase in reinsurance prices peaked in 2023 leaving the sector under less pressure. The sector’s premium rate increases should be sufficient to cover the burden arising from claims inflation and reinsurance price increases leading to stable underwriting profitability in 2024.
All 17 Fitch-rated German non-life insurers have Stable Outlooks. One entity was upgraded in 2023 by one notch. The upgrade was not driven by the German non-life insurance activities but by the overall credit performance of the international group to which it belongs.
by Yana Keller