Ratings agency Standard & Poor’s believes insurance companies in Germany will continue and demonstrate resilient credit fundamentals following tough operating and financial conditions. German insurers and Germany based subsidiaries of international groups thus have an average rating of ‘A’ from S&P. In a recent market report, Standard & Poor’s says that it expects credit quality in the German non-life insurance market to remain stable, while the life insurance sector may see a downward trend over the next few years.
Standard & Poor’s report :
The report titled, “German Insurers’ Staying Power Faces An Endurance Test From The Financial Markets,” states that German life insurers will likely undergo greater challenges than their non-life counterparts.
We expect life insurers to be potentially more exposed than non-life insurers to persistently low interest rates, volatile equity markets, increasing credit risk, and forthcoming EU Solvency II regulatory measures. Lower bond yields reduce the spread between investment income and guaranteed rates on life insurance policies, which could strain capitalization and exert pressure to cut crediting rates. Life insurers will have to balance competitive crediting rates to policyholders to sustain new business against the need to protect policyholder capital buffers and financial resources.
Non-life insurers are, on average, better capitalized than life players, have a greater ability to generate earnings, and are less reliant on investment returns; therefore, their credit quality should remain stable. Nevertheless, in this highly competitive segment, reduced investment returns have, in our view, not led to an increased focus on underwriting profits in recent years.
We also monitor rated German insurers’ credit exposures to certain European sovereign issuers, mainly in the southern part of the continent. Currently, we don’t expect exposures to Portugal, Ireland, and Greece to have the scale to significantly erode German insurers’ capital bases. Nevertheless, exposures to Italy and Spain are more material, and increasing credit risk stemming from these countries could create rating pressure on Germany’s insurers.
From this perspective, we believe positive rating momentum in the German insurance market is relatively unlikely. Positive impetus could arise from a sustained gradual rise in interest rates or a strong improvement of underwriting performance. Instead, we regard ratings downside as more likely if financial market volatility reduces German insurers’ capital positions to levels that are inconsistent with our current ratings.
Source : S&P
