Low investment yield challenge for German life insurers puts pressure on non-life affiliates to deliver

Challenges in the German life insurance industry have led their non-life affiliates under pressure to compensate, notes a new special report from ratings firm A.M. Best.

The current low interest rate environment is a major reason life companies are performing poorly, putting pressure on non-life companies to increase premiums and profit margins, according to the report.

“However, cross-selling opportunities in lines of business such as motor and residential property insurance create a competitive market, which is further fuelled by the growth of aggregators,” the firm says.

Last year, total premiums in the German insurance sector increased 1.5% to 180.7 billion euros, it adds. Similar growth is expected for 2013, A.M. Best notes, basing those figures on data from the trade association Gesamtverband der Deutschen Versicherungswirtschaft (GDV).

“German non-life premiums have grown largely as a consequence of rate increases implemented over the past two years, with insurance participants attributing the rise in business to a correction of insufficient premiums as opposed to increased exposure,” A.M. Best says.

“Non-life insurers are attempting to increase rates, as there is a heightened focus on technical income given challenges in their investment portfolios,” adds Stefan Holzberger, managing director of analytics for A.M Best. “However, strong competition has moderated these increases in previous years.”

The political and regulatory climate in Germany could also have a major impact on the insurance industry there, particularly the life sector, the rating agency notes.

“Despite the challenges facing German insurers, A.M. Best expects ratings to remain stable over the near term, although in extreme scenarios, life companies already under strain from the prolonged period of low interest rates may see capital deteriorate, which would place pressure on ratings,” the firm says.

“Fortunately, the German insurers followed by A.M. Best benefit from a diversified book of both life and non-life businesses. These organisations are able to offset underperforming life operations with healthy profits from other lines of business.”