Pandemic magnifies ‘hurt’ of low interest rates for German insurers

The COVID-19 pandemic has exacerbated the challenges of low interest rates for German insurers, according to S&P Global Ratings.

In its report, titled " German insurers: the pandemic heightens low-interest-rate challenges", the ratings agency said the main impacts are related to investment volatility and lower-for-longer investment yields.

Silke Sacha, credit analyst at S&P Global Ratings, explained: "This is hurting all lines of business, but we expect life insurers will be hardest hit, owing to still high back-book guarantees of about 2.5 percent in 2020 and a greater dependence on investment income than property/casualty and health segments."

Property/casualty insurance will need to continue to focus on underwriting profitability, the report said, while the scope for price wars will be more limited than in previous price cycles as a result of the lower investment returns.

For German health insurers, the key to successfully navigating the current market conditions will be to balance the very low interest rate environment against medical inflation via premium adjustment features.

S&P added that despite the challenges, German insurers had “withstood” the turbulence of 2020. Ratings remained largely stable, with the average rating in the upper 'A' category.

As of March 15, 2021, 86 percent of the 60 German insurers rated by S&P had a stable outlook, while negative and positive outlooks balanced each other out at 7 percent each. Most negative outlooks reflected pressure on industrial insurance performance and negative outlooks on insurers' parents, in particular banks.

Ratings on German insurers also benefit from the insurance groups' diversity as most groups write multiple lines of business, including life, health, and property/casualty.

S&P said that although the insurers' operating performance was volatile throughout 2020, it had ended in a much better position than the agency had anticipated at the mid-year point. In particular, the capital market recovery, lower claims frequency in motor and household insurance, and a benign natural catastrophe year helped the sector to post 2020 earnings that were only “a little below 2019”.

Sacha added: "Through 2021 and 2022, we expect their good diversification, sound capital adequacy, and focus on underwriting profitability will counter accelerated challenges and maintain ratings stability."

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