Regulatory mis-steps are making insurance ‘uninvestable’: Allianz CEO

Multiline insurers are suffering from low market valuations and the ensuant high cost of capital, in part because of failings by financial and monetary regulators, Oliver Bäte (pictured), CEO of  Allianz, said on Thursday (November 18) during a S&P online conference on the European insurance industry.

“The financial system is not getting safer, it is getting more dangerous again,” Bäte said. He argued that regulators had created an uneven playing field by easing rules in some areas while taking hardline approaches in other areas.

Restrictions on dividend payments have left Bäte “puzzled” given the industry’s notable overcapitalization vis-à-vis regulatory requirements. The biggest effect of this has been to disorient investors, thus driving up the cost of capital.

In Bäte’s opinion, many European regulators were guided by their fears for the banking system, where lower solvency ratios and worries over credit exposures merited true concern. Extending the approach to other financial institutions showed regulators “overreacting on insurance dividends,” thus creating “a huge problem” for investors valuing the industry, he said.

“You make the sector uninvestable, very much like the banking sector is today,” Bäte said.

Market valuations are telling that very story with a discount in price to earnings ratios since the pandemic outbreak “despite better EPS delivery.”

Retail P&C enjoys one of the few exceptions, with less volatility in the books. In contrast, commercial P&C volatility may have driven away investors.

The life business suffers “very high” cost of capital on the impact of everlasting low interest rates, itself a questionable policy from the ECB. Heavy guarantees on legacy products deepen the impact, he noted.

Multiline insurers are largely punished for whatever anathema element of the business they hold. Monoline P&C and capital-light life insurers are getting the better deals, Bate noted, with caveat for the above-peer valuation of his own multiline group.

On the flip side, an easing on capital requirements for occupational pensions, include a complete lack of capital requirements in Germany, offers an example of unreasonable policy easing. The regulator stance looks off the mark on a continent with an ageing population, he noted.