AM Best is maintaining a Stable outlook on the German non-life insurance sector thanks to healthy technical profitability and investment portfolios with limited exposure to COVID-19 related financial market volatility.
AM Best expects the profit margins of German non-life insurers to remain healthy, supported by stable to positive rate adjustments in most business classes.
Investment returns are not expected to contribute significantly to earnings due to further pressure on interest rate levels and an increase in financial market volatility.
Growth in the non-life insurance market is expected to be subdued in 2020 and 2021, due to the COVID-19-driven economic decline.
AM Best says Germany’s economic fundamentals had already weakened during 2019, and the country went into recession in March 2020. Gross domestic product growth for 2019 is estimated at 0.6%.
AM Best expects overall underwriting earnings for the German non-life insurance market to remain positive in 2020, supported by rate increases in most segments that are sufficient to balance out claims inflation or the increased occurrence of higher frequency and severity claims in some sub-segments.
In 2019, the GDV reported a combined ratio of 93% for the overall non-life sector. That performance reflected significantly better claims experience and hardening rates in the industrial property sub-segment, and generally lower natural catastrophe experience.
AM Best notes that German non-life insurers have exhibited effective cycle management and good underwriting discipline, reporting combined ratios of between 93% -96% over the period 2014 to 2019.
While technical profitability is deemed sustainable over the medium term, in the absence of material natural catastrophe events, investment income is expected to make only a modest contribution to earnings, reflecting low interest rates and increased financial market volatility.
AM Best expects gross written premium growth to decline in 2020, with the severity depending on the length and depth of the country’s COVID-19-driven economic downturn.
The impact across various business classes is expected to differ, with commercial lines that are closely linked to economic activity likely to be more severely impacted.
The expectation is that premium growth will recover once COVID-19-related restrictions are relaxed.
Am Best says profitability in Germany’s motor market, the country’s largest individual segment, has been positive over the past five years, with reported combined ratios of between 96% to 99%.
The underwriting environment for industrial property lines continues to be challenging due to underpricing, although premium rates started to harden in 2019.
However, AM Best believes that underwriting discipline in other lines of business will continue to support profitability for the overall property segment.
The low interest rate environment continues to dampen investment results in the German non-life sector.
Investment yields are expected to remain subdued in the near-term following the European Central Bank (ECB) announcement of a series of measures to support the European economy, including an expansion of the existing asset purchase programme and a reaffirmation of key ECB interest rates – the ECB’s main refinancing operations, the deposit facility, and the marginal lending facility.
The German non-life market maintains a robust level of capital adequacy, supported by insurers’ relatively low underwriting leverage and conservative investment strategies.
As at year-end 2018, the market’s aggregate Solvency Capital Ratio under the Solvency II regulatory regime was 290%, as reported by the Federal Financial Supervisory Authority – BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht).
However, AM Best notes that there remains a significant variance in the ratios of individual insurers.