Fitch Ratings has warned that the German life re/insurance sector is likely to face significant investment challenges once the country emerges from the COVID-19 pandemic, which is set to prolong the ultra-low interest rates that have troubled the country since the 2008 crisis.
The rating agency believes that interest rates will be the biggest challenge for the sector going forward, given the high proportion of business with long-term investment guarantees.
Low rates constrain reinvestment yields, gradually eroding returns on investment portfolios, making it increasingly difficult for insurers to cover policyholder guarantees solely from investment income, Fitch argues.
Additionally, re/insurers’ portfolio yields are reducing faster than the average guarantees on their liabilities due to asset-liability duration mismatches, with asset durations often significantly shorter than liability durations.
Declining ability to meet investment guarantees pushes up re/insurers’ reserve requirements, weakening their earnings and capital.
And low yields also make it harder to offer guarantees that are attractive to new customers, putting pressure on business models.
“German life insurers have taken various measures in response to more than a decade of low interest rates. They have gradually shifted their business mix towards products whose earnings and capital requirements are less sensitive to interest rates,” Fitch stated.
“This takes time given the long duration of many existing contracts, which can be 30 years or more, and we expect the trend to continue for several years.”
However, while the German life re/insurers could be pressured by low interest rates after the pandemic, they generally maintain strong credit quality, Fitch added, supported by diverse business, strong capital positions, and earnings from sources that are not interest-sensitive.