German non-life re/insurers are likely to continue raising their premium rates throughout 2019 to maintain profitability as the sector deals with increasing costs per claim and dwindling investment returns, according to a new report by Fitch Ratings.
The rating agency forecasts overall premium growth of 2.3% in the sector, largely driven by motor lines, which will see premium increases of around 3%, as well as a strong economic environment.
Motor premiums have risen by 36% since the end of the last soft pricing cycle in 2011 to counter the effects of medical expense inflation and higher vehicle repair costs, as well as modern driver-assistance systems, which have a higher cost per claim despite reducing the overall frequency of claims.
Overall, Fitch expects German non-life underwriting performance to remain strong, with good profitability from individual liability, accident and contents insurance making up for weaker motor profitability and resulting in a 2019 combined ratio of around 95%.
However, the market is likely to report underwriting losses for commercial property business in 2018 and 2019 despite achieving a combined ratio of 97% in 2017, which was primarily due to a benign claims experience for the year.
Insurers have not since been able to achieve the rate increases needed to turn commercial property business into underwriting profitability, Fitch said, and overcapacity will also continue to pressure market rates in 2018 and 2019.
Investment income has historically been the most important contributor to German commercial property business, but underwriting results will account for a larger share in 2019 as investment income drops by 3% and insurers push up premium rates to compensate.
The report forecast that the combined ratio for this line would be about 105% for 2018 and 2019, as claims experience returns to normal levels and the German economic environment enforces additional claims.
Fitch also claimed that the buildings insurance segment may turn profitable in 2019 “for the first time in many 100 years,” as insurers maintain underwriting discipline and push through further rate rises.
“We expect German non-life insurers to maintain underwriting discipline, but the trend of the raising average cost per claim to persist in 2019,” explained Fitch Director Christoph Schmitt. “This is driven by medical inflation and raising repair costs. As a result, insurers will be forced to raise premiums rates and grow claims reserves.”
