According to Fitch Ratings, German primary insurers’ ratings which are supported by their capital positions, has improved in recent years.
The rating agency highlighted that insurers’ capital positions are generally at least level with the ratings assigned, with ‘Very Strong’ or ‘Extremely Strong’ Prism Factor-Based Capital Model (FBM) scores.
Most ratings are constrained by factors other than capital, such as high interest rate risk, low profitability, limited scale, or low geographical diversification.
Fitch considers capital buffers, such as funds for future appropriation, or Rueckstellung fuer Beitragsrueckerstattung (free RfB) and the value of in-force business (VIF), in available capital.
Free RfB and the VIF made up 14% and 7%, respectively, of total available capital at end-2020, supporting German primary insurers’ capital positions.
Free RfB receives 100% equity credit in Prism FBM, as well as under Solvency II, due to its loss-absorbing characteristics. VIF receives 40% to 60% equity credit in Prism FBM.
Life asset risk is the main risk for German primary insurers, as it currently represents 40% of total undiversified Prism FBM target capital. This is driven by traditional German annuity business, which represents the majority of the sector’s in-force life insurance liabilities.
Although German primary insurers are now selling more unit-linked and hybrid products, the long duration of traditional annuity liabilities means the risk exposure breakdown will evolve slowly.
The well-diversified portfolios helped minimise the number of defaults and downgrades in insurers’ investment portfolios over 2020.
