S&P Global Ratings analysts have highlighted how the COVID-19 related recession is heightening some of the difficulties the German insurance sector already faced prior to the pandemic.
The main impact relates to investment volatility and lower-for-longer investment yields and is seen as hurting all lines of business, but analysts expect life insurers to be hardest hit.
This is owing to still high back-book guarantees of about 2.5% in 2020 and a greater dependence on investment income than P/C and health segments.
Concurrently, analysts believe property/casualty insurance will need to continue its focus on underwriting profitability, with more limited scope for price wars than in prior price cycles given lower investment returns.
For health insurers, balancing the very low interest rate environment against medical inflation via its premium adjustment features will be key.
S&P says German insurers nevertheless withstood the 2020 challenges well. Ratings remained largely stable, with the average rating in the upper ‘A’ category.
As of March 15, 2021, 86% of the 60 German insurers we rate had a stable outlook, while negative and positive outlooks balanced each other out at 7% each.
Most negative outlooks reflect pressure on industrial insurance performance and negative outlooks on insurers’ parents, in particular banks.
Ratings on German insurers also benefit from the insurance groups’ diversity: most groups write multiple lines of business, including life, health, and property/casualty (P/C).
Although the insurers’ operating performance was volatile throughout 2020, it ended much better than analysts had previously anticipated at the mid-year point.
In particular, the capital market recovery, lower claims frequency in motor and household insurance, and a benign natural catastrophe year helped the sector to post 2020 earnings only a little below 2019.
“Through 2021 and 2022, we expect their good diversification, sound capital adequacy, and focus on underwriting profitability will counter accelerated challenges and maintain ratings stability,” said S&P Global Ratings credit analyst Silke Sacha.
