German and French Insurance Markets Show Resilience

October 16, 2014

Despite varying internal pressures, the German and French insurance markets have shown resilience in their respective ways, according to two separate reports issued by A.M. Best.

While Germany’s economy is among the strongest in Europe, its insurance market will continue to cope with pressure points such as very low domestic bond yields and lackluster investment income for both the life and non-life sectors, according to a new A.M. Best special report.

The Best’s special report on Germany’s insurance market, titled “German Insurers Resilient, But Continue to Face Headwinds” also cites weather-related flood losses and isolated record-level hail losses as factors that severely impacted non-life performance in 2013. Last year marked a record for non-life losses with more than two million claims filed.

Given the challenges of a protracted low rate environment for investment portfolios, non-life insurers in Germany have been increasing rates as a result of a heightened focus on technical income and underwriting profitability.

Persistent low interest rates also have stressed the German life segment, particularly on traditional guaranteed life savings business. Life insurers also are feeling the weight of regulatory requirements to finance the “Zinszusatzreserve,” an additional interest rate reserve required to ensure life insurers can meet guaranteed returns.

“Companies have a variety of ways to finance the Zinszusatzreserve, including out of investment surplus, regular income, or through unrealised gains,” said Stefan Holzberger, managing director of analytics. “However, complying with the Zinszusatzreserve in a low rate environment will continue to put pressure on German life insurers’ balance sheets and earnings, particularly for smaller companies that are less diversified and more dependent on their life business.”

Despite the persistent backdrop of low interest rates, GPW for the life segment grew 4 percent to EUR 90.8 billion in 2013.

A.M. Best also expects improvements in lines such as motor and property, as German domestic demand continues to recover and as insurers attempt to recoup losses through rate increases.

In a separate special report on the French insurance sector, A.M. Best said the market rebounded in 2013, posting a 3.7 percent increase in gross premium written (GPW), after two straight years of decline.

The Best’s report titled, “France’s Insurance Market Rebounds Despite Ongoing Economic Weakness,” states that the 2013 rebound followed a decline in GPW of 4.3 percent in the previous year that came on top of a sharp 8.5 percent reduction in 2011.

The 2013 turnaround was driven by increases in life and savings premiums, as well as in the accident and health sector. Unlike other major European economies such as Germany and Spain, which have a more even split between life and non-life, life accounts for roughly two-thirds of France’s insurance market.

The insurance sector showed signs of further recovery in the first five months of 2014, with total GPW rising 1.8 percent, the report noted.

However, uncertainty over tax treatment for life insurance products and pressure on insurers’ profitability as a result of the low interest rate environment, as well as the more stringent capital requirements expected under Solvency II, have created significant challenges for the industry.

The French non-life sector exhibited lackluster growth in 2013, but reached a record level of EUR 50.3 billion in premiums, compared with EUR 49.4 billion in 2012. Increased competition and the impact of a weak economy on the volume of insurable goods put pressure on profitability for the sector, resulting in a net combined ratio of 101.9 percent in 2013 compared with 100.9 percent in 2012, said A.M. Best.

This trend of diminishing growth has continued in the first five months of 2014, when the non-life sector grew by just 1.5 percent.

Discussing the life sector, the report said uncertainty over tax treatment for life insurance products and pressure on insurers’ profitability as a result of the low interest rate environment, as well as the more stringent capital requirements expected under Solvency II, have created significant challenges for the industry.

“French consumers have shown less of an appetite for life products, despite their favorable tax treatment, following the eurozone crisis and subsequent volatility in the financial markets. Instead, they have shown a preference to invest in savings products offering greater security while remaining fully liquid, such as ‘Livret A,'” said Ghislain Le Cam, an associate director of analytics.

“In 2013, the yield on ‘Livret A’ was revised downward, making it a less attractive savings vehicle. This, along with the recovering financial markets, has helped to buoy the life sector again.”

Source: A.M. Best

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