Moody's report describes upheavals in insurance, yet a stable outlook

The German insurance industry, the second-largest in Europe, continues to see ongoing M&A activity and reorganisation, according to a report by Moody’s.

In addition, many large groups have focussed on introducing wide-ranging improvements to productivity and expense levels.

The effect, according to the report, is that the industry overall “continues to move towards an improved level of efficiency and profitability”.

However, he the fundamental credit outlook for the German life and P&C insurance sector remains stable. The stable outlook expresses Moody's expectations for the fundamental credit conditions in the industry over the next 12 to 18 months.

The new Industry Outlook report by Moody's Investors Service says that business growth on the P&C side remains relatively muted, as a consequence of relatively low levels of economic growth and high levels of insurance penetration. Life insurance continues to see stagnating growth despite demographic changes and continued low levels of retirement provision.

"The industry continues to rely heavily on tied-agency distribution, ensuring good levels of control although often high distribution costs. Broker and direct channels however continue to increase," said Simon Harris, a team managing director at Moody's.

Financially, the industry is considerably more stable than in the recent past. Capitalisation has recovered in the past few years, as profitability and capital markets have been generally favourable, although recent changes to dividend and capital management policies for some groups implies that capitalisation will continue to be more closely managed than was historically the case.

Harris notes that asset quality remains sound, with a continued conservative approach to asset allocation, and German insurers have generally speaking avoided high levels of exposure to sub-prime ABS securities and similar assets.

However, more negatively, Moody's expects profitability for P&C insurers to see continued negative pressure as competition in the key German motor market continues, although life insurers may see some respite as a consequence of rising interest rates and continued action on risk management and mitigation.

"The industry also faces a significant period of administrative turmoil, as a consequence of the introduction of new insurance contract law which, although it should improve the industry's overall transparency, is likely to lead to a one-off transition expense and potentially changes to product portfolios and profitability levels," Harris concluded.