S&P Reports Warns German Insurers of ‘Winds Of Industry Change’

Standard & Poor’s has issued a report – “Insurance Industry Risk Analysis: Clear Skies Belie A Brewing Storm As German Insurers Need To Prepare For Regulatory Reform & A Cyclical Downturn,” that is self-explanatory.

S&P notes that generally insurers in the country have “benefited from a generally more benign market environment.” However, the apparent calm has served to mute the “sweeping undercurrents of change in the industry that will undoubtedly test the future credit strength of many players.”

A number of factors have contributed to the recent sense of well-being: improved operating performance, more capital, a growing focus on costs and operations, and “continuously evolving risk management practices have underpinned existing ratings,” according to S&P. A “more benign market environment and improved investment markets” have also boosted profits.

For this year and next, however, S&P expects to see a downward trend in market performance. P/C revenues are likely to decline, but not excessively, while the life sector “is expected to remain largely flat based on our view that investment markets are likely to remain stable.”

S&P is concerned that the “ultimate financial impact of ongoing reforms and legislative change is currently unknown and adds some uncertainty to this outlook.” Credit analyst Karin Clemens said the rating agency considers “key risks to the market’s credit quality to be more long-term, but they are already starting to cloud the horizon.” She cited “competitive pressures,” that have begun to cause an overcrowded market with significant mature segments. “The product and distribution landscape, particularly in the life insurance market, is shifting rapidly, and claims trends in P/C are deteriorating,” she added.

Reforms in the German market are expected to “significantly increase operational and compliance risks,” S&P continued. “Moreover, the fluid environment sometimes makes it difficult to establish a consistent long-term strategy.” The changes, however, can also create opportunities and S&P said it expects “the ratings on those companies able to seize these opportunities to potentially benefit in the long term.”

S&P cited the following factors as critical to success and therefore important rating considerations: “an insurer’s ability to solidify its distribution and customer relationships, and to demonstrate superior operating and expense efficiency and strong technological systems to keep up with competitive and legislative changes.”

Effective enterprise risk management will be equally important. In a highly fragmented market, we expect only a limited number of insurers to be in a position to leverage ongoing change to significantly strengthen the overall management quality of the operation.

Nevertheless, those able to do so will undoubtedly start breaking away from the market, whereas an increasing number of insurers unable to adequately respond might well perish in an increasingly complex environment.

Topics Carriers Germany