Fitch: New Provisions to Cost German Life Insurers EUR10bn
The German insurance regulator has since 2010 forced the sector to hold supplementary reserves, known as Zinszusatzreserve (ZZR). These reserves cost the industry EUR8.5bn in 2014 and have risen each year, reflecting the large overhang of old, high-yielding guaranteed products in the market, which offer returns well in excess of investment returns achievable today.
Our estimated reference rate is calculated using the average nine month zero-coupon euro swap yield to end-September 2015. The final rate will be published by BaFin, Gemany's financial supervisory authority, at year-end. 2014's reference rate was 3.15%.
Guaranteed products already subject to ZZR will require provision top-ups in 2015 because the reference rate's decline means that an ever-larger pool of guaranteed products is caught up by ZZR requirements. Products guaranteeing a 3% annual return will be, for the first time, subject to a ZZR requirement in 2015. We estimate that by end-2015, 60% of all guaranteed products in the German market will require ZZR provisions. This will exert additional pressure on the already weak profitability metrics reported by German life insurance companies. These insurers continue to operate in a difficult environment, adversely affected by low interest rates that depress investment returns.
Low interest rates have pushed up the market value of bond portfolios and German life insurers have accumulated substantial unrealised capital gains. We expect insurers to sell some of these investments, supplementing earnings and making it easier to meet the cost of providing for ZZRs. Additional ZZR requirements for 2015 can easily be funded by realizing capital gains, but this action may weaken the ability of insurers to generate adequate investment returns in future years.
In our view, Germany's more diversified insurers, such as those offering more disability or unit-linked products, will be better placed to withstand growing pressure on profitability.
Fitch's outlooks on ratings assigned to German life insurance companies are stable but our outlook for the sector is negative. Our simulated run-off scenarios, which consider a variety of assumptions, suggest that rated entities should have sufficient resources to meet policyholders' guaranteed returns, reflecting mainly adequate capitalisation across the sector.