Market Report: Europe - Moody's downbeat over German life industry.

(From Reinsurance)

The overall rating outlook for the German life insurance industry remains negative, owing to ongoing earnings pressure and a series of strategic challenges, according to Moody's Investors Service in its new industry outlook on the sector.

Although the industry's financial status has improved as a result of recovering stock markets, external capital support and various risk mitigation strategies, Moody's remains concerned about the continued low interest rate environment in light of the relatively high amount of in-force business that carries a guaranteed rate of return. In addition, the recent introduction of new mortality tables pressurises capital in the short term, and strict tax and regulatory policies limit the industry's flexibility to improve its profitability and restore its capital base.

Furthermore, there are significant challenges over the short-to-medium term as a result of new legislation, tax reforms and new accounting regulations.

Germany's recent tax reform, due to be implemented in 2005, poses the greatest and most immediate challenge. This tax regime forms part of the government's wider pension reform plan designed to encourage private provision and reduce the costs of Germany's generous welfare system. "However, the tax reform is likely to lead to greater competition from other financial service providers and could pressurise margins in the long term. It will also lead to a fundamental shift in products offered and portfolio changes, including the likely decline in the sale of endowment policies (the industry's flagship product), although increased demand for annuities and group products might partly offset this adverse sales trend," said Beatrice Braun, a London-based Moody's analyst and author of this report.

Another key challenge for German life insurers is the planned modernisation of the Insurance Contract Law in 2008, which aims to promote greater consumer protection and greater procedural transparency.

Moreover, an EU proposal that, via the Insurance Mediation Directive (IMD), sets certain minimum industry standards could result in additional costs in an area that has not been regulated in Germany to date. Moody's highlights that, preceding the IMD, the German parliament implemented the EU Financial Conglomerates Directive in November 2004 through the passing of the Finanzkonglomerate-Umsetzungsgesetz, which aims to strengthen the supervision over financial conglomerates and eliminate the use of double leverage within such entities. As a consequence, Moody's expects that some groups might face an increase in their regulatory capital needs, which (depending on the final outcome of the rules) could force them to take corrective ...