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08 Feb 2005
MOODY'S REPORTS: GERMAN LIFE INSURANCE INDUSTRY'S NEGATIVE OVERALL OUTLOOK REFLECTS CHALLENGES OF NEW LAWS AND TAX REFORMS, BUT FINANCIALS IMPROVING
London, 08 February 2005 -- The overall rating outlook for the German life insurance industry remains
negative due to ongoing earnings pressure and a series of strategic challenges,
says 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 which 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 (so-called
'Alterseinkünftegesetz' or 'AltEinkG') --
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 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 (aided by tax incentives) might partly
offset this adverse sales trend," says 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 ('Versicherungsvertragsgesetz'
or VVG) proposed for 2008, which aims to promote greater consumer
protection and greater procedural transparency. Moreover,
an EU proposal which -- via the Insurance Mediation Directive or
IMD ('EU-Vermittlerrichtlinie') -- 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 to 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 action.
Moody's also expects substantial changes to the way in which life
insurance business is conducted in Germany, with more active risk
and capital management under way via the International Accounting Standards
Board (IASB), and the planned review by the European Commission
of prudential supervision ('Solvency II'). The rating
agency says that these new developments should be beneficial in the long
term, but cautions that the industry will be challenged in the short-to-medium
term to ensure that these developments are properly understood and incorporated
within the required timescale.
In Moody's opinion, not all industry players are equally well
equipped to address the various industry challenges associated with the
aforementioned changes, thus leading to increasing divergence in
financial strength over the long term. The rating agency believes
that niche players with a clearly defined strategy, and larger companies
with strong capital resources, risk-management capabilities,
scale and distribution power will be able to gain market share over time.
However, the other players are at risk of being marginalised,
and the German life insurance market is therefore expected to experience
greater consolidation over the medium-to-long term.
* * * * *
NOTE TO JOURNALISTS ONLY: For a copy of this report, please
contact Anna Passey in London on +44-20-7772-5456;
Louisa Pearce-Smith in Paris +33-1-5330-1073;
New York Press Information +1-212-553-0376;
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or visit our web site at www.moodys.com
Beatrice R. Braun
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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