Make hay while the sun shines in German corporate insurance market

But commentators agree that the insurers are in no mood to follow the market down to silly levels and a correction is sure to follow any significant spike in losses, further deterioration in investment returns and any increases in the cost of capital through external pressures such as Solvency II, Europe’s planned new insurers’ capital adequacy regime.

The message for German insurance buyers, as they gather for the DVS annual conference in Munich, is clear, just as it is for all other insurance buyers in Europe currently: ‘Lock your prices in with long term agreements, sooner rather than later.’

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Karin Clemens, credit analyst at Standard & Poor’s in Frankfurt told Commercial Risk Europe the industrial lines sector in Germany clearly remains very competitive.

She said that this is caused by ‘abundant’ capacity as well as reduced overall demand because of relatively weak economic conditions. A growing number of mid-size and smaller domestic players that aim to grow their market share in this segment further intensifies competition, said Ms Clemens.

“In casualty insurance market conditions in 2010 have become more difficult again following some evidence in 2009 that the market may have bottomed out. We expect rates in this line to stabilize at year-end 2010 at the earliest with a view that prices may start moderately rising 2011,” she said.

“Property rates in our opinion continue to face downward pressure in 2010, partly due to the lack of major catastrophies in 2009. We don’t expect a meaningful turn in the cycle unless a large loss event serves as a catalyst for significant rate increases.,” continued Ms Clemens.

Despite these pressures, that are evident in both commercial and private lines, the aggregate combined ratio for S&P’s interactively rated Germany-based insurers was still a ‘respectable’ 97.5% at year-end 2009, she said.

“We estimate that the aggregate combined ratio for the full year 2010 will be close to 99%, with a view that underwriting results will start improving again from 2011 onwards. Also, in light of exceptionally low yields on investment portfolios that should keep more competitive behaviour in check,” added Ms Clemens.

Wolfgang Faden, CEO of Allianz Global Corporate & Specialty Germany, told CRE that the industrial insurance market remains ‘challenging’ worldwide. He said that plenty of capacity is still available in the German market but added that the adequacy of limits offered still depends on exposure and individual pricing.

“Although there are now signs of economic upturn, for the second half of last year significantly lower production, trade and construction activities have put pressure on the overall insurance market. Most market players agree on seeing continued pricing pressure for most commercial lines of business with only a few exceptions. Although, at the same time, natural catastrophes, like flood and earthquakes, such as in Chile and the Deepwater Horizon accident are challenging the bottom line of insurance carriers. However, for certain risks, such as the pharmaceutical and automotive industries, more capacity is still needed,” said Mr Faden.

Dankwart von Schultzendorff, Regional Country Manager for ACE Germany, Austria and Switzerland, told CRE that after five years of premium reductions the market is finally bottoming out but the process is still not over. “We see some peaks for stormy risks be it windstorm, financial institutions D&O or offshore energy after the Deep Horizon oil spill—but this did not last for long,” he said.

Despite the maturity of the German market Mr Von Shultzendorff still sees fresh competition arriving as Germany is considered a ‘promising battlefield’ for insurers, he said, noting new entrants from Lloyd’s and Zurich that have recently opened up had added capacity in main and niche lines.

“First, it has been for years, and continues to be a buyers’ market. Second, while rates were only moderately reduced during the financial crisis, revenue related premiums like in liability or business interruption proportionally went down with the economic downturn. Now, as revenues pick up brokers and buyers want to benefit with long term agreements at again lower rates. Taking more risk by insureds is more exception than rule as nothing beats cheap insurance,” said Mr Von Shultzendorff.

Michael Dehm, country manager for XL Insurance said that the ‘much talked about’ hardening market has still not arrived and he expects the ‘challenging conditions’ to continue in the near future.

“It is unclear what would trigger a hardening as many companies are still rigorously focusing on costs in all parts of the business. Insurers need to be paid a fair premium for the risks they take,” said Mr Dehm.

The XL man said that insurers, brokers and clients should make a joint effort to achieve more price stability, avoiding extreme price swings, especially for complex risks.

“We believe that more balanced price movements are in the long-term interest of the insurance buyers, even in the current market,” he said.

Mr Dehm said that the German market remains very competitive and so insurers need to focus on service to win and retain quality business.

“There is overall still plenty of capacity in most areas so insurers need to stand out through service, innovation and even their claims handling capabilities. We hope clients and brokers see the long-term benefits these services provide, rather than seeing insurers as pure capacity providers,” he said.

Christoph Willi, Head of Global Corporate for Zurich Germany told CRE that he expects the German commercial insurance market to finally bottom out after the prolonged soft market.

This will, however, not be helped by continued high competition in the German market, which he said remains ‘extremely tough’, and sometimes even ‘unhealthy.’

Mr Willi said that the economic crisis reduced demand because of lower turnover but added that insurance was also seen as a ‘stable and reliable’ provider of contingent capital during these rough times.

Peter Schneider, Senior Manager and Head of Business Development at Tokio Marine Europe Insurance in Düsseldorf said that the German industrial property market has been profitable in recent years on the back of combined ratios below 100% and the trend seems set to continue this year.

He said that prices are still very competitive and many clients seek to lock in the current conditions with long term agreements. He also sees few signs of a turnaround in conditions for insurers.

“The market still supports price reductions on a low premium quality level. This applies for capacity driven accounts with a good loss runs and with a professional risk engineering approach. But also in the midsize business the competition is still high and markets continue to support price reductions sometimes regardless of the technical quality,” said Mr Schneider.

Excess capacity is clearly a reason for the continued soft market, said Mr Schneider. “There has been excess capacity for more than three years and we do not expect markets to step away as long as the technical result still is profitable,” he said.

Indeed, Mr Schneider said he expects to see a revival of some existing markets through the re-launch of activity or increased capacity.

“We would not be surprised to see, in the near future, some more new markets, perhaps from Bermuda or London, trying to get a piece of the cake,” he said.

Ralph Brand, Managing Director of Chartis Northern Europe, said that the insurance market in Germany remains soft.

“In general, market behaviour suggests a strong emphasis on retaining customers with fewer opportunities to acquire new business also because of multi-year contracts in place. At the same time there is still plenty of capacity in the market. The recovery of the German economy has not yet had a positive impact for the commercial insurance industry,” he said.

Mr Brand said that, against this backdrop, Chartis currently does not expect a general market hardening in Germany before the end of the year, barring any major catastrophes.

He did say, however, that he sees improved terms and conditions in certain areas such as professional indemnity for financial institutions, some construction and offshore property and energy exposures and trade credit.

“In addition, we see improvements on individual accounts, where the performance is not satisfactory. For the future, we do expect some market hardening in a broader scale, as market combined ratios are edging closer to 100 %, and in some instances have already crossed that line,” he said.

Mr Brand said that capacity remains plentiful for almost all lines of business and that there have even been some new market entrants recently, despite increasing combined ratios and reduced profitability.

“However, in general, the German market is looking for sustainable capacity, and therefore sudden additional capacity arriving is often viewed as not appropriate for the long-term oriented buyer,” said Mr Brand.

Patrick Steenwegen, Underwriting Manager Property Europe, Corporate Insurance Partners at Munich Re, said that he still sees a competitive market for corporate insurance business in Germany and little hope for improved profit for insurers.

“We still see early roll-overs of long-term agreements for another year, and the vast majority of insurers defend their book of business. We expect stable renewals and do not expect major rate increases if no major events occur. A deterioration of results can thus be expected,” he told CRE.