Courts in Germany ruled in H1 2012 that the early termination fees previously applied by German life insurers were invalid. But while the costs of the retrospective claims should be manageable, the attention that the rulings generated could impair the insurers’ market reputations, says Moody’s Investors Service in a new Special Comment published today.
The new report, entitled "German Life Insurance: Compensation Costs Unlikely to Pose Risks to Industry’s Financial Strength ", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
Moody’s estimates that initially the costs of retrospective claims for the entire German life industry, net of tax and policyholders’ participation, will remain below €200 million. Increasing pressure from customer associations could further inflate the costs, pushing the final costs for the German life industry considerably higher, but Moody’s currently expects that the final cost will not exceed €1 billion if these costs are shared with policyholders.
“Essentially, we believe that the financial impact of these claims will remain limited for the German life industry, and will not threaten the financial strength of insurers, at least in the short to medium term” says Benjamin Serra, a Moody’s Vice President - Senior Analyst and author of the report.
However, Moody’s says that the attention the claims have generated and the potential reputational damage the claims might cause, are of more concern to the industry.
“Impaired reputations also attract policymakers’ scrutiny, and the recent developments are consequently likely to influence any future debates on reforms impacting life insurers. Longer term, we believe that regulators might also impose increasing constraints on life insurers that would be accompanied by rising costs for meeting new requirements,” explains Mr Serra.
In particular, the claims against German insurers might prompt policymakers to implement legislative changes in line with consumer sentiment, often to the detriment of the industry’s financial strength. Moody’s believes that if the market takes an increasingly negative view of German insurers, this could translate into further indirect factors that might damage those companies franchises in the longer term.
Subscribers can access this report here
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