The head of insurance supervision, Frank Grund, is preparing the industry for difficult times.
(Photo: Bloomberg)
Frankfurt In view of the current challenges, the financial regulator Bafin is asking insurers to reconsider high dividend payments. With a view to geopolitics, the pandemic, inflation and the turnaround in interest rates, the industry is facing difficult times. “Insurance companies need sufficient capital and liquidity buffers,” said Bafin Executive Director Frank Grund at the annual conference of insurance supervision.
Insurers are doing well at the moment, Grund emphasized. But even if 2022 is likely to be quite decent, 2023 will be a difficult year. The industry is moving in an environment that is not encouraging. Many of the critical developments that the insurance industry is currently confronted with could intensify and reinforce each other at any time.
“Companies must therefore act prudently now,” Grund continued – also with regard to the distributions to their shareholders. He was skeptical two years ago when a ban on dividends for insurers was called for in view of the pandemic. “Just as then, every company is well advised to proceed very carefully with this issue,” emphasized Germany’s top insurance supervisor.
He sees the effects of high inflation primarily on property and casualty insurers. The strong rise in prices is leading to rising claims expenses, especially where repair services are required or where replacement value has been agreed.
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Insurers may therefore have to increase existing provisions this year. “From Bafin’s point of view, it is unacceptable to simply bet that the high inflation rates will normalize and completely use up the existing buffer in the reserves,” Grund clarified.
Higher contributions for insured persons
Insurers would also have to take the higher damage costs into account when calculating their premiums. In 2023, the increased inflation will therefore “necessarily result in higher premiums in property and casualty insurance,” said Grund. Insurers shouldn’t compromise on prices just to keep customers.
Rising interest rates are good news for life insurers. However, high inflation could lead to more cancellations and less new business. Good liquidity management is required here.
At the same time, Bafin is currently paying particular attention to customer benefits and the value for money of the insurance products on offer. A few days ago, it therefore published a draft of a leaflet on endowment life insurance.
According to this, insurers must ensure that their old-age provision products “have a reasonable probability of real investment success over the term”. This means that the return after costs should be above the expected inflation.
The Bafin announced that it would primarily examine insurance companies where the effective costs of the products are significantly higher than in the industry comparison. Bafin also wants to take a closer look at insurers who pay high acquisition commissions to insurance intermediaries.
More: Bafin – Insurers need to prepare for prolonged high inflation