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Life insurers record increase in solvency ratios

The solvency situation of German life insurers is expected to have developed positively in 2021 despite the Corona crisis. In property/casualty insurance, the solvency ratio is expected to have decreased only slightly, notwithstanding the losses from natural catastrophes.

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Solvency situation of life insurers improved in 2021

According to estimates by the German Insurance Association (GDV), the solvency ratio of German life insurers averaged around 450 per cent at the end of 2021. As of the previous year's reporting date, the ratio was around 380 per cent. The solvency ratio is the ratio of own funds to the solvency capital requirement (SCR). With a solvency ratio of 100 per cent, insurers can meet all obligations even in a crisis scenario that occurs only every 200 years.

The higher solvency ratio in life insurance is attributable not only to the increased interest rate level, but also to the changed product portfolio and the resulting decrease in life insurers' guarantee obligations.

Excluding transitional measures, the solvency ratio in life insurance is also expected to improve, with an estimated 250 per cent as of 31 Dec. 2021, 50 percentage points higher than the comparable figure for 2020.

In property/casualty insurance, substantial charges due to the flood disaster in the Ahr Valley, among other things, caused the solvency ratios to decline slightly. However, with a value of around 270 per cent at the end of 2021, the development should be pleasingly stable (solvency ratio as of 31 Dec. 2020: 285 per cent).

Insurance companies must publish their 2021 solvency ratios in the Solvency and Financial Condition Report (SFCR) by 8 April 2022. The effective date for insurance groups is 22 May 2022.

Commission proposal brings additional burden

However, the EU Commission's current proposals for revising Solvency II would lead to additional burdens for German insurers on balance if the proposed change in the calculation of long-term interest rates (interest rate extrapolation) were to take place. Nor would this additional burden be offset by relief with respect to other elements. This would make it more difficult for life insurers to make long-term investments, for example in energy and transportation infrastructure projects. The insurance sector's potential investment contribution to key European projects would thus be limited.

New rules not before the end of 2024

The EU Council and the EU Parliament are currently dealing with the European Commission's proposal. A joint legislative process of Commission, Council and Parliament (trilogue) could start in 2023. The changed rules could then take effect from the end of 2024 at the earliest.