Handelsblatt Exclusive

British Insurers Eyeing Germany Post-Brexit

Frankfurt am Main
Frankfurt's skyline is not only attracting banks. Picture source: DPA

Germany’s insurance market stands to profit from Brexit, as some insurers consider relocating to Europe’s largest economy, the head of the insurance division at German financial watchdog BaFin told Handelsblatt. “We’ve had a few discussions,” Frank Grund said, adding that a few smaller insurance companies “will be drawn to Germany.”

At the same time, the played down the idea of a “great wave” hitting the country and said he does not expect these moves to result in drastic changes to Germany’s insurance sector, given the lenghthy preparation times insurers require to finalize their planning. “But I expect to see decisions roughly during the third quarter of 2017, otherwise it will be far too late to complete the process in time,” said Mr. Grund. Britain is set to exit the European Union at the end of March 2019, unless all EU member states approve a delay.

The world’s largest insurance market, Lloyd’s of London, only a few weeks ago announced its plans to move its EU headquarters to Brussels. BaFin’s Mr. Grund is quick to point out that this decision was not made due to the underwriter’s fear of Germany’s substantial regulations.

The insurance business is the second major financial sector looking at concrete moving plans in light of Britain’s exit from the 28-nation union. As with the banking industry, insurers require a location within an EU member country to freely conduct business across the continent. Only last week, British bank Standard Chartered announced it will move its EU headquarters to Frankfurt.

More broadly, Mr. Grund said he considers Germany’s insurance industry to be well-prepared to weather an era of rock-bottom interest rates – something many fear is threatening the livelihood of life insurers in particular. “Our general findings are that German life insurers won’t run into existential problems in the short and medium run,” he told Handelsblatt. Following a May 20 deadline, some 350 German insurance companies will be required to publicly release details on their financial situation. The BaFin supervisor cautioned that the future public quotas should not be interpreted as the sole criteria to determine the financial stability of the firms.

Mr. Grund also advocated in favor of changes to the capital requirements that life insurance companies face. The watchdog wants these groups to set aside billions of euros in so-called additional interest provisions, which should ensure insurers’ ability to deliver on promises made to customers during times of high interest rates. “In 2017, German life insurers will have to pay another €20 billion ($21.9 billion) into the additional interest provisions,” Mr. Grund said. That will bring total provisions to €64 billion. “We believe that the highly reasonable mechanism of the additional interest provisions will lead to the creation of a security cushion, which will allow us to advance more mildly in the future.”

While low interest rates are a problem for life insurers, a rapid rate hike by the US Federal Reserve would prove equally unsustainable, Germany’s Bundesbank recently warned. “Rising interest rates obviously are a challenge for the insurance industry,” Mr. Grund said, adding that a quick increase would be a test of stamina. “But Germany’s life insurers have developed ample measures to control that risk.”

The insurance regulator also said his office will make the supervision of a technological overhaul among insurers a high priority by setting up a special department. While BaFin already focuses on IT adjustments in the banking sector, insurers will increasingly be scrutinized as well. “You can certainly say that there is demand for action,” Mr. Grund said, without providing further detail.

 

Carsten Herz leads Handelsblatt’s asset management and insurance coverage and is based in Frankfurt. To contact the author: herz@handelsblatt.com

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