MNI INTERVIEW: NYC Winner From Brexit-German Insurance Chief

New York’s financial markets are proving the main beneficiary from Britain’s withdrawal from the European Union, with the continent’s financial centres failing to muscle in on business lost to London after Brexit, former European Central Bank Executive Board member and current head of the German Insurance Association Joerg Asmussen told MNI.

“Before Brexit we had the debate: will it be Frankfurt, Paris or Zurich which benefits most when London is outside the single market? Now we know: the financial centre that benefited most was New York,” said Asmussen, “This is from a European perspective not a great outcome, and underlines the need to complete the capital markets union.”

Asmussen pointed to how the UK’s insurance regulation was now diverging from the EU’s, calling moves to lower risk-based capital requirements “very ambitious,” though other aspects of the future British prudential framework remain to be determined.

In contrast, the EU’s Solvency II review provides only moderate capital relief for German companies, he said in an interview.

GERMAN INSURANCE OUTLOOK

Asmussen was cautiously optimistic for Germany’s insurance market this year, with premiums set to grow by a nominal 3.8% or just over EUR230 billion following several years of decline. Non-life insurance should grow by almost 8%, he said, with increased costs as a result of recent inflation still to be fully passed on to policy-holders. Gains will be more moderate in the life sector, though some improvement is expected as real wages improve.

While geopolitics remains the major source of downside macro risk, positives include rising real wages which will once again allow consumers to increase pension savings. Climate change will provide business opportunities for insurers.

“There is clearly a protection gap when it comes to climate-related risks which we can fill in,” he said.

Asmussen, who sat on the Executive Board from 2012-13, expects the ECB to hold rates at current levels until the middle of the year, and sees Germany’s economy growing by only 0.3-0.5% in 2024. The country needs to improve “urgently” its attractiveness to investors by reducing red tape and corporate taxation, and by making improvements to its public and private infrastructure, particularly in the digital field, he said. (See MNI SOURCES: "Biggest Minority" Favours ECB June Cut)

With some 80% of German insurers’ assets held as bonds, higher interest rates of recent years have diverted funds from riskier alternative investments, he said.

“Higher rates improve the alignment between insurance companies’ assets and liabilities, so it reduces long-term mismatch risks,” he said, adding that capital losses as rates fall will not be realised as insurers will simply hold onto the debt.

FINANCIAL STABILITY

European insurance markets should prove more resilient than UK counterparts from a financial stability perspective, Asmussen said, thanks to their avoidance of the liability-driven investment model that blew up in September 2022, and laws in places like Germany limiting the use of derivatives.

“The EU financial system is much larger and diverse, especially regarding the size of government bond markets. EU life insurance differs substantially from UK pension funds: they simply don't follow this LDI investment type,” he said.

Domestic and commercial property values account for just 5% of total assets under management, and do not pose much immediate or significant risk, “though of course, one has to look at the indirect effects, such as a decline in credit worthiness,” Asmussen said.