Bafin warns insurers to be careful when paying dividends to shareholders

BaFin in Frankfurt

Insurance supervisory chief Frank Grund is preparing the industry for tough times.

(Photo: Bloomberg)

frankfurt In view of the current challenges, financial regulator Bafin is asking insurers to reconsider high dividend payouts. In the face of geopolitics, the pandemic, inflation, and interest rate reversal, the industry is facing tough times. “Insurance companies need sufficient capital and liquidity reserves,” Bafin chief executive Frank Grund told the annual insurance supervisory conference.

Insurers are doing well at the moment, Grund stressed. But even if 2022 is likely to be pretty decent, 2023 is going to be a rough year. The industry moves in an environment that is not encouraging. Many of the critical developments currently facing the insurance industry could intensify and reinforce each other at any time.

“Companies therefore need to act prudently now,” Grund continued, also with regard to distributions to their shareholders. He was skeptical two years ago when a ban on dividends for insurers was called for in light of the pandemic. “Just like then, all companies are advised to proceed very carefully with this issue,” Germany’s top insurance supervisor stressed.

He sees the effects of high inflation primarily on property and casualty insurers. The sharp increase in prices is causing an increase in claims expenses, especially when repair services are required or when replacement value has been agreed.

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Therefore, insurers may have to increase existing provisions this year. “From Bafin’s point of view, it is unacceptable to simply bet that high inflation rates will normalize and completely deplete the existing buffer in reserves,” Grund said.

Higher contributions for the insured

Insurers would also have to take into account the higher costs of damage when calculating their premiums. In 2023, rising inflation will therefore “necessarily lead to higher premiums in property and casualty insurance,” Grund said. Insurers should not 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 currently pays special attention to the benefits for the client and the value for money of the insurance products offered. For this reason, a few days ago it published a draft brochure on dotal life insurance.

According to this, insurers must ensure that their old-age pension products “have a reasonable probability of real investment success in the term”. This means that the return after costs must be above the expected inflation.

Bafin announced that it would examine mainly 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 that pay high acquisition commissions to insurance intermediaries.

Plus: Bafin: Insurers must prepare for prolonged high inflation

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