Life Premiums

Guaranteed to disappoint

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Is Germany's Finance Ministry letting the air out of the insurance balloon?
  • Why it matters

    Why it matters

    Life insurance used to be the main form of saving for Germans. But with interest rates tanking, companies are finding it harder to earn the returns they’ve promised customers.

  • Facts

    Facts

    • The German finance ministry plans to reduce the maximum guaranteed interest rate on life insurance policies to 0.9 percent from January 1, 2017, from 1.25 percent now, sources have said.
    • The guaranteed rate has slumped from 4 percent in the 1990s and with interest rates at rock-bottom levels, the government wants to stop insurers making promises to savers that they can’t keep.
    • The German Insurance Association (GDV) criticized the ministry’s move, calling it overhasty and unnecessary.
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    Audio

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Life insurance, the foundation for decades of Germany’s risk-averse savings culture, is about to suffer another blow after years of falling interest rates. The German Finance Ministry wants to reduce the maximum guaranteed rate of return on life insurance policies to a record low of 0.9 percent from 1.25 percent, Handelsblatt has learned.

In Germany, the government sets the maximum return insurers can guarantee customers on life insurance products. Actual returns could be higher, depending on the insurer’s own returns on its invested premium income. By reducing the guarantee rate, the government is attempting to insulate the industry from possible disruption by preventing insurers from outbidding each other with ever higher rates they eventually can’t deliver.

The government’s proposal aims to stop insurers from making unrealistic financial commitments to win clients that might necessitate an eventual government intervention or a costly bailout. But the reduction couldn’t come at a worse time for the insurance industry, which is already struggling to attract customers unimpressed with near-zero returns on life policies.

In the mid-1990s, Germans were still getting a guaranteed rate of 4 percent on life insurance policies, their favorite retirement savings product. But those days are gone thanks to the low-rate policies of the European Central Bank, which has led to mounting criticism from German policymakers in recent months.

The plunge in interest rates, driven by the ECB to boost economic growth in the 19-nation euro zone and lift inflation to its target of just under 2 percent, has triggered fears that some insurers may become unable to honor their past commitments and could go bust.

“It’s self-evident that interest rates of 1.5 percent aren’t tenable in the long run if interest rates remain as low as they currently are.”

Felix Hufeld, Bafin President

The finance ministry seems to be taking a skeptical view as well. Reducing the maximum guaranteed rate to below 1 percent, starting in January 1, 2017, is a “clear signal that the life insurance companies must calculate their provisions even more cautiously,” said a ministry spokeswoman. It also reflects that the “period of low interest has progressed further.”

No formal ruling has been issued as of yet, but government sources said the decision had been taken. The International Monetary Fund, European Central Bank and rating agencies have been warning for a long time that life insurers could get into trouble as a result of falling interest rates.

But the German Insurance Association, the GDV, criticized the ministry’s move, calling it overhasty and unnecessary. It said insurers were on average still earning returns on their investments of more than 2 percent.

The decision doesn’t affect the current holders of more than the 90 million existing life insurance policies in Germany because it will only apply to new contracts.

The ministry said in October that it wanted to scrap the legal limit on guaranteed interest because it will soon be replaced by new European capital rules. But in December it said it wanted to keep the limit until at least the end of 2018.

The finance ministry is responsible for setting the interest rate and is guided by recommendations made by the Federal Financial Supervisory Authority, or BaFin, and insurance mathematicians at the German Actuarial Society.

BaFin President Felix Hufeld recently told Handelsblatt he was in favor of reducing the rate. “It’s self-evident that interest rates of 1.5 percent aren’t tenable in the long run if interest rates remain as low as they currently are,” he said.

The rate is based on the average yield of European government bonds, which have been steadily falling, making it increasingly difficult for life insurers to earn the capital market returns they’ve been promising clients.

 

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The maximum guaranteed rate is intended to reflect this trend and enable the regulatory authorities to intervene before a life insurer gets into trouble for making unrealistic promises, but the ministry does have some leeway in setting the rate where it sees fit.

Mr. Hufeld, who previously worked in the insurance industry, had called for a stronger cut in the rate than the actuaries at the DAV, who had previously recommended cutting it only to 1.0 percent, and not until 2018.

But the DAV refrained from criticizing the ministry for going further. The more drastic cut was “quite understandable from an actuarial point of view,” the DAV said in a statement, though it warned a swift implementation would confront the affected firms with “considerable challenges.”

Many insurers have recently been trying to sell life insurance policies that offer no guaranteed rate at all. Part of the reason is that the guarantees are expensive because they force insurers to set aside more funds as collateral.

Allianz, the German market leader for life insurance and one of the world’s largest insurance firms, said it wasn’t concerned about the cut in the rate.

“At Allianz Life, 9 out of 10 customers for private retirement provisions are currently opting for retirement concepts with new guarantees, only 10 percent are purchasing classic life insurance products,” said a spokesman.

 

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But the new forms of guarantees will only make it more difficult for customers to sift through the vast array of products on offer.

Rivals Generali, Talanx, Zurich and Ergo are also offering new forms of retirement savings which, according to consumer rights groups and insurance experts, all have one thing in common: They’re not comparable with each other and they’re difficult to assess.

Not everyone is getting in on the act. Insurer Alte Leipziger is continuing to bank on life insurance policies with guaranteed returns. For many customers, it remained paramount to be certain about the long-term returns on their retirement savings, the company said.

 

Kerstin Leitel covers banks and insurance companies for Handelsblatt out of Munich. Frank Drost is a Handelsblatt editor in Berlin, covering financial supervision and banks. To contact the authors: leitel@handelsblatt.com, drost@handelsblatt.com

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