Life Premiums

Guaranteed to disappoint

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


    • 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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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.

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