Insurance Revamp

Goodbye to life as we knew it

Strategiemeeting Lebensversicherung 2017
Remember when profits used to go up? Source: Ute Wagner for Handelsblatt

Michael Fauser, head of the life insurance arm of German insurer Ergo, doesn’t mince words. Speaking at a Handelsblatt conference on the insurance industry, Mr. Fauser said the insurer withdrew from annuity-based life insurance last year because the returns were no longer attractive.

Since then, Ergo has been talking up new pension products, ones that as you would expect, no longer offer a lifelong fixed rate of payout. They are by no means alone. Insurers such as Zurich, Generali and Talanx have ditched a decades-old flagship product and completely reorganized their businesses.

Germans love life policies with guaranteed annual returns. Statistically, each of Germany’s 83 million residents holds more than one such policy, as around 95 million of them are currently on insurers’ books. However, a long and nasty patch of low interest rates and shrinking investment profits combined to humble insurers in their cosy existence. Saying Auf Wiedersehen to interest-rate guarantees is a bitter pill – the product, industry critics say, of the European Central Bank’s easy monetary policy. Moreover, insurers’ long-term forecasts for profits, once rock-solid, are now in disarray.

For decades, many insurance companies lured customers with juicy annuities. In 2000, for example, guarantees of 4 percent were common, a level that allowed them to invest in higher-yield corporate and government bonds, and then skim off the difference. But the ECB’s low interest rates changed all that. For insurance managers, the generations of customers’ life policies they had accumulated turned into a crushing burden. No surprise, then, that more and more German insurers are winding down their life insurance operations, which they often hive off to so-called runoff specialists.

“Guarantees are on the way out.”

Guido Bader, board member at Stuttgarter Versicherung

“The insurance industry is still under pressure to act,” said Michael Heise, chief economist at Allianz, the German insurance giant. The minimum fixed rate for life insurance policies, as set by the federal government, was cut again in early 2017 (see chart). Since then, consumers taking out a new policy have been guaranteed a razor-thin 0.9 percent.

Despite all the doom and gloom, BaFin, Germany’s financial regulator, believes that the sector is on steady ground. “German life insurers are holding up astoundingly well by international standards,” said Frank Grund, BaFin’s senior supervisor for insurance in Cologne. All 84 of Germany’s life insurers have an adequate solvency ratio, which measures how resistant they are to a financial crisis, he said. However, the situation remains tricky. “Naturally, there are still deficiencies,” Mr. Grund said. “Life insurers need to make an effort to adapt to the new environment.”

Mr. Grund’s wake-up call has been heard. Insurers have responded with a raft of new life policies which no longer promise a fixed return, but tempt with rosy prospects of investment paybacks. This trend is rippling through the sector. At life insurer Stuttgarter Lebensversicherung, new pension policies with fixed-rate guarantees has dropped to a mere 20 percent of the total. Says Guido Bader, a member of the company board: “Guarantees are on the way out.”

GDV, the German insurance association, revealed that more Germans are opting for modified guaranteed life insurance products, such as “new classic” policies which lower guarantees, but claim to increase profits potential by freeing up cash to invest. These new products accounted for 46 percent of new business in 2016, compared with 37 percent the previous year.

“The most important question is, does the customer understand the new products?”

Joachim Geiberger, head of corporate analysis firm Morgen & Morgen

Yet consumers are struggling to get to grips with the new products, which are more difficult to compare. “Products are becoming much more modular,” said Joachim Geiberger, head of corporate analysis firm Morgen & Morgen. He believes the biggest challenge faced by the industry is the knowledge gap. “The most important question is, does the customer understand the new products?” he said.

Analysts have mixed feelings about the new-fangled policies. Lars Gatschke, a consumer protection advocate, believes the decision to drop rate guarantees is basically “a step towards more honesty.” He said the fixed rates in traditional policies tended to cut yields, both for insurers and policy-holders. Still, Mr. Gatschke, who works for the federation of German consumer organizations, advised consumers to take a close look at new policies. He advised against investing in the many hybrid products available on the market, which combine stocks and investment funds. “In most cases, it’s neither fish nor fowl,” he said.

In the long-term, customers would be better off investing directly in the securities markets, for example via index-linked funds, Mr. Gatschke said. However, he noted a broad swath of Germany’s legendary risk-averse investors would find this advice off-putting.

Carsten Herz leads Handelsblatt’s asset management and insurance coverage in Frankfurt. Claire Corlett and Jeremy Gray adapted this story for Handelsblatt Global. To contact the author: herz@handelsblatt.com

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