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.