Insurance Woes

In Euro Zone, the Return of Too Big to Fail

Insurance suitcase PhotoAlto Agency, getty, morgen and morgen
European insurers are struggling under near-zero interest rates, and many regulators are warning that some big insurance companies may need state support unless changes are made.
  • Why it matters

    Why it matters

    Concerns are rising in the euro zone that the region’s big insurers, squeezed by low-interest rates and high investor demands, may soon need state help.

  • Facts


    • Germans cancelled €15 billion worth of insurance policies last year, a record.
    • Low interest rates are eroding the capital cushions of many European insurers, especially small ones.
    • Germany’s Protektor system for insurers doesn’t have the financial firepower to bail out a large insurer, the lead regulator said.
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Yet another large insurer has sworn off traditional life insurance amid Europe’s record-low interest rates. Starting in 2017, Talanx, a German insurer that owns Hannover Re and HDI Gerling, will no longer offer life insurance policies with guaranteed yields, a staple of conservative German investors.

In a few years, the company will only sell “modern, capital efficient products,” just like its rivals Allianz and Ergo already do. But insurers do so grudgingly, forced to rethink their portfolios as interest rates remain at rock bottom in the post-2008 crisis era.

Many experts believe conditions have become so grim that not all insurance companies will survive. Customers in Germany have turned their backs on them, canceling life insurance policies worth €14.9 billion, or $16.5 billion, last year, a new record.

At the same time, low interest rates are chewing through companies’ capital cushions. The current yield insurers offer their customers continues to slide, recently hitting 3.14 percent. And doubts are growing about whether insurers can keep their own profits intact.

There’s a growing chorus of cautionary voices, including from Germany’s financial watchdog, BaFin, the Bundesanstalt für Finanzdienstleistungsaufsicht. “Insurers will have to make a concerted effort to bolster their capital foundations,” said the BaFin chief, Felix Hufeld, on Wednesday after analyzing the latest industry data.

Germany’s regulator demanded insurers disclose how much equity capital they would have if the planned Solvency II rules – the E.U. rules tightening reserve requirements on German insurers starting in 2016 – were already in place. The new requirements are being eased in – there is a 16-year transition phase.

The sobering answer: Not all insurers would make the grade if the Solvency II rules were applied today. And many life insurers would need help coming up with the required capital. For an entire industry, the warning lights are flashing.

Experts would like to see Europe-wide rescue mechanisms for struggling life insurers.

“If you put all the information from recent weeks together, one has to be concerned,” said Gerhard Schick, the financial policy spokesman of Germany’s Green party. “Even after the last reform, it’s impossible to rule out that smaller and mid-sized life insurers could run into trouble,” he told Handelsblatt.

And he’s not the only one worried. The European Systemic Risk Board, an advisory group linked to the European Central Bank, emphasized the industry’s woes in its annual report. Europe’s regulators see a “double whammy” for the sector as insurer liabilities increase amid low interest rates and shrinking market returns. “It is therefore quite possible that the current market developments could hit both assets and liabilities on balance sheets,” warned the advisory group.


Oliver baete Allianz DPA
Oliver Bäte, the new CEO of Allianz, Germany’s largest insurer, is revamping the company to adapt to the new low-interest rate realities of his business. Source: DPA


In another internal paper, seen by the German daily newspaper Süddeutsche Zeitung, the same advisers demanded prompt action by politicians and regulators in Europe. The experts called for Europe-wide rescue mechanisms for struggling life insurers, since national solutions, such as Germany’s Protektor system, are “apparently not in the position to handle the potential insolvency of a larger life insurer or the simultaneous insolvency of several smaller life insurers.”

The industry is convinced that the root of this crisis is low interest rates. The ECB has slashed its prime interest rate to nearly zero in an effort to combat the euro zone’s economic slowdown. Insurers, forced to invest billions at market rates, can’t earn enough to cover their obligations to customers over the long term. This is an issue that should not be underestimated: Germans alone hold about 90 million life insurance policies.

For years, the interest rates offered by insurers, tied to the returns of fixed-rate bonds and other conservative financial products, has decreased. In 2015, the industry average was 3.14 percent, measured against guaranteed yields to customers of 2.8 percent. A risk cushion implemented in 2011 was meant to address this problem. But more and more, insurers are struggling to cover the spread and are demanding changes and relief from industry regulators.


Life Insurance on its Last Legs 2-01


Smaller insurers are having the hardest time meeting the new reserve requirements. Unless something changes, insurers will need to make provisions worth €150 billion by 2024, according to the rating agency Assekurata, which is based in Cologne. “Reserve requirements of this amount would pose a massive burden on the sector and lead to widespread financial shortages,” the agency wrote recently.

Low interest rates also make it more difficult for insurers to meet the new capital requirement of Solvency II: Insurers will have to set aside even more money than planned to insure that they produce the minimal returns they need for their business and profit expectations.

The industry is facing a serious crisis, insiders in Germany say.

The warnings are growing. The International Monetary Fund recently said that the introduction of Solvency II would exacerbate the problems faced by insurers and the Organization for Economic Co-Operation and Development cautioned that the solvency of pension funds and life insurers was “a cause for concern.”


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Another group watching closely: rating agencies. Insurance expert Christoph Schmitt of Fitch in an interview said the low interest rate environment, combined with the past practice of guaranteeing interest rates on life insurance policies, would lead to “immense capital needs” in the future. German insurers will have “exceptionally big challenges” meeting the Solvency II requirements compared to most European countries.

The BaFin boss, Mr. Hufeld, sounded the alarm: “If interest rates continue to stay so low, we’ll have to put more firms under individual regulatory scrutiny.”

For their part, insurers are trying to adjust to the new market realities. But their conservative customers are shying from unfamiliar risks.

Consumer advocates are critical of the decision by some insurers, like Talanx, to offer new life policies without a guaranteed yield. “Life insurance is not an appropriate model for retirement planning,” said Kerstin Becker-Eiselen from Hamburg’s consumer protection association. “And that’s especially true of these new products.”


Life Insurance on its Last Legs 1-01


Mr. Schick, the Green party expert, said that the industry’s woes can’t be blamed just on low interest rates. “It just exposes the mistakes make by some insurance executives. That’s why the whole industry isn’t in crisis, just some firms,” he said, adding that the insurers need to re-examine their own liberal dividend policies, which are partially responsible for their financial binds. “I find it embarrassing how the industry is trying to scapegoat the ECB.”

“If a company isn’t doing so badly, ban profit distributions to shareholders,” Mr. Schick said, arguing that such action wouldn’t necessarily require legislative measures. Insurers would no doubt beg to differ.

Mr. Schick added that he believes “BaFin already has plenty of options to ensure the stability of an insurer,” though he also acknowledged that the country’s Protektor system for insurers lacked the financial firepower to be effective.

“Nobody seriously believes the financial means would be enough to bail out a large concern or several mid-sized firms. The federal government cannot sit on the sidelines and just hope for the best as it has been,” he said.


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Kerstin Leitel, Sara Zinnecker and Jan Hildebrand cover the financial sector for Handelsblatt. To contact them:, and

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