Frankfurt Rising interest rates are good for life insurers in the long run – but some providers will benefit more than others. Herbert Schneidemann, head of the German Association of Actuaries (DAV), predicts a “very heterogeneous development” in the industry in an interview with the Handelsblatt.
According to the head of the association, which represents the actuaries, providers who mainly have policies with short remaining terms in their portfolio and at the same time invested little money in fixed-income securities are in a good position. “But anyone who already has hidden burdens on their balance sheet and has to continue to build up additional interest reserves will have a hard time in the future,” says Schneidemann.
The rise in interest rates has been noticeable on the financial markets for some time. The European Central Bank (ECB) recently raised its key interest rate for the first time in more than a decade – surprisingly by half a point to 0.5 percent. But even that might only have been a first step.
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“Higher interest rates are good news for life insurance, especially for reinvestment,” emphasizes Schneidemann. If the insurers buy new bonds now, they get higher yields for their portfolios. However, there is also a reverse effect. “The existing capital investments initially come under pressure, since most insurers are heavily invested in fixed-income securities,” explains the DAV boss.
Because of the rise in interest rates, the market value of the bonds already in the portfolio from the long phase of low interest rates has fallen. If the current market value of the investments is lower than the book values in the balance sheet, the insurers incur so-called hidden burdens. Conversely, if the book value is higher than the current market valuation, this is referred to as valuation reserves.
While the companies still had valuation reserves of around EUR 150 billion at the end of 2021, according to Assekurata, the rating agency assumed in June that there were hidden burdens of EUR 40 billion across the industry.
In principle, the hidden burdens are not a problem as long as the insurers hold the papers to maturity. “In the case of some investments, such as 100-year government bonds, the insurers will find it difficult to convince the auditors that they will actually remain on the books until the end of the term,” says Schneidemann. In his opinion, write-downs could be necessary here.
On the other hand, the rising interest rates provide relief for life insurers when it comes to the requirements for the additional interest reserve (ZZR). Because of the chronically low interest rates, the legislator obliged the industry in 2011 to set up a capital buffer to secure the high interest rate guarantees from old contracts on the balance sheet.
In the 1990s, life policies with guaranteed interest rates of up to four percent were sold at times – in the low interest rate environment of the past few years, it was difficult for insurers to generate these returns. According to Assekurata, the industry will have built up a ZZR inventory of 97 billion euros by the end of 2021.
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“On average, the life insurers will have fully financed the additional interest reserve this year,” says Schneidemann. But rarely has an average said as little as it does at the moment, warns the DAV boss.
The first insurers will probably be able to start dissolving the additional interest reserve – in order to use the money to balance hidden burdens or to increase the profit participation for their customers. Other providers, however, especially those with strong new business at the turn of the millennium, have many long-term policies in their portfolio and will have to build up the additional interest reserve for a few more years.
“If these insurers have released valuation reserves in recent years to finance the additional interest reserve, they now have to see where the money is coming from,” says Schneidemann.
Solvency no longer a problem
As a result of the rise in interest rates, the solvency ratios of life insurers, which indicate the relationship between existing and required own funds, have also increased significantly. Insurers must keep the solvency ratio above the 100 percent mark.
In the past, numerous providers only managed to do this with the help of special rules that will expire in 2032. “I assume that no life insurer currently has a rate of less than 100 percent – even without transitional measures,” says Schneidemann, who is also head of the insurance group Die Bayerische.
However, the rising interest rates do not solve one problem: high inflation. In July, inflation in Germany was 7.5 percent. For life insurance, there was recently only a current interest rate of 2.02 percent on average. For Schneidemann, this is above all a communicative challenge. The insurers would now have to explain to customers that they “need to save even more for old-age provision despite or precisely because of the negative real interest rate”.
The DAV is therefore still calling for the guarantee requirements for the Riester pension and company pension schemes to be relaxed so that insurers can invest more in alternative investments. Higher returns are possible here, which offer a kind of inflation compensation.
With the maximum actuarial interest rate of currently 0.25 percent, which life insurers are allowed to calculate at most, Schneidemann does not expect any changes in 2023 or in the following year.
“It would be important for society as a whole that politicians quickly consider what a concept for private old-age provision could look like in the future,” emphasizes Schneidemann. Nothing has happened since the commitment to this in the coalition agreement.
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