Frankfurt As interest rates have risen, it has become easier for insurers to meet their capital requirements. Thanks to sufficient own funds, the insurance industry sees itself in a good position to cushion the current financial market fluctuations and high inflation. The German insurers are stable, says Jörg Asmussen, General Manager of the industry association GDV.
However, the rising interest rates are by no means only positive for companies. Experts warn that life insurers in particular should monitor the cancellation behavior of their customers more closely.
According to GDV calculations, solvency ratios increased across the industry in 2022. This key figure indicates the ratio of existing own funds to the solvency capital requirements. With a solvency ratio of at least 100 percent, insurers could meet all their obligations to their customers even in an extreme crisis scenario, which statistically only occurs every 200 years.
Due to the higher interest rates, it is now much easier for insurers than in previous years to meet the quota because they can invest their money more profitably on the capital market. In life insurance in particular, the necessary provisions for future payments are therefore lower.
That is why the solvency ratios of life insurers rose to an average of 510 to 530 percent at the end of last year, as the GDV announced on Wednesday. As of the previous year’s reporting date, the quotas were around 450 percent.
Only after 2032 will insurers have to reach EU requirements without help
Without considering transitional measures According to association estimates, the average solvency ratios of 270 to 290 percent were also above the previous year’s figure of 262 percent.
The transitional measures were decided when the European regulatory framework Solvency II was introduced in order not to impose high capital requirements on insurers immediately, but to enable them to gradually implement the new rules. They expire at the latest in 2032. Then the insurers have to create the 100 percent without this help.
In the prolonged phase of low interest rates, it seemed that this goal would remain unattainable for some providers. But since mid-2022, for the first time, no German life insurer has been dependent on Solvency II transitional measures, according to the financial regulator Bafin.
According to Asmussen, customers can therefore rely on “insurers being able to meet their obligations even under adverse conditions”. The confidence of the insured is also reflected in the persistently low cancellation rates.
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Cancellation rates have recently come into focus. According to the analysis company Assekurata, they have consistently averaged just over four percent for life insurers in recent years.
In a blog post, however, Assekurata analyst David Dyschelmann asked whether, if interest rates continued to rise, there would be a certain tipping point at which customers would no longer hold on to life insurance contracts, but would rather invest their money in other investments, such as with banks.
This interest rate has not yet been reached, said Dyschelmann. Nevertheless, life insurers are required to keep a close eye on their own cancellation trends and the necessary liquidity requirements.
The problem with this: Most life insurers still have many long-dated bonds from the low-interest phase in their portfolio, which have lost massively in value as interest rates have risen. If the current market values slipped below the book values, this led to hidden charges in the balance sheet.
With interest rates rising, other forms of investment such as bank deposits are also becoming more attractive again.
(Photo: dpa)
As long as the insurers hold the bonds to maturity, they don’t have to make any write-downs. However, increased cancellation rates could mean that they realize the hidden burdens and have to write the losses on their books.
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Bafin insurance supervisor Frank Grund therefore called for better liquidity and risk management last autumn. Companies should prepare for increased cancellations, declining new business or increased exemptions from contributions and a short-term increase in liquidity requirements.
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Meanwhile, in property and casualty insurance, solvency ratios have remained stable despite high inflation. With an average value of 270 to 280 percent at the end of 2022, according to the GDV, they roughly corresponded to the previous year’s value of 277 percent.
The higher prices had a negative impact on the quotas. However, the higher interest rates had a relieving effect on insurers’ provisions.
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The industry is currently watching the review of the Solvency II regulations at European level with excitement. In particular, the talks in the European Parliament are ongoing.
Among other things, the question of how sustainability risks could be integrated into the regulatory framework in the future will be discussed. However, the idea of introducing equity relief for green investments is viewed critically by many – including by insurers.
According to the GDV, providers are already increasingly examining the effects of climate change on their own business as part of their own risk and solvency assessment (ORSA). The financial regulator Bafin also demands this.
ORSA is a core element of Solvency II. Insurers must regularly identify, assess and control their short and long-term risks. According to the industry association, the results relating to climate change are incorporated into risk management. In many cases, however, the availability of data remains a challenge.
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