Insurance

Life insurers in the interest rate trap

Summary

It seems like a luxury problem: life insurers don’t know what to do with their money. You should invest customer funds as securely as possible, but also as profitably as possible. Given historically low interest rates, this is like squaring […]

Life insurers in the interest rate trap.  The investments of the insurers are paying less and less interest (source: Thinkstock by Getty-Images)

It seems like a luxury problem: life insurers don’t know what to do with their money. You should invest customer funds as securely as possible, but also as profitably as possible. Given historically low interest rates, this is like squaring the circle. Many savers feel the consequences immediately. They receive far less money than they originally hoped for when they signed their contract. Insurers are looking for ways out of the interest rate trap.

Even a four percent return is difficult to maintain

In the 1990s, for example, the average interest rate on life insurance was still eight percent, according to the Federal Government. Last year it was an average of 4.2 percent, and even the four before the decimal point seems to wobble.

“I cannot predict how long the industry will be able to maintain the interest rate level of four percent,” Maximilian Zimmerer, Allianz CFO, recently predicted. However, other forms of investment such as ten-year Bunds bring even less returns at just under 1.5 percent.

Guaranteed interest rates fell again

The guaranteed interest rate set by the Federal Ministry of Finance for life insurances, which customers can safely count on, was once four percent. Today, savers who sign a new contract can expect just 1.75 percent. At the same time, the voluntary profit sharing has been falling for years.

The industry’s problem: The money is mainly in fixed-income securities. Almost 90 percent of life insurers’ investments are made up of Pfandbriefe, government bonds, corporate loans or other bonds. Since the long-term low on the interest rate front, with which the European Central Bank has made loans cheap during the sovereign debt crisis, the securities that are considered safe have barely given off anything.

Investments in stocks shut down significantly

German government bonds bring less than ever before. Insurers feel this especially with new systems. On the other hand, investments in stocks, which are considered more profitable but riskier, have significantly reduced companies after the collapse of the New Market at the beginning of the millennium.

The interest that many life insurance customers are entitled to from old contracts is therefore becoming increasingly difficult to earn on the financial markets. “Occasionally, the first insurers have to attack their reserves in order to satisfy customer claims,” ​​says Hajo Köster from the Association of Insureds.

Do not return at any price

Insurers are therefore looking for new, attractive forms of investment that are comparatively safe. “The speculative element is alien to life insurance. We do not invest in returns at any price, ”said the President of the General Association of the German Insurance Industry (GDV), Rolf-Peter Hoenen, recently in a“ Zeit ”interview.

Infrastructure projects offer stable returns

The insurance giant Allianz identifies infrastructure objects such as gas networks as profitable and safe alternatives. The company expects high, stable returns from this for decades, regardless of the capital market. For example, the insurance giant has had a stake in the Norwegian network operator Gassled since last year.

In this context, however, the industry is concerned about the planned supervisory and equity capital rules under “Solvency II”, according to which insurers will in future have to show certain own funds for all risks. Accordingly, just as much equity should be reserved for investments in renewable energies and infrastructure as for riskier investments, for example in hedge funds.

Real estate is also interesting

Real estate is also considered an alternative investment. According to the current status, they should be backed by at least 25 percent equity under “Solvency II”. The German insurers consider this to be inappropriate. For comparison: With stocks it should be 30 percent.

According to a current proposal, however, all existing contracts should be exempted from the new set of rules for seven years. The EU is responding to warnings that many insurers could face problems with the new regulations.

Insurers should save on costs

According to Kösters, life insurers will have to focus primarily on costs for the foreseeable future. “The best way to save is with advertising budgets”. The industry cannot do magic, says Hoenen. “If there is no ten percent interest on the market, we cannot earn it either”.