18.09.2013
Key Positions

Life Insurance in the Low-Interest-Rate Phase

The measures to resolve the euro crisis are proving to be inimical to savers and small and medium-sized
businesses and, in the end, are inequitable in intergenerational terms. Supporting ailing banks and overindebted governments through cheap central bank funds is taking a heavy toll on the pension of citizens. In the end, the financial policy strategy of extremely low interest rates with average inflation is nothing other than a cold expropriation of savers.

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Who is affected? Not only private insurance but also occupational pension schemes, pension schemes of the liberal professions and every private individual who in whatever form has saved money for old age. The ongoing artificially low-interest-rate phase poses a major challenge to life insurance. In 2012 alone, insurers had to withstand 4 billion EUR in lost revenue conditioned by interest rates. Losses of this scale naturally also affect the yields of the pension contracts of citizens. Declining profit shares for insured persons are a direct consequence of the low-interest-rate strategy of the ECB and policy. In light of this framework, German life insurers still offer a highly attractive return which weighs in at a market average of 3.6 per cent. Apart from professional investment management and the development of new longterm investment options (e.g. renewable energies), the still sound return of life insurance companies is also attributable to long-term, high-yield investments which were made in the past but are still held in the portfolio of insurers based on their long-term business model. It is incomprehensible that ill-advised legal regulation concerning the participation of customers in valuation reserves will force insurers to sell off precisely these investments.

German insurers highly regret that a new arrangement for the participation of customers in valuation reserves was not found in connection with the SEPA support Act. The Federal Financial supervisory Authority, which is the supervisory authority of the insurance industry, also favored such new regulation.

Our Positions
Stop flooding the capital markets with central bank money
A clear perspective is needed as to when and how this phase of artificially low interest rates should end. If banks want to take on debt, they should pay a nor- mal market interest rate commensurate with risk, instead of receiving cheap money from the ECB. The ECB cannot become a permanent rescue and support instance. Instead, it should end its engagement in this sector as quickly as possible and turn the helm back over to political institutions. Japan is a good example of the risks of central bank politicisation. Using inflation to try to solve the debt and financial market crisis would counteract government‘s plea to citizens to assure their standard-of-living in old age through private supplementary old age pension.
Reorganise participation in valuation reserves
The participation of customers in valuation reserves must be reorganised. Only that portion of the valuation reserves from fixed-income investments and hedging transactions which is not required to secure the ability to fulfill insurance agreements with guaranteed interest rates should be distributed to outgoing policy holders. such regulation would increase the risk-bearing capacity of life assurers in this low-interest-rate phase and create an equitable balance of interests between withdrawing policy holders and those remaining in the insurance collective.
Adjust repurchase values in the event of a sudden rise in interest rates
With a sharp increase in interest rates, a heavy amount of hidden charges arises on the fixed-income instruments held in portfolio. If an insurance contract is terminated in a phase of rising interest rates, these hidden charges must be realised. Yet, due to the guaranteed repurchase values, this does not have any effect on the terminating customers; instead, the losses must be borne solely by the collective of remaining insured persons. This not only represents inequitable treatment of policy holders, but could also lead to a wave of cancellations in the event of a sharp increase in interest rates. here, too, a solution that distributes the losses fairly between outgoing and remaining customers would be appropriate. Conceivable, for example, is an arrangement where the collective of insured persons would only bear the losses up to a certain base amount; any losses beyond that amount would be borne by the outgoing customers. This would avert the risk of a wave of cancellations arising in the case of heavy amount of hidden charges.
Extend the transitory provision in § 21 of the Corporate Income Tax Act
Low interest rates on the capital market can make insurance companies feel compelled to reverse existing reserves for tax purposes. In order to prevent this, lawmakers created a transitory provision in § 21 of the Corporate Income Tax Act (Körperschaftssteuergesetz; KstG) establishing a maximum amount of reserves for premium refunds for tax purposes. This transitory provision will expire at the end of 2013. In light of the persisting low interest rates, this transitory provision should be extended: The maximum amount of reserves for premium refunds should also amount in 2014 and 2015 to five times (instead of three times) the annual allocation.