Exclusive Exclusive: German Financial Regulator In Favor of Lowering Guaranteed Returns on Life Insurance Products

Felix Hufeld, the head of Germany’s financial regulator BaFin, is in favor of lowering the maximum guaranteed returns on life insurance products that German insurance companies offer their customers. “It is self-evident that an interest rate of 1.25 percent is not viable in the long term when interest rates are as low as they currently are,” Mr. Hufeld told Handelsblatt in an interview. “I personally feel a certain sympathy for making a more significant change.” Germany’s finance ministry sets the maximum returns offered to customers after consultating with the German Actuary Association DAV and BaFin. The Actuary Association has argued for a moderate decrease in 2018 to 1 percent. The ministry has the final word. Life insurance policies with guaranteed interest rates have been the foundation of Germany’s savings culture for many decades. But with interest rates at rock bottom, they’re no longer a viable business model for insurers. High guaranteed returns pose a burden to life insurers in Germany at a time when interest rates have fallen dramatically over the past years and in some instances have turned negative, meaning a depositor has to pay to put money in an account. Under the present system, the government sets a maximum limit for the guaranteed rate that life insurers are allowed to promise to policyholders. It was meant to prevent companies from offering excessive rates that might overstretch them. The German government might even abolish the guaranteed rate offered to insurance clients to prepare for tough new European capital rules coming into force next year, the German finance ministry said last October. Mr. Hufeld’s agency is also responsible for fining banks and other financial companies when rules have been violated, and he was in favor of higher penalties. “If you asked me if I would like to turn a €5,000 fine into a €5 million fine, I would say definitely,” Mr. Hufeld said. Last year, BaFin issued penalties totaling more than €40 million, or $45.5 million, for money laundry violations, including the highest single fine ever in Germany, the director said. Picture source: Arne Dedert/DPA