ECB Impact Insurers Hit By Zero Interest Rates

The European Central Bank's decision to slash interest rates had hit German life insurance providers hard, and many complain people no longer have an incentive to save into these policies.
The ECB's zero interest rates are headache for insurers.

Germany's insurers are outraged.

They struggled for years to make their policies attractive in the face of historically low interest rates. Now, the European Central Bank has added insult to injury by slashing rates to zero.

"It's a catastrophe," said Oliver Bäte, the head of Allianz, Europe's largest insurer. That sentiment is shared widely throughout Germany's insurance industry.

"The insurance market views with great concern the central bank's decision to further ease its already extremely expansive monetary policy," said Alexander Erdland, president of the German Insurance Association.

The central bank's effort to spur lending is coming at the expense of the 90 million life insurance policies held by Germans, who buy policies not just to have peace of mind, but to earn interest on their savings.

With benchmark rates now zero, however, they are increasingly paying higher premiums for lower returns.

"After a long period of low interest rates, the most recent rate cut is more or less symbolic," Fred Wagner, with the Institute of Insurance Science at the University of Leipzig, told Handelsblatt. "But the fact of the matter is that the insurers face growing challenges the longer this low interest period lasts."

I don't see any danger of the insurers falling into financial distress Fred Wagner, Institute of Insurance Science, University of Leipzig

Cutting benchmark rates to zero isn't the only challenge for insurers. ECB chief Mario Draghi also lowered negative interest rates on deposits to -0.4 percent on Thursday. Nearly 80 percent of German government bonds now bear negative interest, one of the securities insurers rely on to produce yields.

"Allianz does not support the ECB's negative-interest-rate policy," Maximilian Zimmerer, a board member at Allianz, said in a press release last week. "For one, it is detrimental to savers and their retirement provisions. For another, it destabilizes financial markets and increases the risk of credit-financed bubbles.”

Life insurances policies with guaranteed interest rates of up to 4 percent were once popular in Germany. But the insurers have responded to the European Central Bank's rate cuts by doing the same in kind, which has driven away customers in droves. In 2014, life insurance policies worth a record €14.9 billion ($16.5 billion) were cancelled.

Consumer advocates, however, warn against making rash decisions. Though life insurance policies have become unattractive as savings vehicles, they continue to provide worthwhile benefits in the event of illness or death, said Axel Kleinlein, head of the Association of the Insured.

"You should check whether or not your insurance is still worth it," Mr. Kleinlein told Handelsblatt. "The judgement will be different depending on the policy."

Despite the rush to cancel policies, analysts believe the insurers will remain solvent. Since 2011, they have been required to pay into a common pot, building €32 billion in reserves to ensure benefits are covered.

"I don't see any danger of the insurers falling into financial distress," Mr. Wagner said.

Even if an insurer did prove unable to meet its capital requirements, that wouldn't necessarily mean it's on the verge of bankruptcy or cannot meet its obligations to customers, said Benjamin Serra with Moody's.

And in the worst case scenario, a rescue company set up by the industry jumps in and takes over failed institutions, like in 2003 when Mannheimer Leben collapsed.

For all the doom and gloom, Andrew Bosomworth with Allianz's subsidiary Pimco sees a silver lining in the central bank's policies. Mr. Draghi's offer to pay a premium of 0.4 percent to institutions that increase their lending helps alleviate the consequences of negative interest rates, Mr. Bosomworth said.

And the central bank will also expand its bond-buying program from states to companies at the end of June. Analysts expect the bank will buy up to €5 billion in corporate securities monthly. The overall bond-buying program will expand from €60 billion to €80 billion.

"The ECB is not giving up," Mr. Bosomworth said.


Kerstin Leitel covers banks and insurance companies. Andrea Cünnen works at Handelsblatt's finance desk in Frankfurt, reporting on the bond markets.  Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. To contact the authors: [email protected][email protected] and [email protected]