“Lock in high guaranteed interest rates now!” Insurance agents in Germany these days are using slogans like these to hunt customers as if their lives depended on it. And perhaps their livelihoods do.
Because starting in 2015 the guaranteed interest rate for life insurance policies will drop from the current rate of 1.75 to 1.25 percent. But instead of feeling inclined to buy, many customers are unsettled because of the widely reported problems low rates are posing for the insurance industry.
Just last weekend, the European Insurance and Occupational Pensions Authority, Eiopa, warned that if interest rates stayed as low as they currently are, almost a quarter of all insurers would have problems meeting its financial obligations.
The agency, which conducted a "stress test" of the health of Europe's insurers, did not disclose which companies it was referring to, but most of the insurers that could run into trouble with low interest rates are based in Germany, Austria, Sweden and Malta. This warning has sparked a debate.
“The stress test shows that despite the stabilization measures already implemented, this isn't the time to sit back and relax,” Gerhard Schick, the financial policy spokesman for the Green party, told Handelsblatt. “I don't think the industry has asked policymakers for help for the last time.”
The German government only recently gave the country’s insurers a helping hand by reforming life insurance law.
“There is no risk of a firestorm, but the consequences of low interest rates for the industry are a serious issue, which cannot simply be dismissed,” warned Reiner Will, the managing director of credit rating agency Assekurata.
But there’s little doubt that the situation has gotten worse since the end of 2013, when the data was collected for the stress test to check how solid insurers' finances were.
But should anyone buy a life insurance plan in a hurry now? Most experts are skeptical.
The European insurance supervisory authority made a close review of 60 groups and 107 companies from the property, casualty, health and life insurances lines in Europe. The authorities wanted to see how resistant the European insurance sector was to possible dangers. The result, according to the authority, was: “A continuation of the current low interest rate conditions could lead some insurers into difficulties in eight to 11 years in fulfilling their promises to the insured.”
That is problematic for countries where commitments to customers reach farther into the future than the capital investments – and that especially applies to Germany.
Policies with the model of guaranteed interest rates are especially common in Europe’s largest economy. If you take out a corresponding life insurance policy, at the valid guaranteed interest rate, it applies for the entire term of the insurance, regardless of whether it is 10, 20 or 30 years. The guaranteed interest rate is currently 1.75 percent for new life insurance policies, and starting in 2015 that will drop to 1.25 percent.
A few years ago the industry even promised its customers 4 percent – a yield that currently isn’t possible for insurers to eaen via safe government and corporate bonds. Interest rates aren't set to rise again any time soon either - the European Central Bank cut its key benchmark rate to a record low of 0.05 percent in September and has said it will hold rates at this level for "an extended period of time."
Still, the German insurers are giving the all-clear.
The test proves that “interest rates held artificially low could become a challenge for the entire industry in Europe in the medium-term,” according to the industry association GDV. But the association said the German life insurers are prepared for this eventuality, and have set up extensive provisions to offset fluctuations and to generate constant yields over time.
Mr. Schick also warns against unjustified panic. “The stress test also shows that the entire industry is not in trouble, although the low level of interest rates is naturally affecting the entire industry,” he said. “What is crucial is whether or not management is correctly handling the challenge of the situation with low interest rates. That is not the case everywhere.”
Axel Kleinlein, head of Germany’s Association of Insured Persons (BDV), also seemed relaxed. “The results are in no way a cause for concern, on the contrary. The low interest rates have already put pressure on the industry for several years, therefore the results of the stress test in my opinion are proof of the strength and stability of the industry. No one should cancel their life insurance or suspend their premiums based on these results.”
But should anyone buy a life insurance plan in a hurry now? Most experts are skeptical when it comes to that.
“Special promotions by an insurer should not tempt anyone to buy a product with such a long term, unless they already planned to do so,” said Mr. Schick.
Mr. Kleinlein agreed. “Consumers shouldn't panic,” he said. “Only in rare cases” are life insurances the right product, he said, independent of whether or not the guaranteed interest rate amounts to 1.75 or 1.25 percent.
Kerstin Leitel covers the insurance industry from Munich. To contact the author: [email protected]