Rising surpluses in life insurance conceivable

Created: 01/06/2023Updated: 01/06/2023 2:36 p.m

Interest rates are rising - and life insurance customers are benefiting as a result.

© Jonas Walzberg/dpa

After the end of the interest rate slump, the first life insurance companies increase the surpluses for the classic old-age provision.

This could become a broader trend.

But there are also downsides.

Frankfurt/Main - After the end of the interest rate slump, millions of pension savers can hope for increasing surpluses in life insurance in the near future.

"I'm already expecting that the profit participation will increase across the board, of course depending on the situation on the capital market as a whole, including the stock and real estate markets," said Germany's top insurance supervisor Frank Grund the news agencies dpa and dpa-AFX.

The industry association GDV expects a trend reversal.

The first insurers have already increased the bonus for 2023, others are at least keeping it constant.

"Life insurers have always adjusted their surplus participation to the conditions on the capital market, since this is decisive for the earnings situation," explained Jörg Asmussen, General Manager of the General Association of the German Insurance Industry.

"The trend reversal in interest rates should therefore also be followed by a trend reversal in the surpluses of safety-oriented products."

Life insurers set the profit sharing each year depending on the economic situation and the success of their investment strategy.

In addition, there is the maximum technical interest rate, also known as the guaranteed interest rate.

According to a decision by the Federal Ministry of Finance, this has been 0.25 percent for new contracts since the beginning of 2022.

Old contracts yield significantly more.

Both form the current interest rate, which only refers to the savings portion after deducting acquisition and sales costs, among other things.

Many only offer new customers slimmed-down guarantees

Grund does not assume that life insurers will get high guarantees back on their books on a large scale.

“We have seen the risks of high guarantees.

I don't think anyone should do that anymore.” The industry was hardly able to earn the interest rate promises from old contracts of up to 4 percent in the interest rate doldrums on the capital market.

The vast majority has only offered new customers products with a slimmed-down guarantee for a number of years.

In the interest rate slump, life insurers had to create a capital buffer worth billions in order to secure the high promises of the past.

The money could not be distributed to the customers.

In view of rising interest rates on the capital market, funds from the so-called additional interest reserve are likely to be released in the coming years.

The money will benefit customers through profit sharing.

However, a large part of the insurers' money is in comparatively low-interest government bonds from recent years.

Their value has fallen due to the recent rise in interest rates.

Hidden burdens arise in the balance sheet.

If insurers are forced to sell the securities before the end of the term, they would have to write off the value accordingly.

That would weigh on the balance sheet.

Industry experts therefore expect that some insurance companies will first take care of the hidden burdens before increasing the surpluses.

"I could imagine that the relief in the additional interest reserve will initially be used to reduce hidden burdens," said Lars Heermann from the rating agency Assekurata recently.

Life insurers under intensified supervision

Added to this is the sharp rise in inflation, which Grunds believes could have consequences for ongoing business.

"Companies should be prepared for the fact that business with new customers is not going as planned." Termination of existing contracts or exemption from contributions by customers cannot be ruled out because consumers need money for other things.

“But we haven’t seen the really big wave of layoffs yet.

Nevertheless, companies should ensure adequate liquidity management.”

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According to Grund, 15 of the approximately 80 life insurers are currently under intensified supervision.

"I assume that the number will drop significantly in the foreseeable future," said the Bafin executive director.

Currently, no life insurer has to make use of the transitional measures of the European regulatory framework Solvency II.

Rather, the companies are already meeting the requirements that will become mandatory from 2032.

dpa