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Most Germans have one:
The statistics count around 83 million life insurance contracts, the majority of which are capital-forming old-age provision contracts
Photo: David Pereiras / Westend61 / Getty Images
As an actuary, Axel Kleinlein has long been a thorn in the side of life insurers - on the one hand through his critical studies, on the other hand through his consumer policy work at the Association of Insured People, whose board spokesman he was for a good ten years until last autumn. Now he wants to "finally do more calculations again," says Kleinlein - and in an interview he talks about the consequences of rising interest rates and high inflation, as well as a push by financial regulators in the interests of customers, which may only appear courageous at first glance.
manager magazin: Mr Kleinlein, life insurers have suffered from low interest rates for a good decade. They had to additionally secure older contracts with higher interest rates. Money that customers also lacked for capital investments. Interest rates are now rising significantly, but there is really no joy. Is the impression wrong?
Axel Kleinlein:
No, that is not deceptive.
The companies get some relief.
Rapidly rising interest rates are currently having negative effects for the insured.
It will be a few years before life insurance customers can benefit from rising capital market interest rates.
And that is then eaten up from behind by inflation
.
Relief for life insurers and disadvantages for customers when interest rates rise? You have to explain that.
You have to understand how life insurance works.
The insurers initially guarantee their customers a fixed interest rate on the money invested, the so-called guaranteed interest rate.
The average for all contracts is around 2.5 percent.
Yes, but for more recent contracts, the companies only guarantee 0.25 percent interest.
If you calculate the costs, there is even a loss with such a low interest rate.
However, customers still receive a surplus from the insurers.
In order for the newer contracts to be positive, this surplus participation must be sufficiently high.
It will be difficult for companies to generate high surpluses in the years to come.
Why?
During the time when interest rates were very low, companies deliberately withdrew money from their surplus participation in order to create a safety buffer.
It is precisely with these buffers that the problems are now slumbering - they are the reason why future bonuses are likely to be lower than they could be without the buffers.
If life insurers dissolve the buffer, this should benefit the customer. Why isn't that so?
The insurers have bunkered investments in these buffers that pay very poor interest.
The value of these papers has fallen rapidly due to the recent rise in interest rates, so-called hidden charges have formed on the balance sheet.
These hidden charges arise when the market value of an investment is below the acquisition cost.
This is to be expected on a large scale at a large number of plants right now.
A former insurance director put the hidden burdens in an estimate to me at up to 125 billion euros. Do you think that is realistic?
Yes, the loads are huge.
However, insurers are still using a trick to hide the risk of billions.
What trick?
Companies claim that they do not have to liquidate these predominantly fixed-income investments.
This means that they can continue to pretend that they still have the acquisition value.
But that only works as long as the life insurers don't have to get hold of the money.
However, if they have to sell these papers due to liquidity problems or a wave of cancellations, they will incur losses.
These realized losses severely depress the business result.
The surplus participation does not then increase, but on the contrary is likely to be worse.
Does this affect all life insurers?
Only the few companies that haven't gorged themselves on such low-yielding investments are doing a little better.
But that is rather the exception.
Because the investment policy of the industry in the last decade was largely too conservatively geared towards fixed-income securities, despite warning calls.
How high do you assess the risk that customers will cancel existing policies on a large scale in times of massive inflation?
Very low.
Many consumers would actually have to terminate their contract or at least make it contribution-free.
But experience shows that the often quoted "financially rational consumer" is the exception.
Advertising and insurance intermediaries do the rest to keep the insured from making the right decisions.
If you then take inflation into account, it is questionable whether life insurance is the right decision anyway.
The inflation rate last year was around 8 percent. For most investments, this means they are generating negative returns. The General Association of the German Insurance Industry nevertheless explains: "The high inflation need not frighten life insurance customers." Is purposeful optimism spreading here or will everything be fine in the long run?
Purposeful optimism is still a euphemism!
Even if the ongoing surplus participation at Allianz increased somewhat to 2.5 percent at the beginning of this year, perhaps 1 percent remains after costs.
If you deduct the inflation of 8 percent, you end up with minus 7 percent after costs and profit sharing.
The Bafin published such considerations last autumn, assuming significantly lower inflation.
The results are nonetheless discouraging.
I no longer see a customer benefit there.
Only the corporations somehow manage to stay alive.
Banks react quickly and are already paying more than 2 percent on call money. How quickly could life insurers switch to investments with higher interest rates in order to remain reasonably competitive?
This is happening very slowly because you have to wait until the low-interest investments expire or are sold with the negative consequences mentioned.
That alone will take a number of years.
But it would then also take courageous board members who say goodbye to an investment policy that is still predominantly based on fixed-interest securities.
But I only see these board members very sporadically.
You spoke of customer benefit. In future, life insurers' old-age provision products must offer "appropriate customer benefits", which the financial supervisory authority sets for a real return "above a justified expectation of inflation". The insurers have to respond to the draft of the so-called rules of conduct by mid-January. You too are asked what will you answer?
There is explosives in the draft for these rules of conduct!
The Bafin follows European guidelines to implement the so-called product release procedure.
The first serve has some very good approaches.
For once, I have hope that the regulators will take a bigger step towards consumer protection.
The Bafin could show much more courage.
What do you mean by that?
For example, supervisors interpret customer benefit mainly as a request to generate adequate returns after inflation.
However, I understand more about customer benefit – referred to as “value for money” in the English original.
For example, the question of a "fair" distribution of profits comes up here.
I also see another massive problem.
Which?
In its proposal, the Bafin only considers returns and costs up to the start of retirement.
After that, however, the companies should continue to have a free hand.
But what use is it to a customer if he is treated fairly until retirement but is then at the mercy of companies' greed?
This applies in particular to Rürup and Riester contracts, where the customer is forced to let an insurer pay out the capital he has saved.
The supervisory authority still has to make significant improvements.