German life insurers are pioneering new temporary guarantee concepts, in a bid to reduce their exposure to a prolonged low interest rate environment.
Allianz Germany is set to launch a deferred annuity product in July with different guaranteed interest rates for the accumulation phase and pay-out phase. Other German life companies are also understood to be experimenting with ‘abschnittsgarantien' – temporary guarantees – which offer policyholders a high rate of return for a period of time and then revert to a lower rate for the remainder of the contract in order to counter the long-term risks associated with traditional guaranteed offerings.
German insurers are particularly exposed to low interest rates. The current average guaranteed rate for existing life books in Germany is 3.25 per cent, according to Fitch Ratings. This compares unfavourably with current yields on German bunds, at 1.29 per cent. Firms risk incurring balance sheet deficits when the time comes to reinvest their short-dated holdings.
German life insurers typically hold assets with shorter duration than their liabilities, which also exposes them to interest rate fluctuations.
With no end in sight for low interest rates, firms are looking to product innovation to mitigate the impact.
Henning Maaß, senior consultant at Towers Watson Germany in Weisbaden, says: "Providing temporary guarantees, for example, from policy [origination] to retirement commencement, followed by a new guarantee for the payout period is supposed to reduce or even remove asset liability mismatch risk".
Other types of guarantee are also being tested. One approach gaining traction, according to Maaß, is the so-called ‘dynamic guarantee', which has similar characteristics to UK unit-linked products. "These are, for example, annually changing guarantees, which vary by the movement in a commonly known bond market index", Maaß says.
Products that only offer guarantees at the end of the accumulation phase, designed to attract policyholders to maintain a contract to maturity, are also being explored by insurers.
The actions of the German regulator, BaFin, may have indirectly encouraged this latest spate of product evolution. Solvency II may also have a hand in encouraging German life insurers to shake-up the guarantees offered. The directive's focus on close asset-liability matching means that shortening liability durations and reducing outgoing cashflows would benefit firms, says Kalb.
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