14 November 2013

Bundesbank/Dombret: Low interest rate environment puts German insurers under pressure

The maximum technical interest rate for life insurers’ portfolios – which generally equals the guaranteed returns – is an average of 3.2 per cent. By way of comparison: the average current yield on public sector bonds with an original maturity of more than four years was recently around 1.3 per cent.

Insurers need to respond. Their capital buffers are shrinking. The coverage ratio, which is the ratio of regulatory capital to regulatory capital requirements, dropped from around 186 per cent in 2009 to just under 169 per cent at the end of 2012. Life insurers are therefore called upon to strengthen their capital resources and to review the level of distributions.

In addition, the low interest rates are leading to high valuation reserves. These amounted to almost €88 billion at the end of 2012. Policyholders are entitled to a half share of these, although the valuation gains on fixed-income assets are nothing but paper profits. In the interests of financial stability, a sound and sustainable regulatory framework should be created for policyholders’ participation in valuation reserves in life insurance.

We have carried out a scenario analysis. It enables conclusions to be drawn about the change in capital resources under Solvency I for various interest-rate paths.

• A mild stress scenario simulates government bond returns like those in Japan. In this scenario, 12 life insurers with a combined market share of 14 per cent would fail to meet the requirements of Solvency I by 2023.
• In the more severe stress scenario, the extremely low interest rates affect a wider range of asset classes. In this scenario, no fewer than 32 insurers fall short of the regulatory requirements by 2023. Their market share is 43 per cent. Thus, in this scenario almost half of the market is affected.

There is therefore no doubt that a persistent low-interest-rate environment harbours a potential risk to the stability of German life insurers.

It also needs to be borne in mind that our simulation is based on the requirements of Solvency I. Fair-value accounting under Solvency II would probably lead to even worse results. It is therefore important to configure the transition to Solvency II in a way which is compatible with stability.

Full speech

© Deutsche Bundesbank