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Ergo, the life insurance subsidiary of Munich Re, will launch a product on July 1, which promises both a guaranteed return of gross premium and a guaranteed pension for life, in addition to potential investment participation.
Allianz Germany is also set to launch a new pension product, ‘Perspektive', on July 5 offering a return of premium guarantee, a minimum guaranteed annuity and a yearly increase in the maturity benefit.
In the case of Ergo's Rente Garantie [guaranteed pension] product, the premium will be split into a secured component to finance the guarantee and a growth component invested in stocks and bonds. The division between the two is managed by what Ergo calls "a dynamic concept", understood to be a CPPI mechanism that uses a volatility measure to trigger shifts in allocation.
Christoph Schmitt, insurance director at Fitch Ratings in Frankfurt, says the product structure is a novel addition to the German life market. "Most hybrid products calculate the investment share, which is not guaranteed according to the market value of the investment. This Ergo product takes more into account the volatility of capital markets", he says.
German life insurers are no strangers to CPPI structures, which shift allocations between risky and risk-free assets, according to an algorithm defined by a fund's net asset value and guaranteed level of return. Ergo's product builds on this concept by factoring in asset volatility to the allocation formula.
While such innovations offer policyholders upside potential alongside a guaranteed return on their investment, they do not solve the underlying problem of low interest rates that is plaguing the German market. The maximum guaranteed rate German insurers are allowed to offer customers, as set by the German regulator BaFin, stands at 1.75 per cent for new products. But low yields on fixed-income assets used to match liabilities, coupled with high policy management charges, makes this difficult for insurers to fulfil.
This problem may undermine the attractiveness of Ergo's new product to some investors, says Fitch's Schmitt. "I would expect that this product is too conventional for those who are investment-risk types, because they recognise the high volatility of capital markets and will assume this product has only a minor portion in the risky part of the investments on average and everything else on the premiums guarantee."
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