The turnaround in monetary policy that the European Central Bank (ECB) implemented with its interest rate hike in July also affects life insurers in particular. After all, their main asset class is fixed income securities. In principle, the rise in interest rates is good for the companies and their customers, but some insurers will also have to contend with problems. This is what Herbert Schneidemann, head of the German Actuary Association (DAV), predicts in an interview with the “Handelsblatt”. In other words, the gap between financially strong and weak life insurers could widen further.
“Higher interest rates are good news for life insurance, especially for reinvestment,” said Schneidemann, who is also head of the Bayerische insurance group, to the newspaper. If the insurers buy new bonds now, they get higher yields for their portfolios. According to the DAV boss, providers who mainly have insurance policies with short remaining terms in their portfolio and at the same time have little money invested in fixed-interest securities are in a good position.
Hidden burdens in the balance sheets
However, there is also a reverse effect. “Existing investments will initially come under pressure as most insurers are heavily invested in fixed income securities,” he explains. Because of the rise in interest rates, the market value of the bonds already in the portfolio from the long phase of low interest rates has fallen. If the current market value of the capital investments is lower than the book values in the balance sheet, the insurers will have so-called hidden burdens – these companies will have a hard time, says Schneidemann.
The rising interest rates are also positive with regard to the solvency ratios, which indicate the relationship between existing and required own funds; the insurers have to have a rate of at least 100 percent in order to be able to meet customers’ demands in an emergency. In the past, numerous providers only managed to do this with the help of special rules that will expire in 2032. “I assume that no life insurer currently has a rate of less than 100 percent – even without transitional measures,” says Schneidemann.
Unsolved problem: inflation
However, the rising interest rates do not solve one problem – the high inflation, the DAV boss told the “Handelsblatt”. The inflation rate was recently 7.5 percent, and life insurance companies generate an average current interest rate of 2.02 percent. For Schneidemann, this is above all a communicative challenge. The insurers would now have to explain to customers that they “need to save even more for old-age provision despite or precisely because of the negative real interest rate”. (jb)