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The economy and inflation dampen demand

Frankfurt Due to the negative economic outlook and the sharp increase in inflation, the rating agency Assekurata expects demand for life insurance products to fall. “The high inflation restricts the savings possibilities of many citizens and eats away at the real interest on the policies,” said Managing Director Reiner Will on Tuesday when presenting a market outlook for the industry.

At the same time, competing banking products could become more attractive again if interest rates continue to rise. However, this effect typically only occurs with a time lag, when the banks actually pass on the higher interest rates to their customers.

The bottom line is that Assekurata expects a one percent drop in life insurance premiums in 2022. As early as 2021, the industry recorded a decline in gross premiums written of 1.7 percent to 98.2 billion euros. The insurance association GDV recently forecast a premium increase in life insurance of less than one percent for the current year.

Contrary to fears, the cancellation rates in life insurance remained stable during the corona crisis. But according to Lars Heermann, who heads the Analysis and Valuation department at Assekurata, one has to watch how this value develops in the uncertain market situation.

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In addition, rising interest rates put a strain on life insurers’ investments. According to Heermann, the companies could achieve higher returns on new investments. However, this positive effect will only have an effect in the medium to long term. “But the inventory loses value immediately.”

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According to Assekurata data, life insurers have invested around 77 percent of their capital investments, which total around one trillion euros, in fixed-income securities. While the companies still had valuation reserves of around 150 billion euros at the end of 2021, the agency currently assumes that this is already the case across the industry silent burdens amounting to 40 billion euros.

Hidden burdens arise when the current market values ​​of the investments are lower than the book values ​​in the balance sheet. If interest rates continue to rise, they could rise further quickly.

This does not pose an immediate problem, as Bafin executive director Frank Grund emphasized at an event last week: since life insurers often hold the bonds concerned until maturity, they do not have to write them down.

According to Assekurata Managing Director Will, however, this could change if the creditworthiness of the companies that issued the bonds deteriorated with the uncertain economic environment or if insured persons canceled policies on a larger scale because they need money. Then life insurers could be able to write off some of the bonds.

There is relief with the additional interest reserve

On the other hand, life insurers are relieved by the rising interest rates when it comes to the requirements for the additional interest reserve (ZZR): Due to the years of low interest rates, providers have had to build up a capital buffer to hedge the high interest rate guarantees from old contracts on the balance sheet since 2011.

In the 1990s, life policies with guaranteed interest rates of up to four percent were sold at times – in the low-interest environment, these rates were difficult for insurers to earn. In the past year, the branch of the ZZR therefore contributed another ten billion euros. The reserve now totals 97 billion euros.

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The recent abrupt rise in interest rates means that many life insurers no longer have to build up the additional interest reserve. Rather, according to Assekurata, the industry is likely to receive initial returns from the capital buffer this year. Heermann expects a figure of four to five billion euros. Even if interest rates remain at the current level in the coming years, life insurers could reduce around half of the additional interest reserve by 2035.

However, the Assekurata experts do not believe that the insured will benefit from this in the form of a higher surplus sharing. Rather, they assume that the insurers will use the funds released, at least in part, to realize hidden losses in the investments and offset them against them.

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Rising interest rates are also having a positive effect on life insurers’ solvency ratios. This key figure indicates the ratio of existing to required own funds. “The solvency ratios have already increased significantly in 2021 and will continue their positive trend in 2022,” predicted Heermann.

Insurers must keep the solvency ratio above the 100 percent mark. Then they can meet all obligations even in an extreme crisis scenario. In the past, many providers only met these requirements with the help of special rules that will expire by 2032.

But according to insurance supervisor Grund, the situation for many life insurers has eased. Overall, with a view to the solvency ratio, his authority only has 15 insurers under intensified supervision, he said. At the turn of the year there were still 20 providers.

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