The economy and inflation curb demand

frankfurt Due to the negative economic outlook and the sharp increase in inflation, the rating agency Assekurata expects the demand for life insurance products to decrease. “High inflation restricts the savings possibilities of many citizens and kills the real interest in policies,” CEO Reiner Will said Tuesday in 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 usually only occurs over a period of time, when banks pass on higher interest rates to their customers.
The bottom line is that Assekurata expects a one percent drop in life insurance premiums in 2022. Already in 2021, the industry recorded a decline in gross written premiums of 1.7% to €98.2 billion. The insurance association GDV recently forecast a life insurance premium increase of less than one percent for the current year.
Contrary to fears, cancellation rates in life insurance remained stable during the coronavirus crisis. But according to Lars Heermann, who heads Assekurata’s Analysis and Valuation department, you have to watch how this value develops in the uncertain market situation.

In addition, rising interest rates put pressure on life insurers’ investments. According to Heermann, companies could achieve higher returns on new investments. However, this positive effect will only have an effect in the medium and long term. “But the inventory loses value immediately.”
According to data from Assekurata, life insurers have invested around 77 percent of their capital investments, totaling around €1 trillion, in fixed-income securities. While companies still had valuation reserves of around €150bn at the end of 2021, the agency currently assumes this is already the case across the industry. silent loads for a value of 40,000 million euros. Hidden charges arise when the current market values ​​of investments are less than the book values ​​on the balance sheet. If interest rates continue to rise, they could rise even faster.

This doesn’t pose an immediate problem, as Bafin chief executive Frank Grund emphasized at an event last week: since life insurers often hold the bonds in question until they mature, they don’t have to write them off.

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However, according to Will, managing director of Assekurata, this could change if the creditworthiness of the companies that issued the bonds deteriorates along with the uncertain economic environment, or if policyholders cancel policies on a larger scale because they need money. So life insurers could write off some of the bonuses.

There is relief with the additional interest reserve

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

In the 1990s, life policies were sometimes sold with guaranteed interest rates as high as four percent; in the low-interest environment, these rates were hard for insurers to earn. In the last year, the ZZR branch therefore contributed another ten billion euros. The reserve now amounts to 97,000 million euros.

The recent sharp increase in interest rates means that many life insurers no longer have to accumulate the additional interest reserve. Rather, according to Assekurata, the industry is likely to receive early benefits from the capital cushion this year. Heermann expects a figure of four to five billion euros. Even if interest rates remain at current levels for years to come, life insurers could cut about half of the additional interest reserve by 2035.

However, Assekurata’s experts do not believe that the insured will benefit from this in the form of a greater distribution of surpluses. Rather, they assume that insurers will use the released funds, at least in part, to make hidden losses on investments and offset against them.

>> Read also: Pension funds benefit from the turnaround in interest rates

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

Insurers must maintain the solvency ratio above the 100 percent mark. So they can fulfill all obligations even in an extreme crisis scenario. In the past, many providers only met these requirements with the help of special rules set to expire in 2032.
But according to insurance supervisor Grund, the situation for many life insurers has eased. Overall, looking at the solvency ratio, his authority only has 15 insurers under heightened supervision, he said. At the end of the year there were still 20 providers.

Plus: Zurich sells old German life shares to Viridium: what that means for the market


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