Life Insurers: Low Interest Rates are Bad. Are Rising Interest Rates Better? Research presentation and a panel discussion with Dr. Frank Grund, Chief Executive Director of Insurance and Pension Funds Supervision, Federal Financial Supervisory Authority, BaFin, Dr. Klaus Wiener, Member of the Executive Board and Chief Economist at the German Insurance Association (GDV), Prof. Dr. Helmut Gründl, Chair of Insurance and Regulation, Goethe University and Managing Director, ICIR. Moderation: Prof. Dr. Jens Gal, European Insurance Law, Institute for Insurance Law and ICIR, Goethe University
Current interest rates, which have fallen to unexpected and unprecedented lows, pose significant challenges for life insurance companies and their customers. During recent years surplus participation has gone down, and if the current rate environment were to prevail for much longer it could become difficult for some life insurers to generate sufficient investment income for providing the granted investment guarantees. Different measures have been taken to handle the challenges: The Long-Term-Guarantee Package was introduced to allow for a smoother transition to a Solvency II world. Moreover, with the additional interest rate reserve requirement (Zinszusatzreserve) in Germany, guarantee levels have been ensured.
However, what will happen if interest rates rise again?
In the book value-oriented German GAAP balance sheet (HGB-Bilanz) assetprices would drop immediately while price changes on the liability side would be slow. The solvency situation, as measured by the GAAP balance sheet, could therefore worsen.
Do we need a revised form of dissolving the additional interest rate reserve?
In contrast, rising interest rates would under Solvency II immediately improve solvency ratios. We therefore face diverging effects from financial reporting and prudential regulation that can lead to a field of tension for supervisory actions.
In addition, rising interest rates could trigger rising lapse rates of life insurance and annuity contracts. Which effects could this have on life insurers’ solvency and liquidity?
In this “Talk on Insurance and Regulation” Prof. Dr. Helmut Gründl will present recent research results on the rising-interest-rate topic, followed by presentations by Dr. Frank Grund and Dr. Klaus Wiener that will be debated in a panel discussion.