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German Actuaries Recommend Life Insurance Guarantee Cut

German life insurers should be allowed to cut the returns that are guaranteed to policyholders next year amid low benchmark interest rates, the DAV association of German actuaries said.

The statutory minimum rate should be reduced to 1.25 percent from 1.75 percent, the Cologne-based association said in a statement on its website today. The long-term nature of guarantees makes it necessary to keep them below market interest rates, the DAV association said, adding that it will review its recommendation during the course of the year.

The German Finance Ministry, which decides on the statutory rate on policies and usually follows the actuaries’ recommendation, lowered the level for new life insurance products to 1.75 percent from 2.25 percent at the start of 2012. That compares with a 1.88 percent yield of 10-year German government bonds, up from a record low of 1.17 percent in 2012.

German insurers called the proposition “overhasty” as a lower interest rate guarantee would “significantly reduce” the incentive for additional retirement savings, the GDV industry association said in a statement today. A decision on the rate should also take into account the treatment of long-term guarantees under Solvency II, a new regulatory framework for insurers in Europe that is scheduled to be introduced in 2016, the GDV said.

The DAV association calculates the recommended rate of guarantees, which can last a decade or more, based on the yield of top-rated euro area government bonds with a term of 10 years.

German life insurers are also required to set aside a so-called interest rate reserve, dubbed Zinszusatzreserve, which was introduced in 2011 to bolster policies sold in the past that feature guarantees of as much as 4 percent.

Allianz, based in Munich, and Ergo Versicherungsgruppe AG, the primary insurance unit of reinsurer Munich Re, in July introduced new life insurance products that rely less heavily on guarantees to cope with the challenge. Both control about a fifth of the German life-insurance market, Europe’s third largest after the U.K. and France, with about 87 billion euros ($118 billion) of premiums.

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