Bafin Urges Quick Fix for German Insurers Amid Low Rates

Germany plans to bolster the ability of life-insurance companies to meet payout pledges to policyholders by tapping shareholders’ profits if needed, Deputy Finance Minister Michael Meister said.

The proposal, part of a package to stabilize an industry shaken by low interest rates, would introduce a requirement for companies to forgo dividend payments to help cover the terms of life-insurance policies, Meister told reporters in Berlin today. Meantime, the legally required guaranteed interest that insurers pay on policies would be reduced.

Companies including Allianz SE, Europe’s biggest insurer, have been pressing Chancellor Angela Merkel’s coalition to change a 2008 law that compels companies to pay matured or canceled policies partly by drawing on reserves. Meister said the government wants to reduce the need to tap reserves, though he declined to say how, saying legislation isn’t drafted yet.

“We must act in the interest of policyholders,” said Meister, a member of Merkel’s Christian Democratic Union.

German insurers are being squeezed by investments they bought when interest rates were higher and a legal requirement to pay into an interest-rate reserve created in 2011 to bolster policies sold in the past with guaranteed returns of more than 3.5 percent. That set-aside was about 6 billion euros ($8.3 billion) last year, according to the Bafin regulator.

To help insurers, the Finance Ministry plan would cut industrywide guaranteed annual interest paid on policyholders’ contributions, which is set by the government, to 1.25 percent from 1.75 percent for new policies, Meister said.

Insurers, regulators and lawmakers are calling for changes to the German rules, which the industry says have led to distortion as insurers pay windfalls to clients from reserves acquired when interest rates were high. The European Central Bank’s current rates are at a euro-era low.

Bolstering insurers’ capacity to treat all policyholders fairly is central to stabilizing the industry, Meister said. The government plans to strengthen Bafin’s powers to assess the long-term ability of insurers to make payouts, he said.

“The possibility that we’re in a prolonged low-interest phase is creating the industry’s number one problem right now,” Felix Hufeld, Bafin’s head of insurance supervision, said in an interview on Feb. 24. “The danger that we may face Japanese circumstances can’t be ignored.”

Over 24 months to December 2012, the value of all reserves held by life insurers multiplied 30-fold, according to the GDV insurance industry lobby group. Payouts on policies made by companies including Talanx AG, Germany’s third-biggest insurer, surged 80 percent and reached about 300 million euros ($416 million) a month last year compared with 2011, according to GDV calculations.

“This a precarious situation from the perspective of financial stability but it’s also deeply unfair” to clients whose policies may mature in coming years, which will have to be topped up by reserves valued lower, Hufeld said.

German insurers currently guarantee customers an average return of 3.5 percent on traditional life-insurance contracts, which can run a decade or more, according to Cologne-based insurance rating firm Assekurata. That compares with a 1.6 percent yield on 10-year German government bonds.

“The extremely low interest rates were certainly justified in order to get the economy back on track,” Allianz Chief Executive Officer Michael Diekmann said on Feb. 27. “But the price we are paying for this zero interest rate policy, in particular the gradual dispossession of savers, is rising every day.”

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