"We've often heard the death knell sounded for German life insurance in the past", said Chief Executive Director Grund. Yet, he continued, BaFin’s findings still indicated that, fundamentally, the sector did not have any problems in the short or medium term that could threaten its existence – despite the persistently low interest rates that were having a considerable negative impact on the health of life insurers. Even though BaFin believes that the risk management and awareness of insurance undertakings have improved significantly, it continues to subject a number of life insurers to particularly close supervision.

Living on capital

A growing number of life insurers are living on their capital. They are straining to meet the required contributions to the premium reserve, and consequently to the additional interest provision (Zinszusatzreserve – ZZR), which is actually intended to strengthen the undertakings, from ongoing investment income.

The consequence is that insurers have to realise hidden reserves. Although this is acceptable to a certain extent, because reserve levels are very high at present, hidden reserves are in essence future cash flows. They cannot be realised indefinitely.

Keep the ZZR...

Although the ZZR is increasingly becoming a burden on undertakings, to abolish it would be a serious mistake. The Zinszusatzreserve gives a systematic boost to the premium reserve. It makes the sector as a whole more robust and underpins its ability to provide guaranteed benefits for the long term. To require insurance undertakings to build up an additional interest provision was therefore still, fundamentally, the right thing to do, emphasised Chief Executive Director Grund.

...but make adjustments

However, from BaFin's point of view it is neither necessary nor advisable to continue building this provision at the current rate. "BaFin expects that the way the ZZR is calibrated will be reviewed and adjusted in 2018", explains Grund. "This will also be important when interest rates rise, because the hidden reserves available to undertakings in such an environment will be lower.

Trend towards products without fixed guarantees

It is a well-known fact that, in response to the low interest rates, some life insurers no longer offer the traditional policies with fixed guarantees – although others still do. The sector as a whole is moving towards products without fixed guarantees. All in all, it is coming up with a more diversified range of products – which is exactly what BaFin has been calling on it to do for years.

Is external run-off the answer?

A small number of life insurers have decided to respond to the low interest rates by putting their business into external run-off, which means that they stop taking on new business and sell or transfer parts or the whole of their portfolio. Three run-off platforms are currently active in Germany. One application is currently being assessed by BaFin. No new applications had reached BaFin or been announced by the time of going to press. It would therefore not be appropriate to talk of a major run-off trend at present.

It may at times make good sense to transfer a portfolio – including to specialised run-off providers or operators. But the issue is causing concern among policyholders, even though the undertaking acquiring the portfolio still has to meet all existing contractual obligations and comply with all supervisory regulations.

Moreover, no external run-off can take place without BaFin having scrutinised all the details of the arrangement first. "BaFin will only accept a sale or transfer if the interests of policyholders remain protected – in their entirety", emphasised Chief Executive Director Grund. "If there were even a single policyholder whose interests were not safeguarded, in that they would be worse off as a result of this transaction, we would not give our approval", he said. "We have excellent tools for preventing such cases."