Since 2016, the phenomenon of negative interest rates has been causing insurance undertakings to revise their internal models (see info box "Models and negative interest rates"). This primarily affected the valuation model for life insurance policies, where a stochastic valuation is carried out on portfolios by simulating the development in future capital market scenarios, and the risk projection model of the users of internal models, which simulates, among other things, possible interest rates over a one-year development period to calculate the capital requirement of the undertaking.

Because of negative interest rates on the capital markets, the traditional assumption of an interest rate floor of zero is no longer tenable. The modelling of negative interest rates raises questions about factors such as the existence and level of a new, now negative, interest rate floor that can be economically justified, since negative interest rates are regarded as difficult to interpret from an economic perspective, especially in the long term. The "physical cash argument" is often used in this debate: if interest rates go deep into negative territory, undertakings could transfer their money to physical cash, rather than incur massive losses by investing the capital. The cost of keeping physical cash would therefore determine an interest rate floor.

However, this argument is controversial and was of minor significance in the modification of models. The implicit interest rate floors were instead chosen in accordance with the other requirements on the models, and they are normally below the notional "cost of holding physical cash". Factors significant for the valuation model are above all market consistency, i.e. the replication of market prices for bonds and interest rate options, as well as no-arbitrage bounds (the model does not generate any risk-free return that exceeds the risk-free interest rate). In the risk model, the one-year forecast horizon is meant to take account of not only empirical experience and existing economic knowledge, but also requirements for appropriate risk management in the insurance undertaking.

BaFin reviewed the model changes required and approved them in 2017. If negative interest rates are adequately modelled and processed, this raises the stability of the model results. The results are a better reflection of the current capital market environment, are easier to interpret from an economic perspective and thereby increase the usefulness of the internal model.