Dr Normann Pankratz, Member of the Management Board at Debeka Versicherungen, outlined the impact of rising interest rates and higher inflation from a life insurer’s perspective.

The Debeka Management Board Member explained that, in the period of low capital market interest rates, insurers have used valuation reserves to a large extent in order to build up the Zinszusatzreserve (the additional provision to the premium reserve introduced in response to the lower interest rate environment). Now that interest rates are rising again, this has contributed significantly to hidden losses in investments, he continued. According to Pankratz, in order to preserve intergenerational equity, these hidden losses should be reduced directly using the funds that become available as a result of the decrease in the Zinszusatzreserve.

Nominal guarantees are losing economic value due to the very high level of inflation and the sharp rise in interest rates, Pankratz explained. This is why the right conditions should now be established to ensure that pension products can be treated as unit-linked during the payout phase, he continued.

Pankratz pointed out that inflation is a topic of discussion in insurance consultations, but for the most part the issue is addressed by intermediaries, not customers. He also noted that more stringent Solvency II requirements seem to be having a minor, manageable impact in the current market environment. “A rapid change in the capital market environment is not unlikely, however, and in that case there would be a major risk that the new system could be too tough,” Pankratz warned. He also stressed that “we need effective volatility adjustments to ensure that we can maintain stability.”

Uncertainty leads to volatility

Dr Oliver Fries, Head of Division in the area of insurance supervision at BaFin, referred to the high level of uncertainty currently surrounding future economic development. This is causing a significant increase in volatility on financial markets, resulting in more volatile interest rates, he explained. “Insurers would be well-advised to take this into account in their risk management. In particular insurers with portfolios that are highly sensitive to interest rates should consider scenarios in which interest rates continue to increase, on the one hand, and scenarios in which interest rates fall significantly again, on the other,” he warned. He added that BaFin also expects insurers to have forward-looking asset-liability management and liquidity management to limit the impact of potential significant increases in lapse rates. He also noted that previous portfolio sales to run-off platforms were primarily driven by pressure on capital markets. The number of such transactions is expected to decrease in future, according to Fries.

IORPs: market values are decreasing

Rising interest rates and growing inflation are also affecting institutions for occupational retirement provision (IORPs). The market value of many investments, and thus the risk-bearing capacity of numerous institutions, is decreasing substantially. Owing to the support of sponsoring undertakings, IORPs are in a good position to weather adverse conditions in this environment, explained Susanne Adelhardt, CEO of the Degussa Pensionskasse. They should not, however, be weakened by increasingly stringent supervisory measures, she warned.

Adelhardt also pointed out that policies offered by Pensionskassen are an attractive way to save for retirement, even in the current environment, since these institutions are not profit-oriented, offer professional investments, benefit from economies of scale and thus offer increased efficiency. However, the general rise in prices is currently having a negative impact on business performance, she explained. “At the moment, we are not competing with other forms of investment like bank savings schemes. We are competing with gas prices,” Adelhardt made clear.

According to Adelhardt, increasing inflation will result in rising wages and IT costs, which will also impact Pensionskassen. “Policyholders have so far not asked for a significant increase in protection against inflation in insurance commitments and policies,“ Adelhardt explained.

She emphasised that long-term investments are the day-to-day business of Pensionskassen. “Time and again, it has been shown that a diversified portfolio offers better protection against any major consequences of developments on the capital market. At the same time, stable returns are more likely, also in the long term, if returns are not only attributable to one asset class,” Adelhardt said. It is therefore still essential for Pensionskassen to not exclusively buy bonds, as these constitute a major cluster risk.

IORPs indirectly affected by inflation

Günther Weißenfels, Head of Division in the area of insurance supervision at BaFin, explained that inflation has had no direct consequences for IORPs. He added that IORP benefits are not linked to inflation. However, he does see indirect effects on the cost results of these institutions. According to Weißenfels, the situation is different as far as beneficiaries’ expectations are concerned. “It can be assumed that pensioners will expect higher profit participation due to the rise in interest rates,” he noted. He also made clear that the low interest rate environment has not yet been overcome as the average technical interest rate of Pensionskassen is still above the risk-free interest rate. According to Weißenfels, profit participation is possible, especially in the case of policies with a lower technical interest rate. “BaFin will be monitoring the situation closely to examine whether such profits can be granted while ensuring that obligations can be met at all times,” he added.

Based on the data that is currently available, the turbulence seen among British pension funds is not to be expected in Germany in the near future, Weißenfels reported. In the United Kingdom, the budget plans of the former government under Liz Truss led to a temporary spike in interest rates. UK pension funds then encountered financial difficulties because they had to use more collateral for certain derivatives transactions. According to Weißenfels, BaFin’s figures indicate that German IORPs do not use derivatives to the same extent as seen in the United Kingdom.