The transitional measures and the volatility adjustment stipulated by the Solvency II regime are achieving the desired effects. Only a handful of undertakings with a collective market share of less than 1% were unable to demonstrate that they had sufficient own funds despite having applied the prescribed measures. BaFin will immediately discuss the necessary steps with these undertakings.

"If the phase of low interest rates persists, life insurance undertakings will be forced to make considerable efforts to strengthen their capital base during the 16-year transitional period", warned Felix Hufeld, Chief Executive Director of Insurance Supervision. If they had not applied the transitional measures, roughly 25% of the undertakings that collectively make up a market share of approximately 10% would not have had the required own funds as at 31 December 2013. This figure is certain to have increased further as the interest rate has since been decreased. BaFin estimates that under current capital market conditions German life insurance undertakings would be short some EUR 15 billion in own funds if the transitional measures had not been applied. However, this gap in own funds is strongly tied to capital market interest rates and the performance of the insurance portfolios, and can therefore only be used as an indicator for the present point in time.

The survey further demonstrated that the coverage ratios under Solvency II were – as expected – extremely sensitive to changes in capital market interest rates. Therefore, life insurance undertakings will have to brace themselves for the possibility that their own funds situation could change sharply within a short period of time. Thus, BaFin expects those life insurance undertakings who currently only just meet the required coverage ratios to implement measures aimed at strengthening their capital bases.

Background:

German life insurance undertakings have traditionally focused on policies with long-term interest guarantees. The market-consistent valuation under Solvency II reveals the risks inherent in these guarantees. Therefore, the introduction of Solvency II in the current environment of low interest rates presents a particular challenge for these undertakings.

A key aspect of the Solvency II regime will be the transitional measures under which the new capital requirements will be gradually phased in over a period of 16 years. The volatility adjustment will be an additional permanent tool available to life insurance undertakings. The adjustment is a spread in the yield curve aimed at avoiding extreme earnings volatility caused by market excesses. The European Insurance and Occupational Pensions Authority (EIOPA) sets the spread. German life insurance undertakings must receive authorisation from BaFin to apply these measures.