The Effects of a Low Interest Rate Environment on Life Insurers

Low interest rates are becoming a threat to the stability of the life insurance industry, especially in countries such as Germany, where products with relatively high guaranteed returns sold in the past still represent a prominent share of the total portfolio. This contribution aims to assess and quantify the effects of the current low interest rate phase on the balance sheet of a representative German life insurer, given the current asset allocation and the outstanding liabilities. To do so, we generate a stochastic term structure of interest rates as well as stock market returns to simulate investment returns of a stylized life insurance business portfolio in a multi-period setting. Based on empirically calibrated parameters, we can observe the evolution of the life insurers’ balance sheet over time with a special focus on their solvency situation. To account for different scenarios and in order to check the robustness of our findings, we calibrate different capital market settings and different initial situations of capital endowment. Our results suggest that a prolonged period of low interest rates would markedly affect the solvency situation of life insurers, leading to a relatively high cumulative probability of default, especially for less capitalized companies. In addition, the new reform of the German life insurance regulation has a beneficial effect on the cumulative probability of default, as a direct consequence of the reduction of the payouts to policyholders

Rising Interest Rates, Lapse Risk, and the Stability of Life Insurers

This paper investigates the effects of a rise in interest rate and lapse risk of endowment life insurance policies on the liquidity and solvency of life insurers. We model the book and market value balance sheet of an average German life insurer, subject to both GAAP and Solvency II regulation, featuring an existing back book of policies and an existing asset allocation calibrated by historical data. The balance sheet is then projected forward under stochastic financial markets. Lapse rates are modeled stochastically and depend on the granted guaranteed rate of return and prevailing level of interest rates. Our results suggest that in the case of a sharp increase in interest rates, policyholders sharply increase lapses and the solvency position of the insurer deteriorates in the short-run. This result is particularly driven by the interaction between a reduction in the market value of assets, large guarantees for existing policies, and a very slow adjustment of asset returns to interest rates. A sharp or gradual rise in interest rates is associated with substantial and persistent liquidity needs, that are particularly driven by lapse rates.In diesem Beitrag werden die Auswirkungen eines Anstiegs des Zinssatzes und des Stornorisikos von Kapitallebensversicherungen auf die Liquidität und Solvenz von Lebensversicherern untersucht. Wir modellieren die Buch- und Marktwertbilanz eines durchschnittlichen deutschen Lebensversicherers, der sowohl der GAAP- als auch der Solvency-II-Verordnung unterliegt, mit einem bestehenden Bestand an Policen und einer bestehenden, anhand historischer Daten kalibrierten Vermögensallokation. Die Bilanz wird dann unter stochastischen Finanzmärkten projiziert. Stornoraten werden stochastisch modelliert und hängen von der gewährten garantierten Rendite und dem aktuellen Zinsniveau ab. Unsere Ergebnisse deuten darauf hin, dass im Falle eines starken Zinsanstiegs die Stornoquote der Versicherungsnehmer stark ansteigt und sich die Solvenzlage des Versicherers kurzfristig verschlechtert. Dieses Ergebnis ist insbesondere auf das Zusammenspiel zwischen einem Rückgang des Marktwerts von Vermögenswerten, hohen Garantien für bestehende Policen und einer sehr langsamen Anpassung der Vermögensrenditen an die Zinssätze zurückzuführen. Ein starker oder allmählicher Anstieg der Zinssätze geht mit einem erheblichen und anhaltenden Liquiditätsbedarf einher, der insbesondere durch Stornoquoten bedingt ist