Dealing with Low Interest Rates in Life Insurance: An Analysis of Additional Reserves in the German Life Insurance Industry
Abstract
:1. Introduction
2. Materials and Methods
2.1. Methods to Derive the ZZR Due to Low Interest Rates
2.1.1. Old Method of Calculating the ZZR in Germany (Valid from 2011–2018)
2.1.2. New Corridor Method to Calculate the ZZR in Germany (Valid from 2018)
2.2. Model Framework
2.2.1. Overview
2.2.2. Asset and Liability Dynamics
3. Results
3.1. Input Parameters and Interest Rate Scenarios
3.1.1. Input Parameters
3.1.2. Interest Rate Scenarios
3.2. The Impact of the ZZR Method on the Life Insurer under Various Interest Rate Scenarios
3.2.1. Interest Rate Scenario 1
3.2.2. Interest Rate Scenario 2
3.2.3. Interest Rate Scenario 3
3.2.4. Interest Rate Scenario 4
4. Discussion
Funding
Conflicts of Interest
References
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1 | By “old high-yield securities”, we mean securities the life insurer has had in their books for a long time. Book value and market value for these securities differ particularly strongly from each other, implying high hidden assets. |
2 | We assume that the life insurer pays the annuities to the policyholders at the beginning of the year. Moreover, we assume that the life insurer pays the lump sum payments on maturity to endowment holders at the beginning of the year. However, lump sum payments on death are paid at the end of the year. |
3 | If , the life insurer must invest the money, which is why this increases the market value and the book value of assets exactly in that amount. However, if , the life insurer must pay the negative amount. The market value is therefore reduced exactly by that amount. However, the book value differs, possibly due to hidden reserves from the market value, and therefore must be reduced by an amount that has to be adjusted by the difference between the book and market values of assets. The philosophy behind this asymmetric treatment is the careful accounting principles of local GAAP in Germany. |
4 | Note that we neglected transaction costs. Taking transaction costs into account would have worsened the effect of realizing hidden reserves. |
5 | Note that the results using the new corridor method were based on (see BMF 2018). Sensitivity analyses for the new corridor method showed more similar results compared to the old setting using a higher x and less similar results using a lower x. This was also the case for the other interest rate scenarios. |
6 | Note that this also shows a problem regarding a fair distribution of hidden reserves among policyholders. Terminating policies obtain a share of hidden reserves. If hidden reserves are realized before terminating, this increases the surplus, in which policyholders also participate. However, since realized hidden reserves are used to finance the ZZR, policyholders do not participate in them. Only when the ZZR decreases does this allow the policyholders to participate. Therefore, in the case of the old method, the share of hidden reserves for policyholders with terminating policies, e.g., in 2022 was too low, while other policyholders (especially new policyholders) benefited, implying an unfair distribution among policyholders in the portfolio. |
Assets | Liabilities |
---|---|
Assets | Liabilities |
---|---|
Start Date (01/01) | Actuarial Interest Rate in % | Annual Annuity Payment in Million EUR | Actuarial Reserve (Excl. ZZR) at t = 0 in Million EUR | ZZR at in Million EUR |
---|---|---|---|---|
1986 | 3.00 | 143.36 | 834.75 | 25.89 |
1994 | 3.50 | 599.41 | 4348.65 | 262.12 |
2000 | 4.00 | 600.85 | 5514.65 | 525.99 |
2003 | 3.25 | 302.39 | 3185.30 | 200.51 |
2006 | 2.75 | 322.05 | 3884.90 | 142.49 |
2011 | 2.25 | 289.13 | 4282.40 | 136.64 |
2014 | 1.75 | 151.67 | 2615.55 | 0 |
2016 | 1.25 | 62.54 | 1219.00 | 0 |
2017 | 0.90 | 29.26 | 614.80 | 0 |
Start Date (01/01) | Actuarial Interest Rate in % | Lump sum Payment in Million EUR | Actuarial Reserve (Excl. ZZR) at t = 0 in Million EUR | ZZR at in Million EUR |
---|---|---|---|---|
1986 | 3.00 | 819.56 | 630.00 | 55.32 |
1994 | 3.50 | 5321.17 | 3282.00 | 532.64 |
2000 | 4.00 | 8526.75 | 4162.00 | 918.83 |
2003 | 3.25 | 5012.82 | 2404.00 | 329.22 |
2006 | 2.75 | 6211.13 | 2932.00 | 218.16 |
2011 | 2.25 | 7064.13 | 3232.00 | 18.65 |
2014 | 1.75 | 3842.03 | 1974.00 | 0 |
2016 | 1.25 | 1519.91 | 920.00 | 0 |
2017 | 0.90 | 672.66 | 464.00 | 0 |
Scenario | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 |
---|---|---|---|---|---|---|---|---|---|---|
1 | 0.90% | 0.90% | 0.90% | 0.90% | 0.90% | 0.90% | 0.90% | 0.90% | 0.90% | 0.90% |
2 | 0.60% | 0.30% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
3 | 1.11% | 1.32% | 1.53% | 1.74% | 1.95% | 2.16% | 2.37% | 2.58% | 2.79% | 3.00% |
4 | 1.60% | 2.30% | 3.00% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% | 0.50% |
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Eckert, C. Dealing with Low Interest Rates in Life Insurance: An Analysis of Additional Reserves in the German Life Insurance Industry. J. Risk Financial Manag. 2019, 12, 119. https://doi.org/10.3390/jrfm12030119
Eckert C. Dealing with Low Interest Rates in Life Insurance: An Analysis of Additional Reserves in the German Life Insurance Industry. Journal of Risk and Financial Management. 2019; 12(3):119. https://doi.org/10.3390/jrfm12030119
Chicago/Turabian StyleEckert, Christian. 2019. "Dealing with Low Interest Rates in Life Insurance: An Analysis of Additional Reserves in the German Life Insurance Industry" Journal of Risk and Financial Management 12, no. 3: 119. https://doi.org/10.3390/jrfm12030119