Allianz leads German insurers in guarantees shake-up

Insurers developing new products to reduce exposure to low rates

German life insurers are pioneering new temporary guarantee concepts in a bid to reduce their exposure to a prolonged low interest rate environment.

Allianz Germany is set to launch a deferred annuity product in July with different guaranteed interest rates for the accumulation phase and pay-out phase. Other German life companies are also understood to be experimenting with ‘abschnittsgarantien' – temporary guarantees – which offer policyholders a high rate of return for a period of time and then revert to a lower rate for the remainder of the contract in order to counter the long-term risks associated with traditional guaranteed offerings.

German insurers are particularly exposed to low interest rates. The current average guaranteed rate for existing life books in Germany is 3.25%, according to Fitch Ratings. This compares unfavourably with current yields on German bunds, at 1.29%. Firms risk incurring balance sheet deficits when the time comes to reinvest their short-dated holdings.

German life insurers typically hold assets with shorter duration than their liabilities, which also exposes them to interest rate fluctuations.

With no end in sight for low interest rates, firms are looking to product innovation to mitigate the impact.

Henning Maaß, senior consultant at Towers Watson Germany in Weisbaden, says: "Providing temporary guarantees, for example, from policy [origination] to retirement commencement, followed by a new guarantee for the payout period is supposed to reduce or even remove asset liability mismatch risk."

Other types of guarantee are also being tested. One approach gaining traction, according to Maaß, is the so-called ‘dynamic guarantee', which has similar characteristics to UK unit-linked products. "These are, for example, annually changing guarantees, which vary by the movement in a commonly known bond market index," Maaß says.

Products that only offer guarantees at the end of the accumulation phase, designed to attract policyholders to maintain a contract to maturity, are also being explored by insurers.

Stephan Kalb, senior director at Fitch Ratings in Frankfurt, says: "At the moment, the guaranteed rates are paid in each individual year, which ties up capital for the insurance company. This product offers guarantees only at the end of the savings period.

"This is not a product targeted at those who may want to get out of the contract early, because then they just have a nominal guarantee and get back what they pay in, whereas if they stay for the entire period they will have a higher chance of getting an extra return," he adds.

Kalb says that by acting as the first mover Allianz will encourage other German insurers to explore temporary guarantees. "It's very good that Allianz has started with this product because many of the smaller companies probably have excellent ideas about new products but they are a bit too shy to start. They will open the way to other companies to have their own innovations," he says.

The actions of the German regulator, BaFin, may have indirectly encouraged this latest spate of product evolution. "I think BaFin is becoming more flexible [when it comes to product design]. The product Allianz is launching would not have been possible in previous years because it was not possible to split the guarantees from the duration of the annuity into two steps. Now this is allowed by the regulator," says Kalb.

Solvency II may also have a hand in encouraging German life insurers to shake-up the guarantees offered. The directive's focus on close asset-liability matching means that shortening liability durations and reducing outgoing cashflows would benefit firms, says Kalb.