In June, Till Förstemann, a policy expert at Deutsche Bundesbank in Frankfurt, released a paper warning Germany’s life firms that they are susceptible to lapse risk if rates rise faster than anticipated.
Förstemann is worried about a tipping point at which rising interest rates would make a rational policyholder surrender their policy to reinvest elsewhere for a better return. If enough policyholders withdraw at the same time, insurers face a mass lapse. That could turn into a liquidity crisis
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