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How is the low-interest-rate environment affecting the solvency of German life insurers?

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  • Kablau, Anke
  • Weiß, Matthias

Abstract

Life insurance companies are affected directly by the impact of the low-interestrate environment. To fulfil promised guarantees they may be forced to tap into their own funds, say if the current income generated is no longer sufficient to cover the policyholders' profit participation share as defined by the enterprises or even guaranteed benefits. They may then find themselves in a position in which their solvency is at risk. A scenario analysis is used to examine the stage at which German life insurers would no longer be able to fulfil the currently prevailing Solvency I own funds requirements owing to the low-interest-rate environment. In contrast to other literature in this field of research we use prudential individual data from 85 German life insurers. Even in a mild stress scenario 12 life insurers, with a combined market share of some 14%, would no longer be able to fulfil the own funds requirements by 2023. Under more severe stress conditions, especially if yields on investments were also to come under pressure, 32 enterprises would no longer be able to meet the Solvency I own funds requirements. This points to a potential solvency risk in the life insurance industry.

Suggested Citation

  • Kablau, Anke & Weiß, Matthias, 2014. "How is the low-interest-rate environment affecting the solvency of German life insurers?," Discussion Papers 27/2014e, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:272014e
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    References listed on IDEAS

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    1. Stolz, Stéphanie Marie & Wedow, Michael, 2010. "Extraordinary measures in extraordinary times: public measures in support of the financial sector in the EU and the United States," Occasional Paper Series 117, European Central Bank.
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    Cited by:

    1. French, Andrea & Vital, Mathieu & Minot, Dean, 2015. "Insurance and financial stability," Bank of England Quarterly Bulletin, Bank of England, vol. 55(3), pages 242-258.
    2. Bonizzi, Bruno, 2017. "Institutional investors’ allocation to emerging markets: A panel approach to asset demand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 47-64.
    3. Düll, Robert & König, Felix & Ohls, Jana, 2017. "On the exposure of insurance companies to sovereign risk—Portfolio investments and market forces," Journal of Financial Stability, Elsevier, vol. 31(C), pages 93-106.
    4. Düll, Robert & König, Felix & Ohls, Jana, 2017. "On the exposure of insurance companies to sovereign risk − portfolio investments and market forces 1," LSE Research Online Documents on Economics 83195, London School of Economics and Political Science, LSE Library.
    5. Hombert, Johan & Möhlmann, Axel & Weiß, Matthias, 2021. "Inter-cohort risk sharing with long-term guarantees: Evidence from German participating contracts," Discussion Papers 10/2021, Deutsche Bundesbank.
    6. Gropp, Reint & McShane, William, 2020. "Why life insurers are key to economic dynamism in Germany," IWH Online 6/2020, Halle Institute for Economic Research (IWH).
    7. Grochola, Nicolaus & Browne, Mark Joseph & Gründl, Helmut & Schlütter, Sebastian, 2021. "Exploring the market risk profiles of U.S. and European life insurers," ICIR Working Paper Series 39/21, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    8. Axel Möhlmann, 2021. "Interest rate risk of life insurers: Evidence from accounting data," Financial Management, Financial Management Association International, vol. 50(2), pages 587-612, June.
    9. Dietrich Domanski & Hyun Song Shin & Vladyslav Sushko, 2017. "The Hunt for Duration: Not Waving but Drowning?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(1), pages 113-153, April.

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    More about this item

    Keywords

    life insurance; low-interest-rate environment; financial stability;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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