Abstract
Interest rates have been very low for several years, which is particularly challenging for life insurers. Since 2001, German life insurers have had to set an additional reserve due to low interest rates to ensure the protection of policyholders. However, the method introduced at that time to calculate these reserves was criticized, therefore, the German Federal Ministry of Finance replaced it with a new approach. In this article, we investigated the effects of the different methods on a typical German life insurer in various future interest rate scenarios and from various perspectives. For this purpose, we modelled such a life insurer holistically, considered its asset liability management and projected its future development in different interest rate scenarios using simulation techniques. Taking into account dependencies between assets, liabilities and interest rates, we analyzed and discussed our results from the life insurer’s, equity holders’, policyholders’ and regulators’ perspectives. The results show that the new method eliminated the weaknesses of the previous one and seems to be a suitable alternative to determine the additional reserve.
Highlights
For several years, interest rates have remained nearly at zero
We investigated the effects of the different methods on a typical German life insurer in various future interest rate scenarios and from various perspectives
Due to the fact that local GAAP in Germany is a system with hidden assets in contrast to a market valuation, the actuarial reserves carefully calculated based on the actuarial interest rate determined at policy begin are in part inadequate, which is why there is the risk that promised guarantees cannot be met
Summary
Interest rates have remained nearly at zero. This is especially challenging for life insurers, since they have many long-term contracts in their portfolios, with high guaranteed interest rates exceeding currently achievable interest rates. If the interest rates stay comparably low or fall even further, the ZZR and its share in the total actuarial reserves will continue to rise (see Assekurata 2018; GDV 2018) To finance such a high ZZR, life insurers’ surplus may not be enough and they may have to realize their hidden assets, which implies that they must sell old high-yield securities (see DAV 2017). The aim of this paper was to investigate and discuss these methods from a holistic point of view, that is, from the perspective of a life insurer as well as their policyholders, equity holders and regulators For this purpose, we modelled a typical German life insurer with a typical portfolio of policies and a standard asset allocation, taking into account their asset liability management.
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