German life insurers rejig product pledges amid flat yields
* Low interest rates squeezing insurer investment income
* Life insurers cutting policy payout rates for 2013
* Life products to de-emphasise guarantees from 2013
By Jonathan Gould and Alexander Hübner
FRANKFURT, Dec 4 (Reuters) - German life insurers are preparing to trim payouts to policy holders and reconsider long-term guarantees on new products in a bid to cope with the tough conditions caused by rock bottom interest rates.
In an end-of-year tradition closely watched by consumers, insurers in Europe's biggest economy have begun revealing the interest rates they plan to award holders of life insurance savings policies in 2013.
Those interest rates have been on a steady downward path since the financial crisis and are expected to decline by around 0.3 percentage points in 2013, according to Cologne-based insurance rating agency Assekurata
That would bring the industry average yield to between 3.6 percent or 3.7 percent, from 3.93 percent this year.
Insurers are reluctant to trim the interest rates on life policies as they are a major selling point in the battle with rival products banks have on offer.
"The client is screaming for yield," said Maximilian Zimmerer, a board member at market leader Allianz, which is expected to unveil its payout plans this week.
Insurers have had their hands forced by meagre investment income due to low yields on the government bonds in which they mainly invest, as well as by regulations requiring them to build up reserve buffers to service their guarantees in the long term.
Munich Re's insurance unit ERGO on Tuesday announced a 0.6 percentage point cut to its interest rate to 3.55 percent. This followed a half-point cut by insurer Alte Leipziger to 4.05 percent last week.
Allianz is expected to make only a minor move this week, after a 0.1 percentage point cut for 2012.
The overall interest rate insurers are paying to policy holders is still well above the rate they are allowed to offer as a guarantee, which currently stands at 1.75 percent.
Germany's Finance Ministry has ordered successive reductions in the guaranteed interest rate on new business to preserve the financial strength of the sector, which is finding it increasingly hard to service its back book of obligations the longer interest rates stay low.
Trimming variable and guaranteed interest rates may not be enough to put traditional life insurance business on a stable footing, however, prompting the industry to mull more fundamental changes.
"You really have to ask yourself whether the business model, where the guarantee rate is set for the lifetime of a policy, is sustainable in the future," said Bert Ruerup, a former economic advisor to the German government who has a popular pension product named after him.
Big players like Allianz and Munich Re are already eyeing 2013 for a launch of retooled product lines.
"I am convinced that we will see new guarantee concepts in Germany that will play a big role in new business," said Allianz board member Zimmerer.
Munich Re Chief Financial Officer Joerg Schneider said ERGO was looking to introduce a more limited guarantee and a link to capital market performance.
"Munich Re will change its product profile in the course of 2013 quite drastically," Schneider said, cautioning that the concept might be harder to explain but should still win clients.
Few details of the changes in store have leaked so far.
"The big companies are the trailblazers but they will keep their plans behind closed doors for as long as possible," said Assekurata analyst Lars Heermann.
Germany's DAV association of actuaries has already made some suggestions for new concepts, including fixing the guarantee rate for the first 15 years of a policy, then resetting the rate for the remainder of the maturity.
Limiting the extent of costly guarantees should in theory allow a policy to return a higher yield overall.
Insurers will need to satisfy regulators that -- whatever remains of the guarantees -- the new products can conform with the Solvency II risk-capital rules for insurers, expected to be introduced in 2016, while still meeting Germans' desire for security.
"The customer wants a safety net. Dropping guarantees entirely simply will not work," said Assekurata's Heermann. (Editing by Hans-Juergen Peters)
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