German life insurers face rising reserve buffers -Bafin

FRANKFURT (Reuters) - Life will get tougher for Germany’s life insurers as they contend with the increasingly onerous need for greater reserves to offset the effects of low interest rates in the coming years, the country’s top insurance regulator said in an interview.

The banking district with the headquarters of Germany's second largest business bank, Commerzbank AG (highest building, centre) is seen from a bridge in Frankfurt, December 3, 2013. REUTERS/Kai Pfaffenbach

“Insurers must prepare themselves for a sustained period of low interest rates; anything else would be negligent,” Frank Grund, head of insurance supervision at financial market regulator Bafin, told Reuters.

Many German life insurers sold savings policies with guaranteed interest rates as high as 4 percent in the past and, with current interest rates near zero, are finding it increasingly tough to achieve the returns needed to pay policyholders.

Since 2011 Germany has required insurers to set aside special reserves to make sure that savings guarantees will be paid as promised.

Insurers last year alone diverted more than 10 billion euros ($11 billion) into their special reserves, known as the ZZR in Germany, bringing total reserves to 32 billion euros. Insurers are already straining to build up their reserves, which reduces the funds available for more profitable investment.

Grund said he is aware that the ZZR is becoming increasingly challenging, adding that when it was created no one had expected rock-bottom interest rates to last so long.


“In the short and medium term insurers can fulfil their ZZR obligations,” Grund said. “We think the burden is still justifiable but we are monitoring it closely.”

Insurers are likely to pay significantly more into the reserve this year and in following years.

“There will be an additional boost in 2018 and 2019,” Grund said.

Low interest rates on the government bonds in which insurers typically invest have also raised the temptation to invest in less-liquid assets that promise higher returns, such as infrastructure projects, including roads, pipelines, electricity grids and wind parks.

Insurers have been seeking such investments with the express approval of politicians, who see them as a way to create jobs and boost economic growth, but complain that the number of available projects is too limited.

Germany's Allianz ALVG.DE, Munich Re MUVGn.DE and Talanx TLXGn.DE have all been active investors in such projects.

Alternative investments generally make up only a small proportion of insurers’ portfolios, Grund said.

“Bafin is somewhat more critical when it comes to infrastructure investments,” he said. “The risk that comes with longer duration must not be underestimated. Assessing those risks properly requires great effort.”

However, Bafin data does not point to an alarming search for yield, where insurers take on excessive risk to boost returns, at least among German players.

“In the rest of Europe, the situation is different,” he said, without specifying countries or companies.

($1 = 0.8994 euros)

Editing by Maria Sheahan and David Goodman