BERLIN (Reuters) - The German government has signed off on a draft law aimed at ensuring life insurers meet interest rate promises to their customers amid low returns from government bonds.
Among other changes, the draft law would give financial watchdog Bafin the power to prevent insurers from paying out dividends before all promises to customers have been fulfilled.
To ease the burden on the industry, the government also plans to cut the guaranteed interest rate on life insurance savings policies that insurers will be allowed to offer to 1.25 percent from 1.75 percent starting next year.
“In this way, we’re maintaining the stability and risk-bearing capacity of life insurance for the next generation,” Finance Minister Wolfgang Schaeuble said on Wednesday.
The changes are aimed at shoring up the 93 mainly small life insurers in Germany, many of which are finding it increasingly tough to service interest rate guarantees as high as 4 percent on policies sold up to the year 2000, while benchmark 10-year government bonds currently yield only 1.4 percent [EU10YT=RR].
A study by Germany’s central bank showed that by 2023, more than one third of the country’s life insurers would be unable to meet regulatory capital requirements if interest rates remain persistently low.
However, big German life insurers such as Allianz Munich Re’s Ergo and Talanx, as well as foreign players such as Italy’s Generali and France’s Axa, are seen as well capitalised enough to withstand low interest rates for a prolonged period.
JP Morgan analyst Michael Huttner calculated the draft law’s provisions might shave 75 million euros ($102 million) off Allianz’s operating profit in 2014, compared with a full year target of 10 billion.
“The new German life insurance proposed law is in ourview at worst a very modest negative for Allianz group,” he said in a note to clients.
The move to cut the guaranteed interest rates on savings policies to 1.25 percent from Jan. 1 would probably lead to increased buying of those policies by the end of this year, with consumers bringing forward purchases to take advantage of the higher rate, analysts said.
In addition to tweaking the rules governing life insurance, Berlin is also acting to make it easier for insurers to invest in infrastructure projects, for example through lending and taking stakes in infrastructure companies.
“The investment act sets incentives in the right direction and we welcome that,” Axel Wehling of German insurance industry trade body GDV told Reuters.
Politicians throughout Europe have been looking to the insurance industry as a source of funding for projects that could help rekindle economic growth as an alternative to spending by cash-strapped governments.
Insurance supervisors, however, have said that any loosening of the investment rules must not come at the cost of protecting policy holders.
EU insurance watchdog EIOPA last year rejected calls to cut capital charges on insurers’ infrastructure investments, saying it saw no evidence of a difference in risk between infrastructure project debt and other types of corporate debt.
The draft law will now be put to Germany’s lower house of parliament for approval.
Reporting by Matthias Sobolewksi and Klaus Lauer; Writing by Michelle Martin and Jonathan Gould; Editing by Stephen Brown and Mark Potter