High Inflation Need Not Scare Life Insurance Customers
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High Inflation Need Not Scare Life Insurance Customers
Here are some reasons high inflation doesn't need to scare life insurance customers.
The current rate of inflation is also eroding the value of old-age insurance. However, in terms of long-term savings, the effect is almost insignificant. Inflation is likely to drop significantly early next year. Market interest rates, on the other hand, are likely to rise further.
Inflation in Germany has reached levels that seemed unthinkable for a long time. In April, prices rose by 7.4% over the same month last year – the highest value since 1973. Given these values, many are concerned about the value of their old-age insurance.
If you have life insurance, you don't have to worry too much. After all, it is a product of long-term provision of financial security in retirement. Short-lived high inflation rates are less important if customers stick to their savings plans.
This compares to a construction site on the Autobahn, which slows down for a short time, but eventually the journey continues at a higher speed.
And in the long term, life insurance is convincing, as the Bundesbank figures show. Thus, the annual interest on insurance customer claims between 1991 and 2020 is always above the respective inflation rate.
Profit Participation Guaranteed Attractive Benefits
This shows that, despite the low and negative interest rates, considerable income has been achieved in recent years. And this is despite the fact that the maximum technical interest rate – also known as the guaranteed rate – gradually falls over the period.
Surplus participation also provides savers with attractive benefits with lower guaranteed interest rates.
This is also due to a change in the strategy of insurance companies, which, in a low-interest environment, have spread their investments more widely and, for example, increased the proportion of stocks or alternative investments.
Additional Interest Reserves Should Have Peaked
To cope with the low interest rate environment, life insurers have been building additional capital buffers since 2011 - called additional interest reserves.
Now it amounts to almost 100 billion euros and provides added security. This reserve is used to finance part of the interest rate guaranteed by the customer up to 4%.
The amount of the capital buffer is determined by the market interest rate: the lower it goes down, the more life insurers have to add to the additional interest reserves. Given the signs of a rate turnaround, the principle is now being reversed.
The additional interest reserves are about to peak – or have already. If interest rates continue to rise, the capital buffer will decrease again. The funds issued are then included in the profit-sharing scheme.
It wasn't until late 2021 that inflation rose above life insurance rates for the first time. This will also happen this year: for 2022, leading economic research institutes assumed in their joint diagnosis that the inflation rate would skyrocket to 6.1% for Germany.
Inflation Driven by Energy Prices
This is much higher than the average market interest rate for life insurance, which recently stood at 2.1%. The high inflation was partly driven by energy prices which continued to rise during the war in Ukraine. Like the previous year, the supply chain that was still disrupted due to Corona also caused price spikes.
However, inflation is likely to drop markedly early next year: the economic research institute then assumed an annual price increase of 2.8%.
At the same time, the pressure on the European Central Bank (ECB) to raise interest rates is increasing given the current high inflation rate in the euro zone. Market watchers now expect the first rate hike in the third quarter of this year.
Capital Markets Anticipate Developments
And with each increase in interest rates, the yield on interest-bearing securities such as corporate bonds, mortgage bonds, debentures or even mortgage loans, in which insurance companies invest the majority of their customers' money, increases.
This development was anticipated by the capital markets: market interest rates have continued to rise since August 2021.
For example, while the yield on the ten-year federal bond was still negative at -0.5% at the time, it has since been quoted more than one percent again - the highest level. since mid-2015.
Not only did inflation rise to new levels. high, but also (nominal ) Capital market interest rates returned to levels not seen for a long time.
Therefore, in the medium term, the life insurance surplus is likely to increase again – and as a result, so will customer profit participation. At the same time, an increase in interest rates has a positive effect on the financial stability of life insurance companies, as already seen in 2021.
The solvency ratio – that is, the ratio of own funds to solvency capital requirements – rose from 370 to 450 percent (or 260 percent without transitional measures) in one year. Therefore, the value is many times higher than the legally required minimum value of 100 percent.
Thus, high inflation does not need to scare customers this life insurance is made to be useful