The effects of a low interest rate environment on life insurers

  • Low interest rates are becoming a threat to the stability of the life insurance industry, especially in countries such as Germany, where products with relatively high guaranteed returns sold in the past still represent a prominent share of the total portfolio. This contribution aims to assess and quantify the effects of the current low interest rate phase on the balance sheet of a representative German life insurer, given the current asset allocation and the outstanding liabilities. To do so, we generate a stochastic term structure of interest rates as well as stock market returns to simulate investment returns of a stylized life insurance business portfolio in a multi-period setting. Based on empirically calibrated parameters, we can observe the evolution of the life insurers’ balance sheet over time with a special focus on their solvency situation. To account for different scenarios and in order to check the robustness of our findings, we calibrate different capital market settings and different initial situations of capital endowment. Our results suggest that a prolonged period of low interest rates would markedly affect the solvency situation of life insurers, leading to a relatively high cumulative probability of default, especially for less capitalized companies. In addition, the new reform of the German life insurance regulation has a beneficial effect on the cumulative probability of default, as a direct consequence of the reduction of the payouts to policyholders.

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Metadaten
Author:Elia BerdinORCiDGND, Helmut GründlGND
URN:urn:nbn:de:hebis:30:3-771963
Series (Serial Number):ICIR Working Paper Series (No. 15/14 [01.2015])
Publisher:International Center for Insurance Regulation
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2015
Year of first Publication:2015
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2024/04/11
Tag:Life Insurers; Low Interest Rates; Minimum Return Guarantees; Risk Assessment; Solvency II
Edition:Version: January 2015
Page Number:56
HeBIS-PPN:517599082
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:E Macroeconomics and Monetary Economics / E5 Monetary Policy, Central Banking, and the Supply of Money and Credit / E58 Central Banks and Their Policies
G Financial Economics / G1 General Financial Markets / G17 Financial Forecasting (Updated!)
G Financial Economics / G2 Financial Institutions and Services / G22 Insurance; Insurance Companies
G Financial Economics / G2 Financial Institutions and Services / G23 Pension Funds; Other Private Financial Institutions
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht