These are challenging times for the insurance industry in Germany.
With current low interest rates, insurance companies are forced to look for new investment areas for financing as yields on government bonds (the main investments are still interest rate instruments) have become too low.
The current financial climate also means the industry is struggling to pay the promised coupons in the long term to its customers.
On top of that, the German financial watchdog Bafin (Bundesfinanzaufsichtsamt) has asked insurers to put more capital aside to be able to meet future obligations as the regulators fears that the future of some life insurance companies could be endangered by the new Solvency II capital requirements that come into force in 2016.
Insurers are now starting to look at innovative products that omit fixed rate coupons, offering higher yield instead.
SRP spoke to Axel Wachsmann, head of sales, cross-asset solutions for Germany and Austria at Société Générale (SG) Corporate & Investment Banking (CIB), about the challenges the industry faces.
Modern life insurance products have developed from classic non-structured products, via unit-linked products, to 100% capital-protected hybrids and finally to dynamic hybrid products. Is there a trend towards structured products and how relevant have structured products become in the product range of insurers?
As early as 2001 products like the “Höchststandsgarantiefonds”, which are CPPI structures with a lock-in feature, i.e. a fund which guarantees the highest price ever achieved by the fund at the end of the term, were distributed successfully.
A major part of the new sales business today is already made up of structured guaranteed products. However, classic life insurance products still outnumber structured products in the overall product portfolio. It should be noted, though, that traditional life insurance is actually a quite complex structured product due to its implicit options.
Is the relevance of structured products increasing in insurance companies ‘own investment portfolio in the current low interest rate environment?
In the own investment portfolios of insurance companies, the “classics” such as multi-callable products and multi-tranches are predominant within structured products.
Due to the low interest rate environment readiness is considerably increasing towards using more alternative products but always under the precondition that from a regulatory perspective it is a simple structured product.
Furthermore, the boundaries between insurers’ own investments and the products they distribute are blurred as insurers often hedge their distribution products partly using their general account. These hedges are not forwarded to the policyholder one-to-one.
What are Société Générale’s plans when it comes to developing innovative service products with capital protection and equity/stocks in terms of structured products?
We consider ourselves a partner of life insurers and based on our success, especially in Japan, we will drive forward to more guarantee versions without the use of the general account (“Deckungsstock”).
The life insurer enters into a reinsurance contract with the reinsurer of the Société Générale group. This contract, usually fully collateralised, covers the major part of the liabilities of the insurance and is therefore solvency capital friendly.
For policyholders, products which profit from increasing interest rates as well as from rising equity markets can be made available. With classical products both are usually not possible, as the general account reacts positively only with a noticeable delay to increasing interest rates and in addition contains at that time nearly no equity.
The German regulator Bafin (Bundesfinanzaufsichtsamt) is encouraging insurers to be more innovative in times of low interest rates. What role do structured products play here?
Besides classic products, dynamic hybrid products are currently the most popular insurance products. These products are offered by more than 20 insurance companies in Germany.
Depending on the specific insurer, the share of these products in new sales business can be more than 50%. The next generation of structured products might be the so-called “select” tariffs, which usually are equipped with annual cliquet structures linked to for example the Eurostoxx50. To find a more suitable underlying than the Eurostoxx50 will be a challenge in the future. “Cross-asset” is therefore a possible reasonable direction.
What challenges are there still to be solved by the industry to meet the requirements of Solvency II?
As briefly mentioned earlier, the general account still plays a major role in a lot of capital-protected products currently available on the market. This is obviously not ideal for the realisation of the Solvency II requirements. The best example for this are the dynamic hybrid products.
Furthermore, it is a big challenge to mix the classic life insurances, which still comprise the majority of the total portfolio and have very high, often life-long guarantees, as quickly as possible with products with a low guarantee in order to lower considerable capital requirements according to Solvency II for the total inventory.
Insurance products, the way we have put them together for Japanese life insurers, could surely be a good solution for Germany as well.