German Government Set To Cut Guaranteed Payouts For New Life Insurance Policies

By Ulrike Dauer

FRANKFURT--The German government is set to lower the guaranteed minimum that life insurers must pay to policyholders annually, to reflect the protracted low interest rate environment. The measure will, however, contribute to make life insurance policies less appealing as retirement products in Europe's largest economy.

The German actuarial association, or DAV, Wednesday recommended new contracts signed from Jan. 1, 2015, will have the guaranteed minimum cut to 1.25% from 1.75%. The German Finance Ministry, which sets the annual minimum rate, usually follows the actuarial association's recommendation.

In Germany, the annual bonus that life insurance policyholders are entitled to consists of the guaranteed part and a flexible part paid on top. The flexible part is decided by insurers annually. The guaranteed minimum payout is calculated based on the 10-year average of the running yield of European government bonds over the past 10 years; the guaranteed minimum can't exceed 60% of that.

To even better reflect the current low interest rates, actuaries also looked at the running yields of the same bonds over the past five years.

The lower guarantee will contribute to further cut annual bonus payments policyholders are entitled to, which most German insurers have already trimmed this year in light of the low interest rates in capital markets and enhanced capital requirements for the sector ahead.

As a result of the lower annual returns, German life insurance policies will become substantially less attractive as long-term investment for old-age retirement compared with other savings products that can generate higher returns.

In the past, Germans favored life insurance policies as pension products with stable annual returns. At the end of 2012, about 81 million Germans owned 93 million life insurance and pension plans.

Write to Ulrike Dauer at [e-mail]; Twitter: @UlrikeDauer_

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