The Effects of a Low Interest Rate Environment on Life Insurers

SAFE Working Paper No. 65

60 Pages Posted: 1 Nov 2014 Last revised: 24 Feb 2018

See all articles by Elia Berdin

Elia Berdin

Generali & International Center for Insurance Regulation

Helmut Gründl

Goethe University Frankfurt - Department of Finance; International Center for Insurance Regulation

Multiple version iconThere are 3 versions of this paper

Date Written: January 2015

Abstract

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.

Keywords: Life Insurers, Minimum Return Guarantees, Low Interest Rates, Risk Assessment, Solvency II

JEL Classification: G22, G23, G17, E58

Suggested Citation

Berdin, Elia and Gründl, Helmut, The Effects of a Low Interest Rate Environment on Life Insurers (January 2015). SAFE Working Paper No. 65. Available at SSRN: https://ssrn.com/abstract=2517197 or http://dx.doi.org/10.2139/ssrn.2517197

Elia Berdin (Contact Author)

Generali & International Center for Insurance Regulation ( email )

Milan
Italy

HOME PAGE: http://www.icir.de

Helmut Gründl

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://https://www.wiwi.uni-frankfurt.de/en/departments/finance/home.html

International Center for Insurance Regulation ( email )

House of Finance
Campus Westend, Goethe University
Frankfurt am Main, D-60323
Germany

HOME PAGE: http://www.icir.de

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