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German life insurers face us-or-them dilemma over client payouts

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(Bloomberg) — In an age of record-low interest rates, life insurers struggling to generate higher returns from their investments face a difficult choice: take a hit on earnings or pass the burden on to new customers by offering them lower yields.

Allianz SE’s German life insurance unit last week chose the latter, lowering the guaranteed rate of return for new policyholders to less than the 4 percent threshold it has maintained for years. The so-called total rate comprises a guarantee rate set by financial-services regulator Bafin, currently at 1.25 percent, plus a bonus rate derived from investment returns, as well as other components.

A day before Allianz’s announcement, the German life insurance unit of Paris-based Axa SA said it would reduce its total rate to 3.6 percent from 3.9 percent. Other companies may follow, according to Michael Haid, an analyst at MainFirst Bank AG.

“Allianz Leben’s policyholder-crediting rate sets the tone for the entire industry,” Haid said by phone. Allianz Leben accounts for about a quarter of the revenue from the company’s Life and Health operations. At the end of 2014, the life insurer had about 30 percent of the German market.

Many German life insurance policies offer a guaranteed dividend from the insurer’s earnings. The annual payout varies depending on when the policy was purchased. Allianz wants to reduce the number and duration of guaranteed return products it sells, the company said in a Nov. 24 presentation to investors.

While slashing returns for new customers may help take the pressure off insurers’ bottom line, it also makes it more difficult for them to win new business, Haid said. Life insurers typically try to keep the policyholder return rate high to grow their customer base.

“Lowering the current policyholder credit rating will continue to apply pressure to life insurers’ new business,” Haid said.


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