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Rule change to help German life insurers meet high guaranteed interest payments

The German government is considering changing rules that require life insurance companies in the country to set aside additional reserves for long-term guaranteed policies, Handelsblatt reported June 12.

The so-called additional interest rate reserve, known as Zinszusatzreserve in German, is a buffer meant to ensure that life insurers can meet the guaranteed interest payments to clients who bought long-term policies with guaranteed returns of up to 4%. The special reserve requirement, in force since 2011, has been a burden for a number of life insurers, predominantly smaller companies that struggle to generate high enough investment returns because of the low-interest-rate environment.

In 2015, Germany's financial market watchdog, Bafin, reviewed the requirements and offered relief to companies on a case-by-case basis. Now, according to government sources cited by Handelsblatt, the federal finance ministry is looking to change how the Zinszusatzreserve is calculated so that the amount life insurers have to set aside increases at a slower pace than before.

At constant interest rates, the total amount of the reserve would jump to some €153 billion in 2021 from €44 billion in 2016, according to the latest financial stability report by the German central bank, or Bundesbank. The total amount currently stands at around €60 billion, Handelsblatt said.

Life insurance is among the most popular savings products in Germany, with citizens often holding more than one policy and many private households using life insurance as the main pillar of their retirement savings, the report noted.

Although the government is looking to help the industry with respect to the special interest rate reserves, it is also considering a cap on costs for the life insurance sector, according to the report. The government is not happy with the small rate at which operating costs have declined since the last life insurance law reform four years ago, Handelsblatt said, adding that more details about possible changes will be announced in the second half of the year.

The new method for calculating the additional interest rate reserve should come into force Dec. 1, the Börsen-Zeitung said June 12, citing life insurance sector sources.