Germany's aging population will pose a serious challenge to the country's life insurance industry, which stands to lose around €6 billion in premium income by 2030 as the number of clients in the age groups most likely to buy a policy declines, according to a new study by auditing firm KPMG.
The study, published March 7, divides life insurance products into two groups based on the type of risk: Products exposed to longevity risk in retirement planning and products exposed to biometric risks such as mortality, disability or morbidity. The group of products exposed to longevity risk in retirement planning, which is considerably larger, stands to lose the most as a result of the expected demographic changes over the next few decades.
Life insurers could lose up to €19B
The likelihood of people aged 25 to 34 to buy a life insurance policy for retirement planning is 50%, and that percentage increases to over 66% in the age group 35 to 54. However, the total number of people aged 25 to 34 is projected to decline to some 8 million by 2030 and shrink to around 7 million by 2060, from 10 million in 2014, according to estimates by the German statistics office. The group of 35- to 54-year-olds will see an even bigger decline to some 20 million in 2030 and only around 16 million in 2060, from 24 million in 2014.
Life insurers make roughly €760 in premium income per average customer aged 25 to 54, while the average premium income for all age groups stands at €430 per customer. The average number of policies sold to customers aged 25 to 54 stands at 2.5 compared to 1.6 across all age groups, according to KMPG.
If the number of clients in the sector's key age groups — which also include the bulk of Germany's working population — declines to the levels predicted by the statistics office, German life insurers could lose €15 billion to €19 billion in premium income by 2060, according to KPMG.
The longevity risk group of products would account for most of the overall decline, as the total premium income losses there would reach up to €16.4 billion by 2060. Biometric risk products could compensate for part of those losses. But to fully offset the drop in the longevity risk group, newly generated premium income from the biometric risk group would have to more than double, KPMG said.
Long-standing problems
The number of life insurance policies in Germany as of Oct. 30, 2017, was estimated at around 90 million, with investments of some €59 billion, according to a Commerzbank analysis. But the expected demographic changes come on top of a number of other factors that have already put the German life insurance sector under pressure.
The life insurance rates guaranteed in Germany have historically been among the highest in Europe, and there is a predominance of guaranteed long-term policies in the local market. Although the German finance ministry capped the maximum return life insurers are allowed to offer clients on new policies to 0.9% from the start of 2017, compared to the previous level of 1.25%, there are still millions of existing long-term policies with returns of up to 4%. The back books of German life insurers are loaded with pension and endowment policies with long-term guarantees, and the industry is struggling to meet its obligations to clients given that the persistently low interest rate environment has diminished investment returns.
The sector faced a further challenge with the implementation of the EU's Solvency II regulatory framework, which came into force Jan. 1, 2016. Under the framework, companies are required to hold enough capital to give them 99.5% confidence that they would be able to fulfill all of their obligations over the next year in the case of one-in-200-year loss event. The higher capital requirements affected traditional life insurance product providers in particular, and some companies have already explored options for a runoff of policy portfolios containing long-term guarantee products.
The only option that would relieve a company's capital requirements under Solvency II would be a sale of the portfolio, but such transactions can be time-consuming and require regulatory approval, KPMG noted. An internal runoff of the portfolio could be implemented fairly quickly but will not help with the capital obligation, so it should be considered as a temporary solution in case no suitable buyer has been found, KMPG added.
The three largest platforms specialized in the runoff of life insurance policies in the country are Viridium Group GmbH & Co. KG, Frankfurter Lebensversicherung AG and Athene Leben.
