Discontinued German life insurance portfolios: rules‐in‐use, interest rate risk, and Solvency II

Abstract

Purpose

This paper seeks to provide an overview on potential impacts German primary life insurers are exposed to in relation to upcoming Solvency II regulation and potential strategic choices, especially in the light of halting low‐interest rates. Given a large degree of complexity, the paper aims at giving some guidance to decision makers considering a discontinuation of underwriting.

Design/methodology/approach

The paper builds upon current observations made in the German primary life insurance industry, especially, recent strategic decisions of two market participants to discontinue their life insurance carriers. On the background of low‐interest rates but yet guaranteed interest participations and additional capital requirements arising from Solvency II, the paper illustrates the strategic options life insurers have in the German market, given the specific market environment.

Findings

Regulatory capital requirements of Solvency II will sanction guarantee products in a way that for some insurers life products will become unattractive. As there is evidence in the market that some participants have started to consider the run‐off option for selected carriers, the paper finds that this option may represent an appropriate consequence not only for foreign insurers ceasing their business in Germany but also for domestic insurance groups. Given the specific rules‐in‐use in the German primary life insurance market, the paper discusses the controlled run‐off approach as a strategic option for selected life insurers, enabling a harvesting strategy through maximizing cash flows from existing liabilities while avoiding further investments.

Originality/value

Discussions in this paper help to bring into focus the strong challenges by both the upcoming regulatory Solvency II and current market conditions. The brief case study included in this paper may illustrate the implications as well as some crucial success factors of discontinued life business.

Citation

Paetzmann, K. (2011), "Discontinued German life insurance portfolios: rules‐in‐use, interest rate risk, and Solvency II", Journal of Financial Regulation and Compliance, Vol. 19 No. 2, pp. 117-138. https://doi.org/10.1108/13581981111123843