Guarantees in Germany: Where are we and does it make sense?

Guarantees in Germany: Where are we and does it make sense?

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The german life insurance market was for a long time dominated by endowment and annuity products with profit participation. For the classical business interest rates, mortality/morbidity assumptions as well as expence loadings are guaranteed. Guarantees on interest rates were declining slowly from 4,0% in the mid-nineties to 0,9% currently. Guarantees are legally required for employee benefits and held tax advantages for private annuities. Unit linked business did not play a role until the 90‘s. The stock crisis in the early 2000s in combination with the low interest rates led to an investment portfolio dominated by long running fixed-income securities. Furthermore it led to government action. On the one hand the obligation to establish additional reserves for classical business and on the other hand the introduction of a new type of employee benefits where guarantees are not only not required but explicitly prohibited. On that basis we discuss the benefits of nominal guarantees and their consequences for clients, insurance companies and the society. It is shown which effects high guarantees have on the ability to achieve a reasonable performance over and above the guaranteed values. We research alternative forms of guarantees such as index- and inflation linking. Whilst inflation linking cannot be fully guaranteed, linking to other indices might not be enough to satisfy the security needs of the consumer. A possible solution are unit linked products where the investment process is made transparent to the costumer and with guaranteed rules and processes. Another approach is a collective solution comparable to the classic endowment products without guarantees similar to the new employee benefit schemes mentioned above. The waiver of guarantees leads to a widening of the potential investment universe.

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