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Speaker(s): Wolfgang Siegert (Allianz Lebensversicherungs-AG)
Life insurance companies are currently operating in a low interest rate environment. Since 2011 German GAAP demands from companies to build increased reserves for guaranteed interest rates; those reserves or "Additional Interest Provisions" are called „Zinszusatzreserve" (in short ZZR) in German.
In this talk we would like to present the German framework of the ZZR-reserves to an international audience: This system is based on calculating the entire reserve based on the so-called „reference interest rate". This rate follows the decreasing interest rate market. For a significant amount of insurance contracts in force the reference interest rate falls short of their actuarial interest rates. The ZZR is given as the part of the reserves which is caused by this gap of interest rates.
Furthermore we would like to dive into its main challenges under the ongoing regime of low interest rates. For example the ZZR-mechanism had been gauged in an environment of „moderately" low interest rates; however, interest rates have fallen below this regime of calibration which leads to unexpectedly low reference rates and thus to high expenses for the ZZR. As a result, life insurance companies and pension funds in Germany face an increased stress on their balance sheets caused by their inventory of traditional in force life insurance contracts.
The downsides of the current mechanism have been tackled by a working team within the German Actuarial Association (DAV) which has developed an overhauled version of the ZZR-algorithm; the proposed „corridor method" manages to prevent the reference rate from falling fast during few years; thereby, the efforts for increasing the ZZR can be arranged more evenly over time.
We present the two methods and illustrate them by means of examples. Additionally the talk intends to pay attention to other approaches of additional interest provisions, e.g. from Austria.