Dietmar Meister: Life insurance as an indispensable element of old-age provisions

There is one thing politicians and ex­­perts agree on: private old-age provisions are becoming ever more important – for with­­out appropriate precautions, a broad section of the population will soon no longer be able to maintain their standard of living after retirement. Demographic changes and decreasing efficiency of the social security systems indicate an uncertain future. The current low interest level and a media land­scape, which is not exactly in favour of provisions, cause further irritation among the citizens. Comprehensive information and awareness-raising initiatives are needed as urgently as the establishment of a stable regulatory framework. One thing is certain: the concept of life in­­surance as a key element of private old-age provisions, which has been tried and tested over generations, provides the highest level of security when it comes to long-term investments.
A stable lifelong income. The conception of private old-age provisions has changed among the population in light of the low-interest period and the na­­tional debt crisis. For three out of four German citizens (74 per cent), security is more important in their old-age provisions than rate of return (Allensbach survey conducted in 2011). Life insurance is the only instrument for private old-age provisions which provides security and, at the same time, meets the specific and individual needs regarding old-age provisions. Benefits guaranteed beforehand are a unique selling proposition. They are available at a spec­­ified time, for example when reaching retirement age, and provide the necessary lifelong income. The insured person benefits from the effect of compound in­­terest. During the period of capital ac­­cumulation, life in­­surance additionally pro­­vides financial security for surviving part­ners as well as an insurance against in­­capacity for work.
The biometric risk, meaning the rather pleasant situation of reaching a higher age than the average population, is not taken into consideration in various alter­native investment products. From this point of view, life insurance is the only investment product which is resistant to demographic developments. It offers a lifetime guarantee and ensures that the insured person receives at least the guaranteed benefit, regardless of the actual duration and lifetime. This is the essential element of old-age provisions that are worthy of their name. More than 94 million life insurance contracts in Germany document that the consumers share the same view and that life in­­surance represents the recognised form of private provision. Day after day, Ger­­man life insurers distribute around EUR 230 million in form of capital payments or pensions – this amounts to about a third of the benefits of the statutory pension insurance (German Insurance Association (GDV) – Source: Die deut­sche Lebensversicherung in Zahlen, 2012). Private old-age provisions play a decisive role in the overall old-age provisions.

Regulated, secured and transparent. The life insurance market is highly regulated and committed to the highest security standards. Mechanisms such as guaranteed actuarial interest rate, capital cover regulations since Solvency I, the rescue company Protektor or regulations of the German Financial Ser­­vices Regulator (Bundesanstalt für Fi­­nanz­­di­­en­­st­­leistungsaufsicht, BaFin), provide a unique security on the financial market, which has been tried and proven over dec­­ades. There are few other products on the financial market that are capable of offering a comparable default guar­­antee. In contrast to how they are commonly perceived, life insurance products may be highly complex, yet they are be­­coming increasingly more transparent. This fact is reflected, for example, in the required participation rates of the policyholders in the results, the continuous improvement of the standard policy conditions and consumer in­­formation as well as in detailed specifications of the acquisition and administration costs in the product information sheets.
If securing the biometric risk and the guarantee are taken into account, life in­­surance proves to be strongly competitive – even in terms of return perspectives. Thus, the actual benefits paid by the life insurers, including profit partic­ipation, are always clearly above the guar­­anteed figures. Long-term comparisons have shown that the return on investment even surpasses the return of most equity funds, which fluctuate much more no­­ticeably in terms of performance. From an economic and social perspective, this is a decisive argument in favour of life in­­surance. A long-term equalisation of re­­sults due to the investment product life insurance results in the problem that the individual time of retirement – boom or downturn – will not determine whether you have a large or only a small amount of money at your disposal.
Reduced willingness to make private pro­­visions. The individual budget available for old-age provisions tends to be tight and is rivalled by the individual propensi­ty to consume. The high level of consum­er spending illustrates that low interest rates have a negative influence on the pro­­pensity to save. The savings ratio in Ger­­many remains high by European stand­­ards, but it has been declining for years and currently amounts to approximately eleven per cent. Most consumers are surely aware of the fact that they need to make private old-age provisions if they want to maintain their standard of living after retirement. But as mentioned before, people are currently un­­settled by the media and the national debt crisis and, therefore, are unwilling to enter into long-term financial commit­ments. The resulting fatalism concerning provisions contradicts the actual need of making private old-age provisions. However, the urgency of making additional provisions remains unchanged. The issue of old-age provisions is only postponed.

According to the Generali old-age survey, which we published in coop­­eration with the Institut für Demoskopie Allensbach in 2012, senior citizens are doing better than ever before. But this situation will not last – unless future pen­­sioners start making private provisions to a larger extent than before. The prod­­uct variants of life insurance provide some of the best opportunities within the frame­work of government-sponsored products such as Riester and basic pension or corporate pensions, enabling consumers to optimise their own financial ex­­pens­­es and the resulting income.
Alternative financial investments and re­­turns. Only few private savers are likely to permanently achieve the return on in­­vestment of institutional investors. Life insurers, however, were continuously able to generate a return on investment above the money market interest rate. Thanks to the size of their portfolios, they can broaden and diversify their financial in­­vestments. In addition, life in­­surers have years of capital market experience and operate an established risk management system, which equally takes the opportunities and risks of financial investments into account. The current trend of de­­clin­­ing returns on life insurances is the re­­sult of low long-term interest rates. Pro­­fessional investors will not be able to es­­cape this trend in the long run. Especially not if they fac­­tor in the money market interest rate as a reference for the necessary fi­­nancial security of their investment. In contrast, life insurers have dem­­on­strat­­ed their ability to limit losses and to react to cri­­ses in the capital markets due to their spe­­cific risk-averse investment strategies. At the peak of the fi­­nan­­cial crisis, not all institutional in­­ves­­tors have succeeded in this regard. The cur­­rent low-in­­terest period, which is, above all, po­­lit­­ically motivated, makes life very difficult for all investors – in­­cluding the life in­­surers. This requires political action and the establishment of adequate conditions to raise the at­­tractiveness of long-term financial in­­vestments in the future.

Meister_1_2012_hoch-KopieThe author was born in 1951 and studied Mathematics and Business Administra­tion in Hanover. Dietmar Meister started his profes­sional career at Volks­fürsorge Deut­sche Lebensversicherung AG in 1980. In 1993, he joined Aachen­­er und Mün­­chener Beteiligungs-AG, which op­­erates under name Generali Deutsch­land Holding AG since 2009. As of 2002, he is a member of the board of directors and chairman of the board since 2007..