The German Association of Actuaries (DAV) has recommended the application of a maximum interest rate on new insurance and pension products of 1% from 2025, from 0.25% currently, the fist increase in three decades.

­The association justified the proposed increase by looking at higher interest rates, current economic forecasts and the trajectory of inflation, it said in a statement yesterday.

­“In 2021 and 2022, inflation has increased due to supply shocks and expansionary fiscal policies in major economies. Central banks reacted last year with significant interest rate increases,” said Max Happacher, chair of the association.

Bond yields have suddenly risen and this development also continued through 2023, as interest rates remained high.

The DAV expects that inflationary pressure will continue, at least in the medium term, pushed by several lasting factors emerging in recent years, including demographic trends and changes in the international order toward de-globalisation.

These changes are coupled with exogenous shocks such as the COVID-19 pandemic, the energy crisis and the Russian war against Ukraine.

“In the medium to longer term, this will be reflected in higher interest rates compared with the period up to 2021. Yields on long-term government bonds will also remain above the European Central Bank’s inflation target of 2%,” said Happacher.

Inflation in the euro area continued to fall in November to 2.4%, from 2.9% in October, according to Eurostat, the statistical office of the European Union.

The maximum interest rate – a measure to calculate provisions and a limit for guarantees promised by life insurance and pension products – reached the highest level (4%) between 1994 and 2000, dropped to 0.9% between 2016 and 2021, and reached its lowest point (0.25%) in 2022.

DAV analysed average return outlooks over a period of five years from a representative investment portfolio, assuming different developments in terms of interest rates, to propose the maximum rate increase.

“In addition, a 40% discount was included as a safety buffer, as required from the mid-1990s until the introduction of the European insurance supervisory regime Solvency II,” said Happacher.

Based on results, the proposed maximum interest rate for new contracts can remain stable in the medium term, it said.

The Federal Ministry of Finance will have the final word on the maximum interest rate, following the recommendations of the actuaries and the financial supervisory authority BaFin.

The German insurance association, GDV, has welcomed the recommendation of the actuarial association.

“In our view, the interest rate increase recommended [by DAV] is an appropriate response to the rise in interest rates. It will have a positive impact on the design of life insurance products, which will benefit consumers,” said managing director Jörg Asmussen.

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