Rising prices: Insurers can live with inflation

German-style life insurance is a popular financial product, but not everyone understands it.

Of the 87 million policies, 45 million are private pension plans that serve the purpose of providing for old age.

As a result of the financial crisis, their construction has changed.

The fixed annual interest rate guarantees were no longer considered profitable when interest rates were low, zero or negative.

Insurers had to build up billions in reserves in order to fund old obligations on a solid basis.

So far, no German has had to endure that his guarantee has not been fulfilled.

What is easily overlooked: The principle of the security assets (also called cover pool), from which surpluses are distributed fairly fairly to different contract generations, has had its good years, especially in times of low interest rates.

Because insurers book valuation reserves on the high proportion of fixed-income securities in their portfolios.

This allows them to offer better interest rates than the market at such a time.

Millions of policyholders benefited from this during the crisis.

With rising inflation and higher capital market interest rates, things are changing at breakneck speed.

This has serious implications for life, property-casualty and health insurers.

The insurance industry has always emphasized that it would like an orderly, slow turnaround in interest rates so that it can adapt well to it.

Now it is happening very quickly because of a long hesitant monetary policy.

For life insurers, this means that policies will quickly become less attractive than alternatives on the market.

At the same time, their investors can now again purchase solid corporate bonds with a bond interest of 4 to 5 percent at a lower risk.

Paradoxically, the fat years may be followed by lean years because years of poor bond market conditions have left many low-yielding securities in life insurers' portfolios.

Valuation reserves are melting away.

It turns out to be far-sighted that the financial regulator has been forcing the industry to use this to build up an additional interest reserve for a decade.

It secured the high interest on old contracts and can now stabilize profit participation in an environment of higher interest rates.

From headwind to tailwind

So the industry and regulators have steered the ship safely through past storms.

Now they have to switch from headwind to tailwind and continue to act cautiously, although they would have wished for a lull for a while.

And that also applies to the other sectors of the industry.

In property-casualty insurance, inflation changes the economic situation.

High claims inflation has been noticeable for years, because the scarcity of craftsman capacities and spare parts as well as medical progress mean that higher costs have to be absorbed even without rising consumer prices.

Then there is general inflation.

But unlike life insurers, property and health insurers can constantly adjust their premiums to changing conditions.

On the recommendation of reinsurers, who always pay close attention to profitability, car policies, for example, will become significantly more expensive in the coming year.

It is not to be expected that the industry will give up the discipline it recently rediscovered in pricing just because higher investment results can now finally be achieved.

So inflation will hit customers: via higher prices for auto and homeowners insurance.

For some people, this will also mean that they have to think about their insurance concept a little more fundamentally: does it need full coverage for a risk, or can it be cushioned with higher deductibles or slightly less extensive protection?

Insurance intermediaries have started to prepare themselves for these questions in order to talk to customers about the consequences of price increases and the turnaround in interest rates.

This will then also have an impact on the premium income in the industry.

Product sales are likely to change.

But inflation is not an existential threat like low interest rates.

Rather, it makes it easier for the time being to rehabilitate unprofitable lines of business in the general rise in prices.

This can be uncomfortable for consumers because they can't easily see where price increases are coming from.

It will be even more necessary than usual to compare offers and get good advice.