Life insurance: two million customers lost after a wave of cancellations

There was once a time when there were significantly more life insurance policies in this country than there were residents. This means that, statistically speaking, every German citizen had more than one life or pension insurance policy and was thus saving for old age. Those days are over. Instead, there is a wave of cancellations among life insurers: there are only 80.7 million life insurance contracts left, two million fewer than in 2021, when there were still 82.7 million.

Premium income is also shrinking. In 2023, they fell by around 5 percent on an annual basis, according to figures from the industry association GdV. Since the Corona year 2020, the balance sheet has looked like this: In 2020, German citizens invested 101 billion euros in capital-forming life and pension policies. Last year, according to GdV, they only saved 89 billion on such contracts. Around 12 billion euros less are now flowing into such contracts every year.

While a good 65 billion euros in ongoing contributions were previously paid into the contracts, recently it was a good 64 billion. That sounds like a very small difference, but you have to keep in mind that many of these long-term contracts have dynamics clauses. This means that the payments into a contract automatically increase by 5 to 10 percent every year. Seen from this point of view, the contribution amount should increase rather than decrease every year.

Many old contracts are expiring

This makes it clear: customers are apparently no longer really participating. This can already be seen in the number of new contracts; fewer new contracts are being concluded than old contracts are expiring. In addition, many long-term savers have apparently stopped the dynamic premium increases or even made the policies contribution-free. This reduces the overall income from ongoing contributions.

Insurance companies are even recording a dramatic slump in the single-premium business. In other words, for those policies in which a large sum of capital flows only once instead of over many years and in which the capital is then paid out immediately or later permanently in small chunks as a monthly pension. In times of low interest rates, such single premium contracts were extremely popular because they still promised small returns, while banks suddenly charged negative interest for larger sums in the account. This allowed many older savers to pile around 39 billion euros into such policies in 2020. Most recently, according to GdV, it was only 24.8 billion.

Overall, many savers no longer seem to want to invest their money in insurance policies, but rather invest it in other ways. The industry also fears this, because since the central bank’s interest rate hikes, insurers’ long-term savings contracts have become far less attractive: For years, providers have continued to reduce current interest rates and surpluses for customers.

Only 2.4 percent interest

Currently, average life insurance contracts only yield 2.4 percent ongoing interest – but only on the savings portion, mind you, before costs. With fixed deposit interest rates of 3.5 percent, this is no longer competitive. Even a standard current account brings more money; many banks currently pay 4 percent for parked funds. As a result, capital is currently increasing far better elsewhere than in insurance.

And even if the insurers always argue with guaranteed payouts until the end of life: especially in the savings phase until retirement, it is important that the amounts paid in increase as effectively as possible. Otherwise, the perpetual payouts will only be even more scarce later.

The Bundesbank’s data on the financial assets of private households clearly shows how much life insurance has already lost weight overall: five years ago, i.e. 2018, the largest item of German financial assets (excluding real estate) consisted of cash, sight and time deposits, i.e. savings money. They made up almost 40 percent of total financial assets. They are still the largest item today; German citizens now even hoard 42 percent of their financial assets in their accounts. Because since the interest rate turnaround it has become worthwhile again.

Stocks and funds bring better returns

At the time, private life insurance and other retirement provision contracts (including company retirement savings contracts) ranked just behind cash in second place; in 2018, they contained around 37 percent of private financial assets. But now it is only 30 percent, a whopping 7 percentage points less according to the Bundesbank. Where did a lot of new money go instead? Especially in stocks and funds, whose share has risen from 20 percent to almost 25 percent in just five years.

And that’s a good thing, because all the statistics on the long-term development of the capital markets say that nowhere does money multiply better than on the stock exchanges. Anyone who invests it broadly has achieved fairly stable and comparatively high returns over the past 120 years. When investing purely in stocks, the return was around 6 percent per year – after deducting the actual inflation values, i.e. in real terms. With a 60:40 mix of stocks and bonds, a long-term real return of 5 percent per year was possible.

You can hardly expect that from life insurance when the interest rate before costs and inflation doesn’t even reach the 3 percent mark in good stock market times like now. In order to actually provide a benefit for customers, as the financial regulator BaFin recently defined, savings contracts would have to generate a return of at least around 2 percent after costs – i.e. to compensate for inflation. That would correspond to a real return of zero.

On average, current private pension insurance contracts – after costs – only achieve a return of 0.39 percent, according to the rating agency Assekurata. This is the guaranteed return based on all contributions paid after costs. Inflation then depends on this. So it’s no wonder that the wave of cancellations in life insurance companies continues.