The global financial crisis had a moderate effect on the insurance sector. The sector is robust to funding market disturbances, and exposure to high-risk securities (“toxic asset”) appears to be widespread but quite limited. Available indicators point to adequate levels of solvency and relatively low, but stable profitability, with the exception of the more volatile reinsurance sector. The holding of sovereign debt holdings in Europe is limited, according to a BaFin-led survey among the German insurers, and prudential limits on riskier investments are not binding for most German insurers.
The main challenge, especially for life insurance and pension funds, is the low interest rate environment, where strains may build up over time. Falling interest rates generate unrealized gains on assets, but they also increase the expected value of liabilities to policyholders. The effect is amplified by certain statutory floors on returns to policyholders, such that the average guaranteed return on the stock of policies outstanding is relatively high. Nonetheless, analysis suggests that insurers could cope with low rates for at least five years due to conservative accounting of both assets and liabilities. Over the long term, longevity risk could turn out to be significant, although actuarial assumptions—based on nation-wide data—are reportedly very conservative.
Some corporations have pension liabilities on their balance sheets, which may become more of a burden. These liabilities comprise more than half of total pension claims and amount to about 10 percent of GDP. As in the insurance sector, these pension liabilities may prove expensive in a low interest rate environment, especially because a relatively high discount rate is applied (currently 5.1 percent).