Some outstanding news from the RealRate scientific department!
Dr. Holger Bartel, RealRate’s CEO, has had an article published in Zeitschrift für Versicherungswesen.
The article “Ranking ‘Financial Strength and Hidden Liabilities'” (German title “Ranking ‘Finanzstärke und stille Lasten’”), published on March 1, 2025, examines the impact of rising interest rates on the financial stability of German life insurers, particularly focusing on the shift from hidden reserves to hidden liabilities.
During the prolonged low-interest-rate period, German life insurers relied heavily on hidden reserves to bolster their reported profits. However, over the past three years, as interest rates have risen, these reserves have transformed into hidden liabilities. This shift is significant for insurers’ balance sheets prepared under the German Commercial Code (HGB), as losses can now only be offset if realizable hidden reserves are available. Currently, most life insurers report hidden liabilities on balance, though.
Economically, increasing interest rates are advantageous for insurers. This is evident in the rising Solvency II ratios. The technical provisions on the liabilities side are discounted more heavily due to their long durations, while bonds on the assets side, typically with shorter maturities, decrease less in value, resulting in a positive economic effect. However, the HGB balance sheet suffers under these conditions. Being generally rigid, the HGB balance sheet does not immediately reflect market value changes of assets. Yet, significant hidden liabilities can limit an insurer’s financial flexibility and may necessitate future write-downs if losses are realized.
The transformation of hidden reserves into hidden liabilities affects the financial strength of life insurers. Insurers with substantial hidden liabilities may face challenges in maintaining profitability and meeting regulatory capital requirements. Conversely, those with remaining hidden reserves are better positioned to navigate the changing interest rate environment. This differentiation is crucial for stakeholders assessing the financial health and stability of life insurance companies.
The article underscores the importance of monitoring the effects of interest rate changes on the financial statements of life insurers. The shift from hidden reserves to hidden liabilities signifies a pivotal change in the industry’s financial landscape, influencing both regulatory assessments and market perceptions of insurers’ stability.
For a comprehensive understanding and detailed rankings of individual insurers, accessing the full article through the publisher’s subscription options is recommended.
You can access the full article here:
https://www.allgemeiner-fachverlag.de/ranking-finanzstaerke-und-stille-lasten-2/
The ranking results of all German life insurers can be found on our website:
https://realrate.ai/ranking-area/2024-de-life-insurance-hidden-reserves/
