Life Insurance in the Modern Era: Balancing Guarantees and Growth for Retirement
In an age where consumer advocates often recommend taking retirement planning into your own hands, a fundamental question arises: Who still needs life insurance, and what for? Laura Gersch, a board member responsible for corporate clients at Allianz Lebensversicherung AG, provides compelling answers. In an exclusive interview, she addresses the enduring role of life insurance, the risks of a pure equity portfolio, and how modern products are evolving to meet today's economic challenges.
The Enduring Demand for Life Insurance
Question: Who still needs life insurance and what for?
Laura Gersch: "Our customers provide the answer. We have experienced a significant increase in demand in recent years, gaining over 500,000 customers between 2015 and 2019. Even in the first quarters of 2020—the greatest crisis I have ever experienced—we gained 60,000 new customers for Allianz Life. Despite zero and negative interest rates, people are not discouraged and continue to provide for their future. This shows that future-proof planning is more important than ever in a zero-interest environment. People need a partner that offers security on one hand, but also enables attractive return opportunities on the other. As the financially strongest insurer in Europe with expertise in global capital investment, that's exactly what we offer. We combine contemporary guarantees with the opportunities offered by, for example, alternative investments."
The Pitfall of Pure Stock Investments for Retirement
Question: It's often argued that life insurance is the only product that can hedge longevity risk. Theoretically, couldn't this also be replicated with an investment in dividend-paying stocks?
Gersch: "Yes, in pure theory, it could also work with a stock investment. However, that requires a lot of experience. People don't seek the help or support of experts in various life situations without reason. And from my perspective, retirement planning is one of those life situations. With a pure investment in stocks, customers go fully into risk: Dividends are not equally high every year, and recent months have shown how volatile the stock market can be. These risks must be contained while opportunities are preserved. This is how retirement planning via life insurance achieves something very important: predictability. We support this, for example, with the annual statement. This way, every customer can anticipate what they will actually receive from us in the future. Besides hedging longevity risk, this reliability of retirement provision is crucial."
Modern Guarantees: The Trade-Off Between Safety and Returns
Question: Can you explain how guarantees tie up insurers' equity and impact profitability?
Gersch: "We, as insurers, must also ask ourselves how we can generate returns for future-proof retirement planning. This is no longer possible with safe investments alone, such as fixed-income securities. We need freedom in capital investment so that we are not limited to fixed-income securities but can diversify more broadly into various asset classes, for example, real assets. With a 100% premium guarantee, there is a clear regulatory requirement to invest very safely. And that would hurt returns. However, if the guarantee level is, for example, 80%, we can invest a larger portion of the capital differently and generate opportunities for higher returns, which ultimately benefit the customer. Take our KomfortDynamik pension concept as an example: With an 80% guarantee and a 30-year term, we can invest two-thirds of the capital in opportunity-rich assets."
Addressing Industry Challenges and Building for the Future
Question: German life insurers also face criticism. For instance, some analysts suggest insurers can only bear interest burdens by selling off their 'family silver.' Do you share this assessment?
Gersch: "I can only speak for us. As the financially strongest insurer in Europe, we are very well positioned here, so this statement does not apply to us. At Allianz, all long-term guarantees are fully financed."
Question: Critics cite miscalculations in the 80s and 90s as a root cause of today's problems.
Gersch: "Interest rates of 6% on government bonds were completely normal 30 or 40 years ago. It was therefore entirely appropriate at that time to offer higher guarantees. Just look at the maximum actuarial interest rate: it was still 3.5% in 1990. We have also consistently and repeatedly adapted our offerings early on in the past to match customer needs and economic framework conditions. And we are doing so again now. Ultimately, it's about shaping the retirement planning of the future. And in my view, that cannot be done with solutions from yesterday or the day before."
The Institutional Advantage: Access to Unique Asset Classes
Question: How has Allianz restructured its capital investment?
Gersch: "It is still the case that we have a large portion in fixed-income securities, but the mix is crucial. And we also see that customers are willing to forgo a portion of the guarantee for higher return opportunities. As an institutional investor, we also have completely different investment opportunities—for example, infrastructure objects like gas pipelines and similar. As an individual investor, you hardly have access to such assets. We essentially pool business here and can act like a purchasing cooperative. This is one of the added values we offer our customers. And in this way, we enable even small investors to secure opportunities in the capital market."
Key Takeaways for Your Retirement Planning Strategy
- Predictability vs. Volatility: Life insurance offers structured predictability for retirement income, unlike the inherent volatility of a pure stock portfolio.
- Modern Guarantee Structures: Lower guarantee levels (e.g., 80%) allow insurers to pursue higher-return investments, potentially benefiting the policyholder's long-term yield.
- Institutional Access: Life insurers can invest in alternative asset classes (infrastructure, real assets) typically inaccessible to individual investors, pooling risk and opportunity.
- Hedging Longevity Risk: A core function of life insurance is providing a guaranteed income stream for life, directly addressing the risk of outliving one's savings.
For individuals evaluating their retirement planning options, the conversation highlights that the choice isn't necessarily between life insurance and the stock market, but about finding a balanced, structured approach that manages risk while seeking growth. Professional guidance in navigating these trade-offs remains invaluable.
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