Drying up of life insurance – too few investment options for too much money

– Why life insurance has outlived its usefulness as a capital accumulation vehicle –


Wim Duisenberg, ex-president of the ECB, when asked how he invests his money:

“Personally, I’m in the fortunate position of having no reserves.”


Statistically, up to more than 80 million German citizens own more than one life insurance policy. This fortune has perhaps been cut by more than half in real terms since the announcement of the
Euro through the introduction of the ECU in the 1990s. Insurance customers notice it at the latest when they receive only a fraction of what the insurer often euphemistically calculated for them when they took out the policy. Some customers know that the sometimes eternally possible revocation of the contract means up to more than double the payout from the insurer.


Global investors displace insurers

Insurers expect higher returns than global investors who offer more money for investments because they are also satisfied with lower returns. This means that insurers are either
The new rules mean that insurers, which are being squeezed out of all areas of the capital market, have to get used to lower yields or accept higher risk in their investments – which brings them into conflict with stress tests and Solvency II. If one quotes insurance board members or managers of pension funds, for example, with the earlier words “Hooray, Hypo-Alpe-Adria has given us a return of over 5% again” today, the laughter sticks in their throats – this bank is broke, there was a legal total default on repayment for the first time. In addition, for some time now German government bonds have also had such haircuts built into their bond terms, just as a precaution of course.


If individual insurers had listened to the IMF in their investments, which once forecast 5% growth for Greece, they would have been mistaken, because this has not happened in any country in the EU in the last two decades. Perhaps collection expertise was confused with investment expertise?


Guaranteed zero return as an advertising argument

Life insurance has something to offer as an investment, and annuities even more so. Because they can guarantee after 30 years that the customer – of course still completely
without inflation compensation – gets his contributions back – in the case of pension insurance even after 25 years, if he lives that long. This is not offered by any equity fund, as there may be a loss here. In addition, there is a chance for more – with some products more along the lines of buying the customer a lottery ticket from any surplus.

The modern retirement saver’s role model is the squirrel. It buries its nuts in autumn, and joyfully finds half of them again in winter – it has forgotten the other half. It has no alternative if it doesn’t want to starve in the winter.


German Bundesbank negates low interest rate policy

The cause of the low interest rates was not the ECB, said the Bundesbank President, but lay in weak growth and low inflation rates, which in turn were linked to demographic developments in the industrialised nations worldwide.

What is right about this is that there is too much money and too few investment opportunities. Inflation does not exist, because the money goes into the remaining investments, and these (shares, real estate, also bonds) become more and more expensive in an “inflationary” way, which drives the yield towards zero, but not into consumption.

The ECB’s policy of promoting growth and pushing up inflation through loose monetary policy is therefore logical, so that interest rates will also rise again. You can also fill a bottomless barrel by pouring in enough water to flood the entire surrounding area beyond the top of the barrel. However, this money hardly ever reached the economy, but rather the casino departments of investment banks and hedge funds.


The demographic change fairy tale

The fairy tale of demographic change is inaccurate, because for almost two decades wages were not increased in real terms, but the increase in prosperity was promoted by exporting abroad – given away by the Germans on credit, as it were, with no prospect of repayment by the GIIPS states. Workers hardly got a share of the increase in productivity through wage increases and to stimulate consumption, as well as for pensions. The quasi-doubling of SHI contributions for pensioners (in 2004), the quasi-multiplication of the assessment base for pension taxation (from 2005) and the reduction in the state pension will force up to more than 50% of pensioners to go to the social security office within 15 years.

While the German Michel was naively happy to be the export world champion, he did not notice that today he has taken over up to more than 25 TEUR per capita in government debts and liabilities for money which was called “rescue policy”, but which was only allowed to compensate for losses from speculative transactions of the credit institutions to about 90% and was available for restructuring attempts of over-indebted states. On paper, such generous gifts lead to the restructuring of private capital investors, because the GIIPS sovereign debt was then assumed by the “institutions” despite sometimes dubious collateral, at the expense of taxpayers. The good news is that sovereign debt will never be paid back anyway – the bad news is that this means that interest rates will have to trend permanently towards zero in order to minimise the budgetary burden on sovereigns. This means that in the long run the investment income of the insurers will lag behind the administrative costs – an apparently certain loss-making business for up to more than 80 million savers.


Company foundations 1870 – 1880 are mostly successful until today

Successful investors ask who will be the next to leave the market by displacement. Citizens, on the other hand, ask if there are alternatives that are as convenient as, say, life insurance? The answer is, yes – but without competence for selection and observation it never works, even if one turns to capital investments with small deposit possibilities, which no intermediary has in the offer and which promise up to more than 4% yield still today, for example with beer manufacturers, real estate providers, energy suppliers and even in the credit economy.

In this way, interested parties can find advisors who can point them in the direction of direct annuity purchases from investors, municipalities or foundations. Eliminating life insurance as a “middleman” for capital also eliminates costs and profit margins across multiple tiers that capital would otherwise have to pass through. The result is significantly higher pensions for the same money, plus for men the avoidance of the unfavourable gender-independent “unisex” calculation.


Privatisation of pensions instead of the welfare state ?

The Greeks used to pay in silver – 2500 years ago – as a unit of account. One man’s debt is another man’s wealth – both are always equal, which is why a society as a whole cannot save – but export wealth. Providing for the future means investing today in order to reinvest later. If then the citizens save, for example because of the threat of Hartz-IV, the companies save because there is an overproduction and the export is not sufficient, and also the state saves because of the dogma of austerity, then the money must be exported abroad, for example to the GIIPS states. For Germany, this resulted in around 600 billion euros “given away” abroad in 2006-2012 alone, money that will apparently never be paid back.

Specifically: Germany lets the Greeks print money, perhaps produced by “Devrient & Giesecke”, registered with the ECB, which is used to buy weapons from German companies, i.e. on credit. NATO is probably clocking something like this in too. Then there are some corruption charges. But in the end the German taxpayer also pays for its export miracle, the taxpayer finances armaments and banks. Instead, maybe taxes could have been cut by as much as half in both countries?

And this, of course, only on the basis of demand at home, quasi in the sense of nationalism through wage increases, instead of de facto giving the money away to foreign countries via “institutions”, as well as predominantly to the so-called “rescue policy”. Capitalism lives on wage increases according to productivity gains and not on Hartz-IV. Germany has an investment gap of around 75 billion euros p.a. and has become an EU low-wage country. Life insurers cannot expect a return on their investment there either. Mass bankruptcy of life insurers seems pre-programmed in the long term, so far without any real resistance from the industry.


Germany as a loser – and life insurance?

Germany’s export surpluses are currently a work of art, thanks to the euro alone. Who would still want to invest in the euro? If the euro fails, it will not only hit Cyprus and Greece, but also the “donor countries”. The up to more than 80 million investors in life insurance policies will have to consider what alternatives are available? The bitter part is that you have to take care of it yourself, entirely commission-free, but with good advisors at best.


by Dr. Johannes Fiala and Dipl.-Math. Peter A Schramm

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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