The Solvency II requirements, combined with the low interest rate environment, have resulted in a trend toward insurers seeking innovative product structures to improve customer return, while minimising capital requirements. In Germany, a number of large insurers have effectively stopped marketing their traditional insurance products to focus on more innovative products, including Constant Proportion Portfolio Insurance (CPPI), index-linked products, static and dynamic hybrids, variable annuities, etc. However, there is often a balancing act between increasing customer return, through the inclusion of investment guarantees, and minimising capital requirements for market risk.

My colleagues in Germany recently published a research report analysing three products in the German market from a capital efficiency perspective. The products include Allianz's "Perspektive" and "Index Select" and Zurich's "VorsorgeInvest Premium." Each product offers attractive investment guarantees to policyholders, with the type of guarantee varying by product. However, the guarantees are structured in such a way as to reduce market risk, compared with traditional insurance products in the German market, resulting in improved capital efficiency.
Asset management techniques need to be considered to fund the investment guarantees offered by these products. In a low interest rate environment with high volatility, the costs associated with hedging investment guarantees can be very high. However, volatility control techniques have emerged as a way to reduce the costs of hedging investment guarantees. Using such techniques, a dynamic investment strategy can be adopted to invest heavily in equities to maximise return when markets are relatively stable, but limit equity exposure during periods of high volatility. The Milliman Managed Risk Strategy (MMRS) is an example of such an investment strategy. The research report discusses this in more detail and compares MMRS to a CPPI investment strategy in terms of policyholder return and capital efficiency.

For more information on this topic, please see the Capital Efficient Products in the European Life Insurance Market research report, authored by Marco Ehlscheid and Dr. Matthias Wolf.