If, say, insurers attempt to increase their solvency ratio during crises, such endeavours can lead to fire sales, which might further accelerate the fall in asset prices. Even what currently appears to be a rather unlikely scenario – that of interest rates climbing sharply within a short space of time – can pose a real threat to the stability of life insurers.
This is because the regulations in Germany leave them with no option but to offer fixed surrender values for products paying guaranteed returns. Since life insurers invest the bulk of their customers’ premiums in fixed-income securities, the market value of their investment is sensitive to interest rates, while surrender values are not.