Sunday, August 4, 2013

The Insurance Investment Path on Shaky Ground

Germany has an interesting problem which bothers the banks greatly.

For decades, Germans have been attracted to insurance-investment accounts.  You'd walk in and lay down thousands of Deutsch Marks or Euro, and sign a contract that would pay typically four-percent interest.  It might be a five-year deal.....maybe a ten-year deal.....maybe even a thirty-year deal.  Up until the last decade in Germany.....this was a simplified method of saving for your retirement.  Germans hated risk.....stock investing was too complicated....and they were all happy with four percent a year in gains.

Well....rough times have hit the banks and this guaranteed rate of four percent just isn't a happy thing for bank managers and executives to think about.  It's tough to make that kind of profit and pay folks.  It's begging for a failure.....somewhere down the line.

So this past week....the European Central Bank did something to make bankers happy on one side....keeping the low rates in place, but really hurting the planning capability of German insurance companies to pay the four percent to investors.

How many accounts are there?  The general number used by German newspaper is around 92 million accounts.  So you sit there for a second and realize that there are only 80 million residents of Germany....even if you count the foreigners, the kids, and such.  So there are way more accounts than residents.

There has to be some return to the standard higher European Central Bank swing things back into a norm.  If can sense an uncomfortable feeling coming up in the next decade as people see their accounts being analyzed by political parties and some law created to help save the banks and what remains of the accounts.  The only way that banks can keep paying out the promised rates?  Seeking risky situations....and we know where this leads to.  Sadly, what was a good habit by Germans decades creates a huge problem in this new era.

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