The (Back) Book of Life

“Life without risks is such a waste of oxygen.” 

Relatively new on the Web this quote may be, but the insurance industry has been living by it ever since the concept came about – by insuring people, their lives and limbs as they go about making good use of oxygen. 

Long in the business of managing risks, insurers often spot future risks that most people may not even see coming. However, insurers also have a responsibility to ensure their financial ability to serve customers. 

And sometimes, this means letting go of the past and preparing for the future...

The future of life insurance

What lies in the immediate future for life insurers? 

Simpler, more efficient products that meet current and upcoming needs of customers, and freeing up capital to develop such products and innovate.

In the near-term, insurers have to meet the challenge of fulfilling Solvency II capital requirements without compromising on their commitments to investors and customers. 

A directive that codifies and harmonizes insurance regulation in the European Union, Solvency II modifies the method of calculating the capital European insurers must hold to reduce the risk of going under. 

Given the long-term nature of some kinds of insurance products, that’s not an unreasonable ask. You do want your insurer to protect you for life. So how do you quantify how much capital is enough? There is no one-size-fits-all. This amount varies from one insurer to another, depending on the size of its business, the risk profile of the products and the extent of guaranteed returns. 

Solvency Capital Requirement (SCR) is the term used to capture the minimum capital required by an insurer or a reinsurer to cover a myriad of the risks it faces. 

Sparing the layperson a complex technical explanation, it essentially asks insurers and reinsurers to identify the maximum loss that the risk in a particular portfolio can trigger, with a certain confidence. 

In short, the number answers the question: what’s the worst that could happen to a portfolio over a one-year period, keeping in mind the risks it holds? 

What's the catch?

Invoking GI Joe’s famous message to children in the 1980s, knowing is half the battle, isn’t it? True. 

So let’s know the risk groups an insurer faces - underwriting risk, market risk, credit risk and operational risk. Of these, life insurers are particularly vulnerable to market and credit risks.

Market risk is the impact of movements in financial variables such as equity prices, interest rates, real estate prices and exchange rates. For life insurers, this risk is the largest component of the basic SCR, accounting often for more than two-thirds of the capital requirement. 

Then, there is credit risk – the possibility that a borrower will not be able to repay a loan or meet debt obligations. The longer the period for which the debt lasts, the greater the credit risk.


If the insurance customer was a mayfly, then the credit risk would span just 24 hours and few borrowers would go bankrupt that fast. Humans, however, live way longer...more than 70 years on average at last count.

Since life insurance spans the entire life of a customer, such portfolios are traditionally heavy on long-term and relatively-safer investments such as bonds, which are interest-paying IOUs. The interest rates on such instruments are based on market conditions. And when the market interest rates languish near zero, it becomes difficult to earn healthy returns for customers.

The problem is magnified in life insurance products that guarantee a certain rate, such as some legacy products carried over from a time when benchmark rates were high. Although rates have drastically declined since, insurers have to keep old promises, even under very different market conditions.

To ensure that they are able to service these obligations, they have to tie up more capital for such guaranteed products under the latest Solvency Capital Requirement directives. 

Herein lies the rub.

Are there ways to free up capital from the older block of business with higher guarantees, while continuing to deliver on customer promises? Continue reading to find out.

Truth is that sustainable growth and innovation need capital investments.

According to a survey by  PwC in 2018, the deferred annuity business is the most concerning area for European insurers in light of the latest developments. “The combination of high guaranteed annuity rates, longevity improvements, together with the low interest rate environment and a lack of very long dated assets make these products the most complex to manage,” says the report, titled ‘European Life Insurance Back Book Management 2017’. 

In Germany, for example, legacy insurance portfolios contain products with guarantees sometimes even up to 4 percent annually, says the report.

Digging into the numbers at Allianz, the company’s 2020 annual report shows that its average minimum guaranteed rate in these products is 1.9 percent in Belgium, 1.8 percent in Germany, 1.5 percent in Switzerland and 1.3 percent in Italy.


Given that money parked in bank accounts gives zilch interest, that’s quite a bit considering the amounts involved.

Often, the longest-dated investment securities are not as long as the horizon of such products. This means insurers have to reinvest instruments that mature along the way. When interest rates decline, the returns on these reinvestments fall, leaving it to insurers to cover the shortfall and absorb the losses. Now that’s hardly sustainable.

Further, many of these products run on inefficient legacy IT-systems. As such products are discontinued, fixed cost per policy rises over time as the book shrinks in premiums and the number of policies.

Capital gains

So how can insurers use their capital efficiently even while meeting new regulatory needs?

In a report, consultancy firm  McKinsey offers several options under three broad categories – transactional levers, such as divesting discontinued products and businesses partly or entirely; structural levers, such as adjusting the product mix; and operational levers such as partnering with specialists for managing these books of legacy products, also called life back books.

The best strategy is to use a mix of options, depending on the nature of the business.

In some cases, handing over the back book to be managed by a specialist is the more viable option. For example, Allianz completed in April  the sale of part of its closed life book portfolio in Belgium to Monument Assurance Belgium (MAB).

Such specialists, called consolidators in finance circles, bring three core competencies to the table – efficient policy administration models, strong fixed-interest investment capabilities and integrated capital management, according to a report by Fitch Ratings

As for structural and operational levers, Allianz has taken several initiatives. Among these are alternative asset management approaches such as investments in commercial property and infrastructure, and partnerships with specialists for policy administration while maintaining the primary customer relationship.

Between 2015 and 2020, the mix of capital-efficient products in Allianz’s overall portfolio has improved to 41 percent from 25 percent. 

Meeting new needs

With more capital at hand, insurers can invest in business growth and innovate to bring to life new products that better meet modern needs.

While guaranteed products provide customers a cushion in challenging times, they also limit their returns when the markets are bullish. 

Mindful of the opportunities, insurers are developing unit-linked or hybrid life insurance products that allow customers to fully participate in the economic process.

Rising demand for such innovative products at Allianz shows that customers are aware of the benefits of moving with the times.

Great innovation can happen only when change is seen as an opportunity, not a threat.

The Allianz Group is one of the world's leading insurers and asset managers with around 125 million* private and corporate customers in nearly 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 746 billion euros** on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage about 1.8 trillion euros** of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we are among the leaders in the insurance industry in the Dow Jones Sustainability Index. In 2023, over 157,000 employees achieved total business volume of 161.7 billion euros and an operating profit of 14.7 billion euros for the group.
* Including non-consolidated entities with Allianz customers.
** As of March 31, 2024.

Press contacts

Kirti Pandey
Allianz SE
Siân Taylor
Allianz SE
As with all content published on this site, these statements are subject to our cautionary note regarding forward-looking statements:

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