Concentration lapse: Bundesbank warns on policy surrenders

German and Austrian life firms have been buying longer-term assets to close a duration gap that is painful while rates stay low. A recent paper from the Bundesbank, though, suggests that vulnerability to lapse risk is growing as a result

In June, Till Förstemann, a policy expert at Deutsche Bundesbank in Frankfurt, released a paper warning Germany’s life firms that they are susceptible to lapse risk if rates rise faster than anticipated.

Förstemann is worried about a tipping point at which rising interest rates would make a rational policyholder surrender their policy to reinvest elsewhere for a better return. If enough policyholders withdraw at the same time, insurers face a mass lapse. That could turn into a liquidity crisis