Topic Investments of insurance companies, Consumer protection Dirk Elsner, BaFin
The German Life Insurance Reform Act from the point of view of consumers
For some years now, German life insurers have been faced with the challenge of realising sufficient levels of capital to be able to permanently provide the guaranteed contractual benefits for the insured event, despite persistently low interest rate levels. For the protection of insured persons and to ensure the ongoing viability of life insurers, the legislators have approved the Act Safeguarding Stable and Fair Benefits for Life Insurance Policyholders, in brief the Life Insurance Reform Act (Lebensversicherungsreformgesetz – LVRG).
This Act became fully effective on 1 January 2015. The initial impressions of the unit of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) which supervises impropriety are outlined in the article below.
One key change is that the Life Insurance Reform Act limits the share of the valuation reserves which policyholders receive upon expiry of their contract. Life insurers may only pass on certain valuation reserves to withdrawing policyholders if the insurance undertaking in question does not have any “security requirements under insurance contracts with an interest rate guarantee”. The procedure for calculation of these security requirements is prescribed by law.
Moreover, to ensure that they are permanently capable of financing their obligations under insurance contracts, undertakings may only distribute an unappropriated surplus to their shareholders if this exceeds any potential security requirements.
In addition, for the purpose of early risk identification, life insurers must now produce multi-year projections if BaFin requires them to do so.
Furthermore, since 1 January a new maximum interest rate is now applicable: it has been reduced from 1.75 to 1.25 percent. The maximum interest rate limits the rate of interest for the premium reserve in the life insurance sector. It is also referred to as the guaranteed rate of interest.
Key changes for consumers
Besides the new rules on the policyholder’s share of the valuation reserves and the reduction in the maximum interest rate, the extended notification obligations for life insurers are the key changes for consumers. They affect both the period prior to the conclusion of a contract and also the term of the contract.
Prior to the conclusion of a contract, undertakings must now also indicate the initial and administrative expenses included. To date, alongside the initial expenses they were merely required to provide information on the “other expenses included”. Moreover, the administrative expenses must now be indicated on the product information sheet. These two changes apply not only for life insurers, but also for health insurers. The Act also provides for improved cost transparency: since early 2015 life insurers are required to notify the potential policyholder of the actual expenses prior to the conclusion of a contract. In the Regulation on Information Obligations for Insurance Contracts (Verordnung über Informationspflichten bei Versicherungsverträgen – VVG-InfoV), these are defined as the percentage by which these expenses reduce the value of the insurance contract. However, this obligation does not apply for purely term life insurance policies.
Over the term of the contract, through their annual surplus participation notice, life insurers must inform their customers of the publication of additional information on the surplus participation, e.g. regarding investment income or the risk result. This is to provide policyholders with a clearer understanding of the value and composition of the minimum surplus participation which is required by law.
Life Insurance Reform Act: key changes
- Limitation of the policyholders’ share of the valuation reserves
- Limitation of the profits distributed to shareholders
- Multi-year projections
- Lower maximum interest rate
- Extended notification obligations
First impressions of BaFin’s unit supervising impropriety
Since the Life Insurance Reform Act came into force, various policyholders have notified BaFin that their insurers have reduced their share of the valuation reserves or even cancelled this entirely. As a rule, they had either learned of this through the annual surplus participation notice or because their contract had expired or they had terminated it and the insurer had subsequently sent them a letter informing them of the impending payment.
As already set out above, under the new rules introduced by the Life Insurance Reform Act, insurers are obliged to reduce the policyholder’s share of their valuation reserves or even cancel it entirely, depending on their security requirements. They do not require approval from BaFin for this. However, BaFin may obtain information from undertakings on their security requirements at any time, e.g. so as to be able to intervene in case of incorrect payments.
Premature implementation of the Life Insurance Reform Act
Several life insurers had already applied the Life Insurance Reform Act’s new rules on the policyholder’s share of valuation reserves as of 1 August 2014. In some cases, policyholders whose contracts expired on this date received a reduced payment from the valuation reserves or none at all. However, the new rules only came into effect on 7 August 2014. The undertakings justified their behaviour on the grounds of having assumed an earlier promulgation of the Act in the Federal Law Gazette. In order to be prepared for this and to avoid overpayments, they had acted early in order to implement the technical changes.
In such cases, BaFin urged these undertakings to pay their former customers the amounts which they would have been entitled to under the old legislation, if they had not already done so. Many policyholders benefited from these subsequent payments, which in most cases also included the interest on arrears which had accumulated in the meantime.
Declared minimum share remains untouchable
Several policyholders whose contracts had expired in 2014 notified BaFin that, in their opinion, their share of the valuation reserves was too low since they were entitled to a minimum or basic share. However, in response to BaFin’s inquiries the insurers concerned declared that they had certainly distributed the minimum share declared for 2014. Policyholders whose contracts expired between 7 August and 31 December 2014 would thus also have received the minimum share.
BaFin has not objected to these insurers’ practice, provided that they had declared the minimum share for 2014 in their business report for the previous year. However, one insurer had only declared here the minimum share of the valuation reserves for contracts ending due to their expiry or in case of death, but not upon termination. Policyholders who terminated their contracts as of 7 August 2014 or later are thus not entitled to any minimum share.
Several life insurers had not specified any minimum share at all. This falls under the scope of their commercial discretion. Accordingly, customers of these undertakings could only claim a share of the actually available valuation reserves provided that these exceeded the undertaking’s security requirements.