The amendment comes in response to the developments of the capital market environment since 2011, when the ZZR was implemented. The persistently low level of interest rates has made it necessary to readjust the interaction between covering existing guarantee obligations adequately and using future investment income in advance.

The legal situation and its effects on insurance undertakings and customers were described in detail in the August 2017 edition of the BaFinJournal (only available in German). This description largely still applies even after the amendment. It should be noted that the primary legal requirement of section 341 f of the Commercial Code remains unchanged: the calculation of the provision for interest guarantees must take into account the current and expected return on the undertaking’s investments. The Premium Reserve Regulation merely specifies the manner in which undertakings are to determine the future amount of investment income.

Contents of the amendment

The amendment that has now entered into force only relates to one, albeit important, element of the regulation: the determination of the reference interest rate used to calculate the ZZR. In the past, determining the reference interest rate was a mechanical process: it was the average rate of long-term capital market interest rates over the last ten years, and it could therefore vary significantly from year to year. In future, the annual change will be limited in that the new value will only be able to change within a given corridor around the previous value. The width of that corridor depends on how far the current capital market interest rates deviate from the previous reference interest rate.

The amendment also means that the possibility of the reference interest rate continuing to fall even if the current market interest rates have already risen no longer arises.

Impact on the amount of the premium reserve

The amendment will have its first effects on the amount of the premium reserve on 31 December 2018. The reference interest rate will decrease from 2.21% to 2.09%. The buffer of around 60 billion euros previously in the ZZR will be retained in full, and a further five billion euros is expected to be added for the 2018 financial year. This will mitigate the now overly dynamic effects of the previous regulation, under which the insurers would have had to provide 20 billion euros for the current financial year (see interview with BaFin Executive Director Dr Frank Grund).

Assuming a constant level of interest rates over the next few years, the amendment to the regulation will initially lead to a further increase in the ZZR. However, this will be much more moderate compared with the previous regulation. Similarly, the release of the ZZR expected in a few years' time will start somewhat later and progress in smaller steps.

According to the forecast calculations regularly made by BaFin, the financing of the interest guarantees is adequately ensured even during this slower progression.

Impact on customers

Many insurance undertakings have so far had to release significant parts of their valuation reserves and use their risk profits to finance the ZZR. Under the new regulation, this is less necessary, which means that the undertakings will have more flexibility in their investments and the allocation of profits to policyholders. The risk that undertakings will have to make withdrawals from the provision for premium refunds solely for accounting reasons has also decreased significantly.

At the current interest rate level, the previous regulation would have led to excessive balance sheet provisions, which would have been to the detriment of customers, in particular of policyholders with low interest rate guarantees. The new regulation thus also contributes to intergenerational fairness.