German Insurance - Compromise proposed on German policy reserve

German industry and the finance ministry have taken a positive step towards reaching a compromise agreement over how surplus bonuses that build up in life insurance companies should be distributed between policyholders and shareholders.

Under current rules, at least 90% of surplus reserves should be distributed to policyholders, with the rest going to shareholders. However, the way in which this is done is slightly different for policies written prior to 1994 and those written afterwards. For pre-1994 business, 90% of gross surplus is distributed to policyholders. For post-1994 business, life companies only have to distribute 90% of investment return to policyholders - with only an 'adequate portion' of surplus reserves credited back to them.

"The problem is that nobody really knows what an 'adequate portion' means," says Norbert Heinen, president of the German Institute of Actuaries. "The general interpretation has been a 50-50 split, but there has been no precise definition."

A compromise proposal, hammered out at the start of May between representatives of industry and the finance ministry, seeks to give greater clarity. Under the recommendations, which still need to be formally endorsed by the finance ministry, insurance companies would be obliged to credit at least 75% of mortality reserves back to the policyholder and 50% of all income from other sources. Shareholders would be entitled to 10% of investment return, 25% of mortality reserves and 50% of income from other sources. Mortality reserves are built up according to the particular rate for mortality risks being used, with deductions made for any claims that have to be paid out. Mortality reserves are particularly relevant for term insurance and traditional endowment insurance policies. The latter were mainly written prior to 1994, says Heinen.

The new rules would apply across the board, irrespective of whether policies were written before 1994 or afterwards. Heinen, who sat on the working party that drew up this latest compromise proposal, says that companies with large blocks of older pre-1994 business are likely to benefit most from the new guidelines. "Companies with newer business will have to sacrifice part of the shareholder surplus that could be generated from mortality and other sources," says Heinen.

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