For more than 10 years, the yields of life insurance policies have been suffering from the low capital market interest rates. As a result, reductions of up to more than 30 % compared to the expectations raised until the turn of the millennium are the rule. However, customers with terminated or expired contracts have been experiencing a small ray of hope for a little over a year now: precisely because of the low interest rates, they receive up to more than 15 % extra performance from the so-called valuation reserves.
Sharp rise in profit participation from valuation reserves
These have recently risen sharply because the higher-interest securities in which life insurance companies invested many years ago have become far more valuable on the stock market as a result of the lower market interest rates than was paid at the time. This profit, as the surplus of the so-called current market value in the form of the stock market value over the purchase price, which counts as the book value – the so-called valuation reserves – the insurance companies must by law share half of this profit with their customers on maturity – expiry or termination – of an endowment life or annuity insurance.
Extensive cancellation of the participation in the valuation reserves threatens in the short term
Due to the sharp drop in market interest rates, customers with long-term contracts in particular are receiving additional payments of up to more than 15 %. In the case of a life insurance contract that was saved at EUR 200 per month for 30 years, the valuation reserves can thus increase a maturity benefit of EUR 110,000 by EUR 20,000 and more to over EUR 130,000. However, the insurers are not at all happy about these considerable outflows, because the money would actually be urgently needed in the next few years to maintain the efficiency of ongoing contracts. At the beginning of this year the attempt to reduce this participation to a minimum failed due to the objection of the Federal Council.
Cancellation soon after the election?
However, the supervisory authority BaFin and the insurance lobby in the form of the German Insurance Association are determined not to stop there. Thus, the agenda of the almost complete cancellation of the participation in the valuation reserves is still on the agenda – it could be implemented soon after the federal elections.
“We consider it necessary that this topic be taken up again in the next legislative period and treated seriously accordingly”, demanded the GDV lobbyist Schwark recently to Plusminus.
Deletion on paper often done in advance
In anticipation of this, many insurers are already no longer reporting the high valuation reserves in status notifications, run-off forecasts and surrender value notifications. When asked, they then say that they will not do this because they do not want to show anything that will soon be deleted anyway. Only the usually much smaller share for a so-called declared base participation in the valuation reserves is still mentioned, which, however, regularly represents only a fraction of the participation in the valuation reserves to which the individual customer is currently legally entitled. Many policyholders therefore believe that benefits have already been cut by double-digit percentages. However, this is only on paper, or rather not at all, because, if they were to terminate their participation, they would still receive this participation with complete certainty according to the law. The money is not – yet – gone.
Less benefit despite further premium payment – valuation reserves as scrapping premium
If one calculates precisely, it often turns out with contracts with only a few years left to run that the valuation reserves currently result in such a high benefit as the surrender value on termination that the continuation of the contract with further premium payment or even with premium exemption on the other hand even leads to a total loss as soon as the legislator reduces the valuation reserves to a large extent as desired.
In this exceptional situation, it can no longer be claimed without reservation that terminating a life insurance policy would always be disadvantageous. On the contrary, participation in the valuation reserves objectively has the effect of a scrapping premium for life insurance policies, albeit with an uncertain, possibly short, time limit.
However, if you ask your insurer how high the participation in the valuation reserves would be in the event of surrender, you usually get no answer at all.
Therefore, if you do not want to be surprised when a contract is terminated, you can have the contract examined by an actuarial expert who can estimate the valuation reserves quite accurately on the basis of the contract history. It has been shown in approximately every second case that, in the case of deleted valuation reserves, continuation would have led to a negative return compared with immediate repurchase. In view of returns of only around 4% in the event of continuation of the contract and assumed – rather unlikely – retention of the valuation reserves, the risk of cancellation often outweighs the chances of continuation.
Advertising with excessive sample calculations
In advertising for new life and annuity insurance policies to be taken out, on the other hand, very high valuation reserves are often still shown in the maturity benefit or annuity increase, although at the same time they are no longer mentioned to existing customers due to the intended cancellation. This could lead to the accusation of advertising with excessive sample calculations, with the consequence that the insurer is liable for the excessive amount, i.e. ultimately has to pay out the reported valuation reserves.
Legal claim to advice, compensation and termination without notice
Since the reform of the Insurance Contract Act in 2008, policyholders have a legal right to advice as soon as the insurer sees a reason for the policyholder to request and receive advice. If the insurer violates this, he may be liable for damages. The relationship of trust can suffer to such an extent that further adherence to the contract becomes unacceptable and an extraordinary termination without notice may be appropriate. Hangers for this would be incorrect representations of the contractual benefits or ” if the fulfilment of the insurance contract by the insurer has become uncertain” (BGH, judgement of 04.04.1951, Az. II ZR 32/50).
It is not only in the event of the insurer’s difficulties that the continuation of the contract will become unreasonable. Even contracts that cannot be terminated by contract or under the Insurance Contract Act (e.g. Rürup or the seizure-protected pension scheme for self-employed persons) can be terminated without notice in the event of an economic emergency on the part of the policyholder, with a claim to the surrender value.
No warning time for many contracts
Many insured persons will not have a warning period if the legislator deletes the valuation reserves. With a monthly notice period and careful observation of the legislation, it cannot be ruled out that, in the case of monthly payment methods, it may still be possible to give notice of termination in good time within a one-month period and collect the surrender value including valuation reserves before the law takes effect. However, in the case of an annual payment method – even in the case of half-yearly or quarterly payments – monthly notice of termination is not at all permitted under the contract – in many cases there is therefore no sufficient period of notice before the change in the law takes effect. Then the next termination date in 2013 – if not already over – will probably be the last to avoid a high – more or less probable depending on the legislation – loss.
Further deletions at the end of 2013?
In addition to participation and valuation reserves, many insurance policies declare in some cases high terminal bonuses – up to more than 10% of total benefits. However, this declaration can be changed annually – i.e. again on 01.01.2014 over the end of the year – until the final surpluses are completely eliminated. Some insurers have already cancelled the terminal bonuses in policies with a 4 % guaranteed interest rate at the beginning of 2013, either completely or for the most part without warning – others may follow from the beginning of 2014.
So here too, there is the threat of a significant loss – and here, too, termination with effect in 2013 for contracts that would expire in the next few years anyway can often still save a large part of the final surplus from possible cancellation. However, here too, a more detailed examination should be carried out before a decision is taken on termination or continuation.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
