Numerous life insurance customers in Germany will lose thousands in payouts because of an amendment to a law that allows insurers to cancel certain distributions. It’s particularly bad news for those customers with more than one insurance policy.
Although the law was adopted last year, its true consequences are only becoming apparent today. Instead of the expected cuts in payouts to a small number of financially weak insurers, the industry is in the process of cancelling these special distributions across the board.
Not only small insurance companies but also several major providers including R+V, AachenMünchener and Generali, as well as Debeka, Cosmos and Ergo have announced plans to reduce distributions to their customers, according to the business magazine Wirtschaftswoche.
The changes stem from the life insurance reform act, known by its German acronym LVRG, which was adopted last August. It permits insurers to refrain from distributing valuation reserves of fixed-interest securities.
Under the new law, insurance customers who cancel their policies or whose policies expire hold a smaller stake in these valuation reserves – across the entire industry.
Valuation reserves on bonds make up a large share of insurance companies’ investments. The value of these securities increases when interest rates are low. But these book profits disappear again if the securities are held until maturity, as is customary with insurance companies. For this reason, valuation reserves can be more or less abundant, depending on when a policy ends.
But under the new law, insurance customers who cancel their policies or whose policies expire hold a smaller stake in these valuation reserves – across the entire industry.
This is determined by the so-called hedging requirement, or the amount needed to secure the financing of the stipulated guarantees, even during a prolonged period of low interest rates. The share in the valuation reserves of fixed-interest securities is limited to the portion of the valuation reserves that exceeds this hedging requirement.
“In light of the current interest situation, the rule on hedging requirements for fixed-interest securities is likely to apply to most companies,” said a spokesman for the German Insurance Association, or GDV.
“The law was designed in such a way that it affects all companies with high existing guarantees in their portfolios.”
Billions are at stake. In late 2013, it was reported that valuation reserves were worth a total of €57.8 billion ($66.9 billion) – and amount that is likely to have increased since then.
Customers whose policies expired shortly after last August were left out in the cold. Their share of the valuation reserves was smaller than they had initially expected, by several thousand euros in some cases.
Those whose policies expire in the distant future, however, should benefit, as more assets are expected to remain in the valuation reserve pot.
“The idea that the LVRG would only affect financially weak insurers when it comes to valuation reserves was a misunderstanding from the start,” said Lars Heermann of Assekurata, a rating agency that specializes in insurance companies. “The LVRG was designed in such a way that it affects all companies with high existing guarantees in their portfolios.”
Axel Kleinlein, president of an association representing the interests of insurance-policy holders, is critical of the legal situation. “We had expected that the law would lead to a comprehensive reduction in benefits,” he said.
But that, he added, doesn’t mean life insurers are in trouble. “The industry is still in good shape,” he said. “The law was a political concession.”
Kerstin Leitel covers the banks and insurance companies from the Munich bureau. To contact the author: email@example.com