Upon publication in the Federal Law Gazette, the package of regulations issued by the Austrian Financial Market Authority (FMA) and aimed at sustainably securing private life assurance within an environment of consistently low interest rates became legally effective. The measures, which already take into account the requirements resulting from the migration to the new “Solvency II” supervisory regime as of 1 January 2016, respond to the economic challenges arising for designing products. “Our package of measures will have a preventive effect, ensuring that the benefits guaranteed for private life assurance policies can in any case be provided in future, even if interest rates continue to stay at a low level. The package makes a major contribution to the stability of insurance undertakings while sending out a strong signal that private life assurance is a secure investment and pension product. It additionally ensures that insurance customers receive clear, transparent and comparable information on the prospects and risks such products entail,” FMA Executive Directors Helmut Ettl and Klaus Kumpfmüller emphasised.
The main measures defined in the FMA package include:
- The maximum guaranteed rate allowed for new contracts will decrease from 1.5% to 1.0% as of 1 January 2016. Rules are additionally defined that spell out how the rate is to be applied.
- To secure the guaranteed interest stipulated in existing contracts, the additional interest provision is required to be increased and built up more quickly – depending on changes in the market environment. Should interest rates continue to stay at the current low level, this would result in additional interest provisions increasing to almost € 1.5 billion by 2021. Allocation of an additional € 180 million to such provisions is consequently required for the 2015 financial year, as opposed to a minimum of € 70 million based on the previous formula.
- Information requirements applying to life assurance have been expanded to enhance transparency for policyholders.
Maximum interest rate decreased
In response to the environment of consistently low interest rates, the FMA already decreased the maximum interest rate for calculating technical provisions in the sectors of life assurance and state-sponsored retirement provision, from 1.75% to 1.5% as of 1 January 2015, with a further reduction to 1.0% scheduled for 1 January 2016. The reduction is designed to ensure that the benefits guaranteed by newly concluded insurance contracts can be provided in the long term. The measure will not affect any bonuses.
The current maximum interest rate only applies to new contracts that will be concluded from that date on. In the case of existing life assurance contracts, the interest rate guaranteed upon signing will continue to apply.
The actual level of guaranteed interest must nevertheless not simply be aligned with the maximum interest rate permitted but has to be determined under consideration of the individual product features in each case as well as the prudent person rule.
Increase of the additional interest provision and shortened period for building up assets
A continuously low interest rate level can present insurance undertakings with difficulties in consistently achieving on the capital markets an assumed interest rate that is high when compared with the predominant economic situation. The portfolios of some insurance undertakings still include valid life assurance contracts with a guaranteed rate of 4%.
The FMA has consequently recognised a need to increase the volume of additional interest provision that has been required to be established since 2013 while at the same time shortening the period for achieving the full volume.
Assets are to be allocated to the additional interest provision primarily from own funds. To ensure that a sufficient volume is established, a limited amount can be deducted when determining the assessment base for the minimum share in profits; this amount is subsequently credited in full to policyholders, in the form of a bonus or as part of providing the guaranteed benefits, when the additional interest provision is released.
More detailed framework conditions for product design
The new supervisory rules entering into force as of 1 January 2016 should also accommodate new products adapted to reflect the current low-interest environment.
Especially during periods of low interest rates and in the face of volatile capital markets, insurance undertakings should be enabled to offer insurance products equipped with more effective mechanisms to compensate varying levels of investment income without comprising policyholders’ entitlement to an appropriate level of profit-sharing. The new Profit-sharing Regulation will include requirements applying to the portion of terminal bonus included in the provision for participation in profits.
In order to ensure sufficient ongoing allocations of profits to cover new products as well, the percentage of terminal bonus in relation to total participation in profits will be limited.
The new capital regime (Solvency II) also encourages changes in product design, focusing more strongly on the long-term nature of life assurance transactions and on guarantees than the previous regime. For this reason it is important for the regulatory framework to also include products with new forms of guarantees.
Enhanced transparency and clarity for customers
The FMA has also issued a Regulation on Information Requirements, which defines in detail the information to be presented clearly and transparently, especially prior to and upon signing a life assurance contract. To facilitate comparisons of different insurance products, uniform features will be required for the models used to calculate the benefits provided by insurers in relation to the premiums paid by policyholders. Other items include the consequences of premature termination and of exemption from premiums, which must be presented in clear terms. Another focus is on disclosure of insurance costs, allowing the customer to recognise at a glance the share of premium paid that is actually available for investment. A standardised table has been specified for this case as well, which facilitates comparisons of various insurance products. As of 2016 insurance undertakings are also obligated to disclose the effective total interest and the effective guaranteed rate.
“For the FMA it is priority concern that consumers are provided with fair, transparent and comparable information. With the information package for life assurance we are making a major contribution to protecting consumers,” Ettl and Kumpfmüller stated in summary.
Journalists may address further enquiries to:
Klaus Grubelnik (FMA Media Spokesperson)
+43/(0)676/882 49 516