Life insurance and maximum interest
The maximum interest rate selected has a great impact on the amount of the technical provisions (life/health insurance provision) which must be established to ensure that insurance undertakings will be able to fulfil their obligations arising from life insurance contracts. The Financial Market Authority determines the maximum rate.
Below you will find information about:
A life insurance policy pays two kinds of interest:
- guaranteed interest; and
- variable bonuses.
The FMA determined the maximum interest rate permissible when a contract is first concluded in the Maximum Interest Rate Regulation for Insurance Undertakings (VU-HZV; Versicherungsunternehmen-Höchstzinssatzverordnung).
To calculate the maximum interest rate, average government bond yields weighted by outstanding amounts (UDRB) covering ten years are used, representing the average yields of government bonds traded on the Vienna Stock Exchange. These UDRB superseded the secondary market yields for government bonds (SMR) on 1 April 2015. A safety margin of 40% is deducted from the average nominal rate of interest calculated on this basis. Consequently, the maximum rate must not exceed 60 per cent of the average yields gained with government bonds.
If the result of the FMA’s calculation is noticeably lower than the current maximum interest rate, the FMA will initiate proceedings to determine whether the rate should be adjusted. The maximum interest rate is then gradually adjusted by one fourth percentage point or multiples. In order to avoid continual adjustments, future developments are forecast and considered when determining the maximum rate.
In response to the environment of consistently low interest rates, the FMA decreased the maximum interest rate for calculating technical provisions in the sectors of life insurance and state-sponsored retirement provision to 0.5% as of 1 January 2017. The reduction is designed to ensure that the benefits guaranteed by new insurance contracts can be provided in the long term.
This does not necessarily entail a reduction in the total return of life insurance contracts, since the total return for the policyholder is made up of minimum interest plus bonuses.
The actual level of guaranteed interest must nevertheless not simply be aligned with the maximum interest rate permitted but be determined considering the individual product features as well as the principle of prudence.
The current maximum interest rate applies to insurance contracts that have been entered into after 31 December 2016 or whose insurance coverage commenced after 31 March 2017. In the case of existing life insurance contracts, the interest rate guaranteed upon signing will continue to apply.
Maximum Interest Rate Regulation for Insurance Undertakings (VU-HZV)
The Oesterreichische Nationalbank (OeNB) publishes the average government bond yields weighted by outstanding amounts (UDRB)