Members of the Bundestag, the German lower house of parliament, are deliberating a package of reforms to life insurance regulation that would, among other things, increase the amount of capital insurers must allocate to policyholders.

 

The proposals would ratchet up the amount of so-called underwriting risk result capital released to policyholders from 75% to 90%. The underwriting risk result is the surplus accrued from improvements in actual biometric risks, such as longevity and mortality risk, over the insurer's initial actuarial calculations. This result is calculated and shared for each life insurance product line sold by German insurers. Fitch Ratings estimates the risk result equates to €6 billion gross profit for the life industry every year.

 

To balance this new requirement, the reforms will allow firms to offset negative investment performance with positive underwriting risk result. However this concession does not seem to go far enough to cancel out the repercussions of the increase in participation.

 

A spokesperson for Ergo insurance group says the planned increase "will significantly narrow the scope for creating equity capital under Solvency II". This is because the proportion of risk result attributable to shareholders will decrease by an amount commensurate with the increase to policyholders (by approximately €0.9 billion according to Fitch's estimates), depriving firms of loss absorbing equity capital, counted as Tier 1 capital under Solvency II.

 

The German Insurance Association (GDV) issued a lengthy commentary on the reform package, stating that the current 75% participation reflects the need for insurers to maintain a sufficient risk buffer for times of stress. The increase to 90%, says the GDV, will slightly improve the overall level of performance for the customer at the expense of part of this buffer. During a period of low interest rates, such a move would prove counterproductive, says the association.

 

Other measures proposed in the reforms include abolishing a requirement in place since 2008 for insurers to distribute 50% of the unrealised gains on their fixed income investments to policyholders when their contracts expire or when they choose to surrender. Firms have lobbied hard for change to this requirement, claiming it is unfair because most unrealised gains are attributable to the growth in value of fixed income holdings caused by current low interest rates and will evaporate as rates rise.

 

Another measure gives BaFin, the German financial regulator, the authority to freeze dividend payouts to shareholders unless net earnings exceed a predefined "security buffer" reflecting an insurer's ability to honour policyholder commitments.

 

The reforms are scheduled to be passed by the Bundestag at the in July and become effective from January 1 2015.

 

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