Profit sharing

A surplus participation is a participation of the policyholder in surpluses from the insurance business of the insurer, usually agreed in long-term personal insurance contracts such as life and health insurance . In Germany, profit sharing also includes a right to participate in the valuation reserves .

By way of profit sharing , the policyholders, particularly in life and (private) health insurance, participate in the commercial law surpluses generated by the insurer or, in some countries, overall increases in value regardless of the commercial law valuation.

background

Because of the need to obtain lifelong insurance cover even if the state of health has deteriorated, many life and health insurance policies are taken out with very long terms, some of which span decades. For this, the insurer promises insurance coverage at the price agreed upon conclusion, regardless of the health development of the insured person. If health deteriorates, the insured person is bound to this insurer at the same time, since no other insurer would take him on for the same price; if the state of health is very bad, contributions that are no longer affordable would have to be levied (“insurance of a burning house”). Policyholders therefore expect the insurer to commit to certain minimum standards for the term, in particular that the price-performance ratio never exceeds a certain level. These are the "guaranteed premiums" and "guaranteed benefits" to which the insurer is bound for the entire term of the contract, just as changes in mortality, inflation, the capital markets, etc. change their own "production costs". Since the development for 20 or even up to 80 or even 100 years cannot be foreseen in any way, insurers only offer such guarantees at a very low level that is always achievable from a human perspective. This is not only an economic self-interest of the insurer, but also a socio-political imperative. In the event of the insurer going bankrupt, insured persons with impaired health would no longer receive the insurance coverage that is particularly necessary in this situation. Therefore, bankruptcies of life and health insurers are considered socially unacceptable and these companies are strictly supervised by the state around the world. According to this, the insurers may only issue guarantees within certain limits due to legal limits.

As a result of this need to levy certain premiums very carefully compared to the actual guaranteed benefits, in most years, with the exception of a very few particularly unfavorable ones, the insurer will almost inevitably have a surplus resulting from this caution. Since this surplus is largely not due to the business performance of the insurer, but rather due to the design, it has been reimbursed to a certain extent to the policyholder as a "premium refund" practically since the beginning of life insurance, mainly for reasons of competition. This first happened in 1768; Just six years after the founding of the first life insurer working on a mathematical / statistical basis, the surpluses were so high that a distribution to the policyholders was necessary.

Since this surplus is partly caused by the state regulations for the careful granting of guarantees, many states have stipulated requirements for profit sharing. Germany is one of the countries with the strictest regulations in this regard. Due to the requirements of the BVerfG in 2005, which went even further than before, the statutory structure was perfected from 2008 onwards as part of the VVG reform. In many other countries, the reimbursement of surpluses is more or less unregulated and thus largely or even completely at the discretion of the insurer, who then undertakes this on the basis of competition considerations. In Austria and Switzerland, the supervisory authorities have the right to intervene, but the insurers' legal obligations are not very specific. As in most countries, they rely on competition among insurers and the authority of consumers. In Switzerland, insurers must have the actual profit sharing approved by the competent supervisory authority, the Federal Office for Private Insurance . The basis of the profit sharing for life insurance contracts concluded before July 29, 1994 in Germany are also subject to approval by the respective German supervisory authority.

The average profit participation for 2019 has remained constant compared to the previous year. German life insurers pay an average of 2.34% p.p. a. If this current interest rate is below the guaranteed interest rate for a contract, the life insurer pays the guaranteed interest rate (up to 4.00%).

Legal basis for entitlement to profit sharing

The legal basis for the profit sharing is the insurance contract . However, in this regard, insurance contracts in Germany must meet the minimum requirements specified in contract law , in particular insurance contract law. According to this, every life insurance contract concluded from 2008 onwards receives an entitlement to profit sharing through Section 153 VVG , unless this is expressly and transparently excluded in the insurance contract. Regulations on profit sharing in health insurance can not be found in the VVG.

Section 153 VVG lays down minimum requirements for policyholders' entitlement to profit sharing, which contractually cannot deviate to their disadvantage. According to this, the policyholders areto participate appropriately in the surplusnormally determined in the annual financial statements under commercial law , or, if otherwise agreed, in any event. In addition, at the latest at the end of the contract, the policyholders receive at least half of the share attributable to their contract in the increases in the value of the insurer's assets not yet recorded in the annual financial statements, unless this is contrary to supervisory regulations ( participation in the valuation reserves ).

Procedure of participation in profits

In Germany, Austria and Switzerland, the profit sharing basically consists of the following individual steps:

• First of all, the surplus in which the policyholders participate must be determined every year. The basis for this determination is usually the annual financial statements under commercial law .
• Then it is determined which part of the surplus should benefit the policyholders and which part remains with the insurer.
• Every year it is determined which amount of the policyholder's share of the surpluses of the year just ended and surpluses not yet distributed from previous years is to be distributed to the policyholder in the following year and which is to be set aside or to remain.
• The relative share of this amount to be distributed based on the cause by the individual policyholder is determined and allocated to the policyholder.
• The amount allocated to the individual policyholder will be paid to him in the form contractually agreed with him.

Statutory regulations (Germany) for the distribution of the surplus between policyholders and insurers

According to Section 56a of the Insurance Supervision Act (VAG), the management board determines the distribution of the surplus between policyholders and insurers. The responsible actuary makes a proposal for this. Here, the contractual agreements must primarily be taken into account, which must not lag behind the requirements of the VVG. In the allocation, both the securing of the appropriate and causal-oriented surplus participation as well as the need for equity capital to secure the permanent fulfillment of the contracts and the right of the shareholders to profit are to be considered. With regard to the latter, Section 56a VAG stipulates that shareholders must retain a profit of at least 4% of the share capital if amounts are allocated to the policyholders during the allocation to which they have no legal entitlement. Securing the equity required according to § 53c VAG takes precedence over the right to profit sharing according to § 153 VVG.

Surplus participation is subject to strict state supervision, not least because of its complexity and collective character. In order to enable the supervisory authority to intervene effectively despite the strict administrative restrictions, the supervisory law describes specific intervention circumstances for the distribution of the surplus. The § 81c (life insurance) and § 81d (health insurance) VAG regulate the minimum regulatory requirements for this division. From an administrative law perspective, this describes when the insurance supervisory authority or, if applicable, a competent state supervisory authority may intervene due to an administrative act that is no longer acceptable to the interests of policyholders. According to the statutory provisions, this is the case if the policyholders do not receive an appropriate share in the insurer's surplus. The ordinances issued on the basis of these paragraphs specify this administrative requirement. If the policyholders do not participate adequately in the surplus, then there is an irregularity and the supervisory authority can take appropriate measures even in the event of simple inappropriateness. Otherwise the supervisory authority can only act under much stricter conditions according to § 81 VAG. These regulations only apply to insurers based in Germany. The contracts offered in Germany by insurers based in other EU countries due to the free internal market for financial services are subject to the regulations of the country of domicile, insofar as those for profit sharing have been issued. The EU has not provided any protective regulations in this regard, Germany may only provide these regulations for insurers based in Germany.

Life insurance

According to § 81c VAG, the supervisory authority can intervene if the profit sharing is no longer appropriate; Since April 4, 2008, appropriateness has been specified in the Minimum Allocation Ordinance.

Health insurance

Here, too, the insured must participate appropriately in the capital, risk and cost results. Details are regulated by the ordinance on the determination and distribution of excess interest and surplus in health insurance (surplus ordinance - ÜbschV). It was issued on the basis of section 12c (1) sentence 1 no. 3 and section 81d (3) sentence 1 VAG.

According to § 12a , 90% of the capital result is to be credited to the customer as follows: The part of the aging reserve resulting from premium surcharges according to § 12 para. 4a VAG is credited directly to the AR ( § 12a para. 2 VAG). Of the remaining amount, 50% + (A-2000) * 2% are allocated to AR, where A is the year of the start of the respective fiscal year. Example: 76% of the AR must be credited for a financial year that runs from January 1, 2013 to December 31, 2013. The remainder is allocated to the non-performance-related provision for premium refunds . For all fiscal years beginning on January 1, 2026, 100% of the AR must be credited.

The risk and cost results are combined with the remaining 10% of the excess interest result. Of this, 80% go to the performance-related provision for premium refunds, the rest is shown as annual surplus. (§4 ÜbschV)

Decision about distribution or replacement

The policyholder's share of a year's surplus does not have to be paid out directly and irrevocably. The insurer can set aside a part first (according to commercial law, these set-back amounts are shown in the provision for premium refunds (RfB)) and later decide on a distribution. It decides annually whether the amounts that have already been set aside should be paid out or whether they should remain in reserve. The saved amounts are already legally determined for future distribution to policyholders. This means that the allocation to the policyholder and the actual occurrence of the insurer's surpluses are separated in time.

Distributions in the form of direct credit or through the use of deposited amounts

From the insurer's point of view, the amounts earmarked for the distribution

• can be distributed directly and allocated to individual policyholders ( direct credit ) without having to be put aside beforehand. Under commercial law, these distributions are charged directly to the financial year of the distribution and are offset against the profit sharing for that year.
• be withdrawn from the amounts deposited. This withdrawal is not an expense under commercial law, as the expense for profit sharing was already taken into account when the amounts were put aside.

Amounts deposited

By saving amounts, the insurer can compensate for fluctuations in the profit participation, because a reliable and predictable development of the insurance is of particular importance in connection with old-age provision. An additional important effect is that, in very special emergencies, the amounts saved may also be used to cover losses, with the approval of the supervisory authority. Therefore, the saved amounts also apply like equity and the insurer therefore has to raise less money on the capital markets as security capital. Since this money would have high interest rates in line with the requirements of the capital markets, it would be much cheaper for policyholders to temporarily forego the distribution of amounts. However, this only applies to amounts for which the insurer has not yet made an irrevocable disposal. The amount of the deposited amounts, for which the insurer has not yet made a regulation on the intended allocation to individual policyholders, is limited by the Minimum Allocation Ordinance .

Determination of the allocation for the individual policyholder

Excess declaration

In life insurance, the board of directors decides on the proposal of the responsible actuary, as a rule, the amount of the awards for the following year. This determination is called the surplus declaration . If the distribution is to be withdrawn from the deposited amounts, this declaration must be made for tax reasons before the end of the financial year prior to allocation. Otherwise the RfB may not be recognized for tax purposes. There are no time restrictions for declaring the direct credit.

The allocations to the individual policyholders are usually determined in the form of profit participation rates in relation to certain assessment bases that can be determined for each contract. The respective assessment bases are specified for the old portfolio in the business plan. In the new portfolio , they are usually agreed in the insurance contracts.

Example of a surplus declaration for a life insurance (other assessment bases can also be agreed and the rates are only examples, they differ from insurer to insurer and from year to year):

• 1.5% of the reserve capital (whereby it is contractually stipulated how this reserve capital is to be determined, e.g. that determined according to the calculation basis of the premium calculation on the anniversary before the allocation)
• 20% of the risk contribution
• 2% of the contribution and
• 0.1% of the sum insured

The assessment bases are variables that describe the respective policyholder's share in causing the excess. For example, the coverage capital of a contract in relation to the coverage capital of all contracts reflects the formal share of the insurer's capital investments and thus also of the capital income. It is therefore appropriate to distribute the surplus from the investment income according to this key.

A certain amount is calculated from these bonus rates for each insurance contract, which is then allocated to it, usually on the anniversary of the conclusion of the contract. The rates are chosen in such a way that the amount determined by the board for distribution results over the entire portfolio.

In the notes to the annual financial statements, an overview of the profit share rates is to be given for the information of the balance sheet reader, since the distributions of the following year weaken the financial strength of the insurer. In addition, this note is used to publish the surplus declaration and thus also make it legally binding. The declaration can also be made known in another way - for example via the Internet  .

Final profit participation

The allocation can be irrevocable or revocable in the surplus declaration. In the event of an irrevocable allocation, the amount from allocation is not only part of the reason, but also the amount according to certain claims of the policyholder from the contract, as well as all services agreed upon when the contract was concluded. In the event of a revocable allocation, the insurer can later reduce this allocation again under certain circumstances, in particular if losses have occurred in accordance with the policyholder's share in this. Revocably allocated amounts apply as well as saved but not yet allocated amounts as security capital of the insurer and are also shown in the RfB under commercial law.

As a result of the revocable allocation, surpluses are allocated to individual policyholders according to the circumstances near the occurrence of the surpluses, i.e. take into account how the policyholders contributed to the creation of surpluses at this point in time. If one were to simply put these amounts aside, it would no longer be possible to determine later to what extent which policyholder contributed to the creation of the surplus. On the other hand, the amounts should continue to serve as security, i.e. they should only be allocated to policyholders subject to compensation for subsequent losses.

Revocably allocated amounts are usually referred to as final profit participation shares, since they are originally irrevocably allocated to the policyholder only at the end of the contract (“at the end”).

The profit declaration determines when the final profit participation shares are finally irrevocably allocated to the policyholder. This is regularly the case at the scheduled end of the contract (expiry). In some cases they can also be given at certain times in advance, e.g. B. at the end of the postponement period, become irrevocable. Even with other contract terminations, e.g. B. through death or repurchase , the final profit participation shares become irrevocable. The amount of the irrevocably allocated amount can be determined differently in the surplus declaration depending on the point in time. The earlier the irrevocable allotment is made, the lower the amount usually is.

The death bonus is a special form of the terminal bonus: In the event of death, an additional payment is made in addition to the sum insured. In this way, excess risk in particular is specifically distributed.

According to commercial law, the final bonus shares are shown in a partial provision of the RfB (final bonus fund) with the value determined by commercial law before the irrevocable allocation. This also shows the difference in commercial law between the amounts generally reserved in the RfB ( free RfB ) and the amounts already allocated to individual policyholders, albeit revocable.

Furthermore, upon termination of the contract, the policyholders are to be granted an additional final profit share based on the participation in the valuation reserves, provided that such a claim exists.

Use of surplus in life insurance

In life insurance there are various contractually agreed options for how the policyholder can receive irrevocably allocated profit shares. Final profit participation components, which are only irrevocably allocated to the policyholder at the end of the contract, are always paid out to the policyholder in cash together with the remaining insurance benefits or the remaining surrender value. If they become irrevocable beforehand, they can be used just like the regular irrevocable profit shares, unless otherwise agreed.

The main ways in which the grants are used in life insurance are:

• Increase in guaranteed benefits (bonus system)
• interest-bearing accumulation of bonus shares
• Offsetting with contributions
• "Constant" pension surcharge (with ongoing pension insurance)

There are also mixed forms (e.g. of a pension supplement and bonus) as well as less common forms of excess use, such as cash distribution or shortening the contract period.

Bonus system

With the bonus system, the guaranteed insurance benefit is increased. The additional benefit usually has the same range of benefits as the basic insurance.

The contractual reserve capital is increased by the present value of the additional premium-free insurance benefit. Technically, this increase takes the form of a one-off premium, which, however, does not have to be paid by the policyholder, but is withdrawn from the RfB, provided it is not directly charged to the annual result (direct credit).

Interest-bearing accumulation

The surpluses are credited to the insured person in a special account, which itself bears annual interest based on the accumulated interest. The interest-bearing profit shares accumulated are shown in the liability item liabilities from direct insurance business with policyholders in the annual financial statements at their nominal value .

Compared to the bonus system, the interest-bearing accumulation leads to a higher payment when the contract expires, while higher death benefits are due with the bonus system.

Contribution settlement

Here, the allocation of surplus is offset against the contribution payment, i.e. the contributor pays only part of the contribution due , the remainder is paid out of the surplus participation. In rare cases, the profit shares are distributed in cash independently of the contribution payment. This cash distribution only occurs regularly for awards at the end of the contract.

Pension supplement

While the bonus system in the case of a pension insurance system for drawing a pension means that the pension amount increases annually, these increasing pension amounts are converted into an equivalent (i.e. cash value equivalent) amount of a constant pension increase.

This means that higher pensions are paid here from the start. However, this is reversed later. Since the bonus system guarantees the pension increase for the entire term, the actuarial reserve is increased by the present value of the bonus pension. With the pension supplement, the incremental pensions are only guaranteed for one year. Although a higher payment is due for the annuity supplement at the beginning, the effort involved in the bonus system is higher at the beginning. Since this takes on an obligation for the future similar to a final profit share, the difference is to be tied under commercial law similar to the final profit share fund within the provision for premium refunds .

This form of surplus use is problematic if the surplus rates have to be reduced. While there is then a lower pension increase with the bonus system, the amount paid out is reduced compared to the previous year for the pension surcharge.

Use of surplus in health insurance

The main forms of excess use in health insurance are:

• Mitigation of premium adjustments
• Reduced contributions in old age
• cash reimbursement of premiums if no benefits are paid

Mitigation of premium adjustments

Health insurance companies have to review their contributions at least once a year and adjust them if necessary. As a rule, the premium adjustments lead to an increase in the premium. This adjustment can be limited by using funds from the profit sharing. The provision for aging is increased by the amount that is required to finance the part of the premium increase that is not passed on to the insured in the long term.

Reduced contributions in old age

Since premium adjustments can be particularly strong in old age, funds are specifically set aside to enable limits for those over 65. Among other things, the statutory premium of 10% contributes to this.

Cash premium refund

Here, insured persons who did not make use of any insurance benefits in the previous year are paid parts of the premium, e.g. B. three monthly contributions, reimbursed (e.g. as a transfer or set-off). The insurance company is also trying to reduce the regulatory costs by avoiding trivial payments. Because only when the insurance benefits are higher than the premium refund is it worthwhile for the policyholder to submit the collected bills.

Individual evidence

1. ↑ Henning Kühl: Profit sharing of all life insurances for 2019. In: Policen Direkt Magazin. Policen Direkt GmbH, December 4, 2018, accessed on July 1, 2019 . 
2. ↑ Surplus Ordinance - ÜbschV , repealed by Art. 1 No. 3 V. v. December 16, 2015 ( BGBl. I p. 2345 )

See also

• Provision for premium refunds

Please note the information on legal issues!