Participation in the valuation reserves
The participation in the valuation reserves is part of the surplus participation in life insurance in Germany. The policyholder must upon contract termination of the costs incurred during the contract period valuation reserves of investments of the insurer are involved.
The relevant valuation reserves are the difference between the fair value of investments (current value) and the so-called book values shown in the insurer's balance sheet according to the lower of cost or market principle (purchase price - possibly reduced by depreciation). According to Section 153 of the Insurance Contract Act (VVG) , policyholders in Germany receive at least half of the share of the valuation reserves from the insurer's investments attributable to their contract at the latest at the end of the contract, unless this is contrary to supervisory regulations.
background
The valuation reserves in the balance sheet of an insurer serve the security of life insurance contracts. They help to balance out market fluctuations on the capital market and to provide the services that are promised. Valuation reserves are only realized through the sale (sale) of capital investments or through the passage of time in the case of fixed-income securities .
Before 2008, the profit sharing consisted only of an entitlement to shares in the profit recorded in the income statement . The increase in value of the investments that does not appear in the balance sheet, i.e. the valuation reserves, is only shown in the income statement when it is realized. Until then, this increase in value could not be credited to the policyholders who had contributed to this increase in value. If the contract of these policyholders ended before the increase in value was realized, the policyholders received no share in the increase in value caused by them. The increase in value thus contributed to the participation of other policyholders who had not caused it. However, the insurer's shareholders were not favored by this error in the process of distributing the increase in value, as this error only affects the fairness of distribution between the policyholders.
In 2005 , the Federal Constitutional Court took this unavoidable consequence of referring to the profit sharing to the income statement to instruct the legislature to change the rules on profit sharing. As part of the reform of the VVG 2008, the profit sharing was redefined as a participation in the surplus, i.e. the surplus shown in the income statement, and as a participation in the valuation reserves, i.e. the increase in value not shown in the income statement. This means that the policyholder's share of the increase in value caused by them is better assigned to the policyholder who caused it. This increases the fairness of distribution between the policyholders. The insurer's share of the generated increase in value, which is always based only on the surplus shown in the income statement, is not affected.
Legal bases in Germany
According to the Insurance Contract Act ( VVG ), which was reformed in 2007 and came into force on January 1, 2008, policyholders within the meaning of ( Section 153 ) Paragraph 3 Clause 3 VVG are to participate in the valuation reserves in addition to participation in the surpluses, unless this is due to regulatory requirements Preclude regulations. The statutory entitlement to profit sharing described in this way cannot be waived in parts, but only as a whole (total exclusion). For this purpose, however, express declarations in the AVB are necessary; Merely not mentioning the profit sharing in the contract does not suffice to claim that they can be waived. Typical examples of contracts in which profit sharing is often excluded entirely are term life insurance with a very short term or unit-linked life insurance .
Investments are the assets to be reported in accordance with Section C of Form 1 of the Insurance Company Accounting Ordinance. The amount of the valuation reserves is determined according to the fair value to be determined under commercial law and corresponds to the valuation reserves to be specified in the appendix according to Section 54 Insurance Company Accounting Ordinance. Policyholders only participate in the valuation reserves of the investments, in the success of which they also participate within the framework of the participation in the surplus. The valuation reserves of the investments are the balance of all valuation reserves of the investments and all hidden burdens of the investments. Insurance customers are only involved in overall positive valuation reserves, but not if there are hidden burdens overall.
The participation in the valuation reserves prescribed by civil law must not result in the insurer no longer being able to meet its regulatory obligations to ensure that the insurance contracts can be permanently fulfilled. In order to increase legal certainty, the general limitation of participation in the valuation reserves originally provided for in the VVG in 2014 was further specified. According to this, valuation reserves from fixed-income securities are only included in the calculation of valuation reserves to the extent that they exceed a security requirement in accordance with Section 56a of the Insurance Supervision Act (VAG) . Since the actuarial reserve is not determined at fair value but on the basis of historical interest, it can be below the value that would result if the current capital market situation were taken into account. This difference is known as backup needs. The real increase in value of the insurer, in which the policyholders are to participate, results from the difference between the current values for the investments and for the actuarial reserves for the future obligations from the existing contracts. Therefore, the hidden burden in the actuarial reserves must be deducted when determining the valuation reserves.
Distribution principles
The share of the individual contract in the valuation reserves at the end of the contract is determined using a causal process. According to the legal justification, it is sufficient for the contracts to be appropriately grouped, the amount intended for distribution allocated to a group according to the criteria of the cause of the surplus, and the arithmetical share of the group amount allocated to the individual contract. Allocation is only made to contracts that provide for capital formation. At the latest at the end of the contract, at least 50% of the valuation reserves are allocated, whereby the last calculation of the valuation reserves by the insurer is decisive for the amount. According to Section 153 (4) VVG, the end of the premium payment and savings phase is the same as a contract termination for pension insurance .
Example for determining valuation reserves
A share should serve as an example for determining valuation reserves. It is bought for € 50 and has increased to € 60 on the valuation date. According to the lower of cost or market principle, the asset is to be reported at the purchase price of € 50 (book value). The difference between book value and market value is +10 € and represents the valuation reserve of the share. All other investments are handled accordingly. On the other hand, if the value falls from € 50 to € 40, the value is -10 € and the share has formed a hidden burden in this amount, because the book value remains unchanged at € 50. The valuation reserves of the investments are ultimately the result of offsetting all hidden reserves with all hidden liabilities.