Reduction in yield

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The key figure Reduction in Yield , or RIY for short (translated for example, yield reduction or effective costs ), shows the loss due to insurance and fund-related costs in the insurance sector . The loss of return due to the closing costs and the running costs including capital investment costs are combined in one key figure. According to the New Conduct of Business Sourcebook of the FSA ( Financial Services Authority ), the specification of the reduction in yield as part of the cost structure information is already mandatory in Great Britain , in Germany, according to the Insurance Contract Act, only the costs of the insurance, but not the costs of the deposited funds or Investments are shown. A few German companies already include the capital investment costs within Monte Carlo simulations in comparisons. This was also incorporated into the non-binding recommendations of the GDV from the beginning of 2011. The following representation is recommended here:

Total value development without costs = a%
- effective costs = x%
= Total value development after costs = ax%

background

The special feature of the Reduction in Yield ratio is that it offers an efficient and detailed basis for decision-making with regard to the return and thus also the risk choice of the investment, because only with full knowledge of all the costs incurred in the investment can the future policyholder estimate how attractive a plant really is. For example, in Germany, insurers are asked to indicate acquisition costs, ongoing contract costs and other costs before signing a contract.

  • The acquisition costs as a uniform total amount in euros (according to § 2 Paragraph 1 No. 1, 1st half-sentence. 1 alternative, § 2 Paragraph 2 Sentence 1 VVG InfoV (Insurance Contract Law Information Duty Ordinance)). This includes all one-off costs such as commissions, contract documentation, risk assessment costs, etc.
  • The running costs as a proportion of the annual premium in euros, taking into account the term of the contract. So these are all costs incurred in the administration of the contract (according to § 2 para. 1 no. 1, 2nd half-sentence, 2nd alternative, § 2 para. 2 sentence 1 VVG - InfoV).
  • Other costs also as a proportion of the annual premium in euros (in accordance with Section 2 (1) No. 2, Section 2 (2) sentence 1 VVG - InfoV, flat-rate contract change costs are usually listed here).

The problem here - especially under German law - are capital investment costs that are not regulated separately in the VVG, InfoV and whose reporting regulations are controversial. Thus capital investment costs are often not shown in German life insurance contracts. The Reduction in Yield key figure does exactly that, because all costs are shown there (acquisition, ongoing and investment costs) and shown in the form of their effect on the return as a deduction from the return. This is particularly relevant for unit-linked insurance products, since capital investment costs can make up a large part of the costs here.

However, two disadvantages of the reduction in yield ratio should always be considered.

  1. Reduction in Yield always only reflects a specific time (usually after 10 years), which of course can lead to policyholders using a key figure as a yardstick that does not correspond to their investment horizon. However, this problem only arises if the policyholder does not calculate his reduction in yield figure himself, but accesses an Effect of Charges table (see below), for example.
  2. Reduction in Yield is based on an illustrated maturity benefit, which is calculated with a sample return. The problem here, of course, is that the return is hypothetical and can therefore arouse false expectations in the policyholder.

Great Britain: the legal application of the reduction in yield

In Great Britain, the reduction in yield key figure was introduced in 1997 as part of the cost transparency and the increase in competition and is currently regulated in the New Conduct of Business Sourcebook 13.4.1 R of the FSA. Annex 3 to 13.4.1 R. 1.1 not only stipulates the specification of the reduction in yield, but also a so-called Effect of Charges Table and a description of costs. In the Effect of Charges Table, the burdens of costs on the return are shown for the first five years and then at five-year intervals. Exceptions with regard to products that are not subject to this statutory regulation can be found in Annex 3 to 13.4.1 R. 1.3.

Fund policies and guarantee models

Another factor that makes fund policies and stored projections difficult to compare is the different guarantee models. Fear of market downturns makes investors gravitate towards products that feature guarantees. There are a variety of ways to provide these guarantees. The behavior of these models on the market can be represented by a Monte Carlo simulation . Here 10,000 random market and interest rate trends are simulated and it is considered how the guarantee products behave. In contrast to a static extrapolation with a fixed cost rate and fixed rate of return, a statement can be made here about how the costs and the rate of return could actually develop. These simulations relate e.g. B. costs for reallocations due to the guarantee of the guarantee and allow a more transparent comparison of fund products.

A guarantee always depends on the guarantor. If this is no longer applicable, a guarantee may also be void. A fund approved for sale in Germany or Luxembourg, as well as a German or Luxembourg insurance company or bank, must show the investor assets in the special fund. In other words, if the issuer becomes insolvent, the investor's assets will not be used. If the guarantor ceases to exist, the investor's assets remain invested; there may be delays in access. There are many different regulations around the world; it should be checked in each individual case who gives the guarantee and how the investor's assets are reported.

Web links

literature

  • CRA International: Benefits of regulation: Effect of Charges Table and Reduction in Yield March 2008
  • Mark Ortmann: Cost comparison of pension products Nomos Verlagsgesellschaft, 2010
  • Schwintowski / Brömmelmeyer: Practical commentary on insurance contract law ZAP Verlag, 2008