Technical Interest Rate (Rechnungszins)

Concept

The technical interest rate is the actuarial interest rate that a life insurer uses as the basis for calculating premiums and the policy reserve for a contract, and which it guarantees to the policyholder on the capital paid in. It is fixed at contract inception and applies for the entire term of the respective contract, irrespective of the actual subsequent development of capital market interest rates.

Prudence Principle and Regulatory Caps

Because the technical interest rate is guaranteed over the entire contract term, which often spans several decades, many supervisory authorities set a maximum technical interest rate that insurers may not exceed; this cap is regularly adjusted to the current capital market environment and lowered accordingly during periods of low interest rates, in order to limit excessive interest guarantees and the associated risks for insurers.

Relevance for Investment and Interest Guarantees

Once fixed for a contract, the technical interest rate obligates the insurer to generate at least a matching return on the policy reserve over the entire term, regardless of the actual performance of its investments; if the general level of interest rates falls persistently below the technical interest rate promised on older contracts, an interest guarantee risk arises, which insurers address, among other measures, by building up an additional interest reserve.