Life Insurance
Life Insurance: 30 technical terms explained – definition, synonyms and legal basis.
Limited Premium Payment Period
Synonyms: Abgekürzte Beitragszahlungsdauer
With a limited premium payment period, premiums for a life or annuity policy are paid only over part of the total contract term, while coverage applies for the full term.
Concept
Under a limited premium payment period, the policyholder and insurer agree that ongoing premiums for a life or annuity policy will be paid only during part of the total contract term, while coverage and the agreed benefits remain in force for the full contract period.
Pricing Impact
Because the premium payment period is shortened, the premium required to fund the total benefit must be calculated at a correspondingly higher level than for a policy with premiums spread over the full term. The insurer also bears a higher lapse risk, since premiums must build the full policy reserve in a shorter time.
Use Cases
A limited premium payment period is often chosen when policyholders wish to complete their premium obligations before retirement or before an expected reduction in income — for example, an endowment policy with premiums paid until age 60 instead of age 65.
Maturity Benefit
Synonyms: Ablaufleistung, Endowment Benefit
The maturity benefit is the amount an insurer pays out when a life or annuity policy reaches its agreed maturity date and the insured survives.
Concept
The maturity benefit is the amount a life or annuity insurer pays to the policyholder or beneficiary when the insured survives to the contract’s agreed maturity date (the survival benefit).
Composition
The maturity benefit typically consists of the guaranteed sum insured plus the bonus/surplus accumulated over the contract term and, where applicable, a terminal bonus. For unit-linked contracts, it equals the value of the allocated fund units at maturity.
Payout Options
Rather than a single lump-sum payment, many insurers offer alternative payout forms when the maturity benefit falls due, such as conversion into an annuity, installment payments, or continuation as a drawdown plan, which is coordinated with the customer as part of maturity management.
Maturity Management
Synonyms: Ablaufmanagement
Maturity management is the process by which life and annuity insurers inform and advise customers, ahead of policy maturity, about benefit amounts and payout options.
Concept
Maturity management encompasses the full set of processes by which a life or annuity insurer informs customers, in good time before their contract’s maturity date, about the expected maturity benefit and advises them on the available payout options.
Regulatory Significance
Germany’s BaFin attaches particular importance to maturity management, since customers often face far-reaching, sometimes irreversible decisions at maturity (for example, a lump-sum payout versus annuitization). Insurers are required to inform customers about their options clearly, in a timely manner, and in a product-neutral way.
Practical Implementation
As part of maturity management, customers typically receive an information letter several months before maturity detailing the expected maturity benefit and alternatives such as annuitization, installment payments, or contract extension, often supplemented by an offer of personal advice.
Continuation Insurance (Anwartschaftsversicherung)
Synonyms: Anwartschaftsversicherung, Waiver of Underwriting Insurance
Continuation insurance preserves the right to reinstate a suspended policy at a later date at its original terms, without a new health assessment.
Concept
Continuation insurance secures a person’s right to reinstate a policy — such as private health insurance or life insurance — in full and without a new health assessment, after a period of suspension.
Use Cases
Typical use cases include a temporary stay abroad, a fixed-term posting abroad with alternative coverage, or temporary membership in statutory health insurance. During the continuation period, only a reduced premium is usually paid, and full coverage does not apply.
Relevance for Policyholders
Continuation insurance is particularly valuable when a policyholder would otherwise face higher premiums or risk exclusions upon taking out a new policy due to age or health status. It preserves the originally calculated terms and coverage without requiring a new risk assessment.
Education Endowment Insurance
Synonyms: Ausbildungsversicherung
Education endowment insurance is a life insurance policy taken out on a child that provides a lump sum to fund education or university studies.
Concept
Education endowment insurance is a form of endowment life insurance taken out by parents or grandparents for the benefit of a child, designed to provide a lump-sum payout at a defined point in time — usually at the start of vocational training or university studies.
Structure
In addition to its savings component, education endowment insurance frequently includes a premium waiver benefit in the event of the paying parent’s death: if the premium-paying parent dies during the contract term, the policy continues on a premium-free basis and the agreed maturity benefit is still paid out in full.
Significance
Education endowment insurance serves to provide long-term financial security for a child’s education, combining a savings element with risk protection, which distinguishes it from pure bank savings plans.
Dowry Endowment Insurance
Synonyms: Aussteuerversicherung
Dowry endowment insurance is a life insurance policy taken out on a child that pays a lump sum upon the child's marriage or upon reaching a specified age.
Concept
Dowry endowment insurance is a special form of endowment life insurance taken out by parents or grandparents on the life of a child. It provides for a lump-sum payout upon the child’s marriage, or at the latest upon reaching a contractually specified age.
Historical Background
The term originates from a time when parents traditionally provided their children with a “dowry” — household goods, linens, or a financial head start — upon marriage. Dowry endowment insurance served to accumulate the necessary capital in good time.
Modern Relevance
The classic dowry endowment insurance has today largely been superseded by other products such as education endowment insurance or general children’s savings products, but it continues to exist as a contract type within older in-force policy books.
Premium Indexation (Dynamic Increase Option)
Synonyms: Beitragsdynamik, Dynamic Increase Option
Premium indexation automatically increases the premium and benefit of a life or annuity policy by an agreed percentage, usually without renewed underwriting.
Concept
Premium indexation is a contractual arrangement under which the premium and corresponding benefit of a life, annuity, or occupational disability policy automatically increase at regular intervals, usually annually, by a defined percentage.
Purpose
Premium indexation is intended to keep the insurance benefit aligned with income and price developments and to counteract gradual underinsurance caused by inflation; it is particularly common in long-term contracts such as occupational disability and term life insurance.
Waiver of Renewed Risk Assessment
A key advantage of premium indexation is that the increase in the sum insured generally occurs without renewed medical underwriting, allowing policyholders to benefit from the automatic adjustment even if their health has since deteriorated; policyholders typically have the option to decline individual indexation increases.
Participation in Valuation Reserves
Synonyms: Beteiligung an Bewertungsreserven
Participation in valuation reserves is the statutory entitlement under Section 153 VVG of German life insurance policyholders to a share of the hidden reserves attributable to their contract's investments.
Concept
Participation in valuation reserves is the entitlement, mandated by Section 153 of the German Insurance Contract Act (VVG), of life and annuity policyholders to receive a share, upon maturity, surrender, or death, of the hidden reserves of the investments attributable to their respective contract.
Calculation and Distribution
The amount of the individual participation is determined by a causation-based allocation key that reflects the capital tied up in the individual contract relative to the total portfolio; for fixed-income securities, a special averaging approach applies to smooth out short-term interest rate fluctuations.
Political Significance
Participation in valuation reserves was particularly contentious during the prolonged period of low interest rates, as fully paying out hidden reserves from bonds to departing policyholders can come at the expense of policyholders remaining in the book; the legislature therefore introduced a restriction in 2014 on participation in reserves from fixed-income securities, to the extent these are needed to secure the guaranteed benefits of the remaining book of business.
Beneficiary (Bezugsberechtigter)
Synonyms: Bezugsberechtigter
The beneficiary is the person designated by the policyholder to receive the insurance benefit upon a covered event, without being a party to the contract themselves.
Concept
The beneficiary is the person designated by the policyholder to receive the insurance benefit upon an insured event — such as death or maturity of a life insurance policy — without being a party to the insurance contract themselves.
Revocable and Irrevocable Beneficiary Designation
Under a revocable beneficiary designation, the policyholder may unilaterally change the designation at any time; the beneficiary only acquires their own direct claim against the insurer once the insured event occurs. Under an irrevocable beneficiary designation, the beneficiary acquires this claim already upon designation, and it can no longer be unilaterally withdrawn.
Relevance for Estate Planning
Beneficiary designation makes it possible to direct insurance benefits to specific persons outside of the estate, which is used in particular in estate and wealth planning, for example to provide family members with immediate liquidity without a probate procedure.
Cliquet Crediting (Ratchet Effect)
Synonyms: Ratchet Effect, Cliquet-Verzinsung
Cliquet crediting permanently locks in annual gains of a fund- or index-linked life insurance policy so that they cannot subsequently be lost.
Concept
Cliquet crediting is an interest crediting mechanism used particularly in index-linked life insurance, under which positive returns achieved in a given period (usually annually) are permanently locked in and credited to the policy value, so that they cannot subsequently be lost through later negative market movements.
Mechanism
At the end of each crediting period, the return achieved, subject to a pre-agreed cap and, where applicable, a floor (often 0%), is irrevocably credited to the policy value; this new, higher value forms the starting point for calculating the return of the next period, creating a “ratchet” effect that permanently locks in gains already achieved.
Relevance for the Customer
Cliquet crediting offers policyholders the opportunity to participate in positive market movements without bearing the full downside risk of a direct equity or index investment, since gains already achieved are protected against future market losses; in return, participation in any single very strong period of gains is regularly limited by the cap.
Policy Reserve (Deckungskapital)
Synonyms: Deckungskapital
The policy reserve is the actuarially calculated capital a life insurer must hold to meet the future benefit obligations of a contract.
Concept
The policy reserve is the actuarially calculated capital for a single life insurance contract that the insurer must hold at a given point in time to cover the difference between the present value of future benefit obligations and the present value of future premiums still to be received.
Calculation
The policy reserve is calculated using the so-called prospective method as the difference between the present value of future insurance benefits and the present value of future net premiums, with the underlying actuarial bases (technical interest rate, biometric probabilities, costs) corresponding to the pricing basis in effect at the time the contract was concluded.
Relevance for Accounting
The sum of the policy reserves for all of an insurer’s contracts forms the technical reserve, which is reported as the most significant liability item on a life insurer’s balance sheet and, under Solvency II, serves as the basis for calculating technical provisions (Best Estimate plus risk margin); the policy reserve calculated under statutory accounting principles can differ significantly from the regulatory valuation under Solvency II.
Cover Pool (Deckungsstock)
Synonyms: Deckungsstock, Segregated Assets
The cover pool is a specially protected ring-fenced asset pool held by life insurers, primarily intended to secure policyholders' claims.
Concept
The cover pool (Deckungsstock), referred to under current German regulation as part of the segregated assets (Sicherungsvermögen), is a specially protected pool of assets held by a life insurer intended to permanently secure policyholders’ claims under their life insurance contracts.
Special Legal Status
Assets allocated to the cover pool or segregated assets are subject to special regulatory investment and valuation rules and, in the event of the insurer’s insolvency, are shielded from claims by general creditors; they are available primarily to satisfy policyholders’ claims, which is a central element of consumer protection in life insurance.
Trustee and Supervision
Proper management of the segregated assets is overseen by an independent trustee, who in particular monitors compliance with regulatory investment rules and must approve any disposal of the segregated assets; this additional layer of control supplements general insurance supervision by BaFin.
Dynamic Increase (Life and Annuity Insurance)
Synonyms: Dynamik
A dynamic increase clause automatically raises the premium and benefit of a life or annuity contract at regular intervals without a new health assessment.
Concept
A dynamic increase clause is a contractual arrangement in life and annuity insurance under which the premium, and the benefit linked to it, automatically increases at regular intervals (usually annually), without a new health assessment, by a fixed percentage or by reference to an index.
Purpose and Mechanism
The dynamic increase is intended to counteract the erosion of the real value of the originally agreed, nominally fixed coverage due to inflation and general income growth over time; through the automatic increase of premium and benefit, the real level of coverage remains roughly constant over the life of the contract, without the policyholder having to actively request a contract amendment or undergo a new underwriting assessment.
Right to Decline and Design Features
Under most dynamic increase arrangements, policyholders have the option to decline a single increase or several consecutive increases; if the policyholder declines increases over a certain period (often two to three consecutive increase dates), the dynamic increase option lapses permanently under many contract terms, which must be carefully monitored in policy administration.
Maturity Age (Endalter)
Synonyms: Endalter
Maturity age is the age of the insured person specified in the contract at which the policy matures and, where applicable, a survival benefit becomes payable.
Concept
Maturity age is the age of the insured person specified in the insurance contract at which the policy is scheduled to mature and, provided the insured person is alive at that time, an agreed survival benefit becomes payable.
Relevance for Pricing
Together with the age at inception and the technical interest rate, maturity age determines the term and thus significantly the level of premium to be calculated for a life or annuity policy; a higher maturity age extends the accumulation phase and, at a constant premium, can lead to a higher maturity benefit, while a lower maturity age shortens the policy term.
Flexibility of Annuity Commencement
In modern annuity products, maturity age is increasingly designed flexibly, granting the policyholder, within certain contractual limits, an option to bring forward or postpone the actual commencement of the annuity relative to the originally agreed maturity age, to respond to changed personal or economic circumstances.
Survival Benefit (Erlebensfallleistung)
Synonyms: Erlebensfallleistung
The survival benefit is the lump sum or annuity payment a life insurer provides when the insured person survives the contract's agreed maturity date.
Concept
The survival benefit is the insurance benefit a life insurer provides under a pure endowment or mixed endowment life insurance policy when the insured person survives the contractually agreed maturity date, as distinct from the death benefit, which becomes payable if the insured person dies before the end of the contract.
Distinction of Contract Types
A pure endowment policy pays out only at contract maturity, provided the insured person is alive at that time, and generally pays no, or only a limited, refund of premiums paid if death occurs before contract maturity; under the widely used mixed endowment life insurance policy, both a death benefit and a survival benefit are agreed, so that a benefit becomes payable in either case.
Relevance for Pricing
Because the probability of surviving to the maturity date varies with the age at inception and depending on the biometric actuarial basis used, correctly assessing survival probability is a central component of pricing pure endowment and mixed endowment life insurance policies; mortality tables representing the statistical mortality of a population group are used for this purpose.
Total Declared Rate (Gesamtverzinsung)
Synonyms: Gesamtverzinsung
The total declared rate is the sum of the guaranteed interest rate and the current bonus a life insurer actually credits to policyholders in a given year.
Concept
The total declared rate is the sum of the contractually guaranteed interest rate and the additional current bonus a life insurer actually credits to the accumulated reserve of its policyholders holding traditional endowment or annuity contracts in a given financial year.
Relevance as a Comparative Metric
Because the guaranteed interest rate on many older contracts is significantly above current capital market levels, while newly concluded contracts often have only a very low or no guaranteed rate at all, the total declared rate is an important metric, relatively easily accessible to policyholders and market observers, for comparing the actual returns of different life insurers and contract generations.
Development in a Low Interest Rate Environment
In a sustained low interest rate environment, the total declared rate comes under pressure, since many insurers’ ongoing investment returns are no longer sufficient to both service the guaranteed rate on older contracts and grant an attractive additional bonus; many insurers have therefore gradually reduced their total declared rate in recent years and built up additional safeguarding mechanisms such as the additional interest reserve.
Survivor's Pension (Hinterbliebenenrente)
Synonyms: Hinterbliebenenrente, Widow's Pension, Orphan's Pension
A survivor's pension is a recurring benefit from a life or annuity insurance policy or a retirement system, paid to a spouse, registered partner, or children following the death of the insured person.
Concept
A survivor’s pension is a recurring payment made upon the death of the insured person to designated survivors – typically the spouse or life partner (widow’s/widower’s pension) or children (orphan’s pension). It is a central element of both occupational and private retirement provision as well as statutory pension insurance.
Structure in Life and Annuity Insurance
In private and occupational retirement provision, a survivor’s pension can be agreed as a standalone contract component (survivor’s pension insurance) or as a supplementary benefit to an annuity policy with a lump-sum option. The amount is often based on a defined percentage of the insured’s original retirement pension and can be differentiated by beneficiary (spouse, children up to a certain age).
Actuarial Relevance
When calculating survivor’s pensions, in addition to the mortality of the insured person, the joint mortality and age structure of the beneficiary survivors (probability of being married, age difference between spouses) as well as the entitlement period for orphan’s pensions (generally until a certain age or the end of education is reached) must be taken into account.
Annual Annuity (Jahresrente)
Synonyms: Jahresrente, Annual Annuity Amount
The annual annuity is the calendar-year amount of an annuity benefit from an annuity policy or a retirement system, used as the reference figure for actuarial calculation.
Concept
The annual annuity refers to the full calendar-year amount of the annuity benefit owed under an annuity policy or an occupational or statutory retirement provision system. It serves as the central reference figure both for the contractual definition of benefits and for the actuarial calculation of technical reserves.
Payment Frequency and Conversion
Even though annuities are usually paid monthly in practice, the annual annuity forms the basis for comparative calculations, present value determinations, and regulatory reporting. Conversion between annual and monthly annuities is generally performed taking into account an intra-year loading that compensates the insurer for the interest loss arising from earlier payment.
Relevance for Annuity Calculation
When calculating the annual annuity from an accumulated technical reserve, an annuity present value factor is applied, determined based on the biometric actuarial assumptions (mortality table, technical interest rate) and any agreed guarantee periods or survivor benefits.
Longevity Risk (Langlebigkeitsrisiko)
Synonyms: Langlebigkeitsrisiko
Longevity risk is the risk that annuitants live on average longer than assumed in premium pricing, resulting in higher than expected annuity payments for the insurer.
Concept
Longevity risk refers to the risk that the actual mortality of an insured population in annuity insurance turns out systematically lower than assumed when calculating the actuarial assumptions (mortality table), causing the average annuity payment period, and thus the insurer’s total benefit outlay, to be higher than planned.
Systematic versus Unsystematic Risk
Unlike unsystematic (idiosyncratic) mortality risk, which is reduced through pooling within a sufficiently large insured population, systematic longevity risk – the possibility of a general mortality improvement applicable to the entire population – cannot be offset through pure risk diversification within the portfolio and must therefore be addressed separately in risk management.
Risk Transfer and Hedging
Insurers use various instruments to hedge longevity risk, including the reinsurance of longevity risk (longevity swaps and longevity reinsurance), targeted diversification across death benefit and survival benefit risks (natural hedging), and conservative, regularly updated generational mortality tables that already anticipate expected future mortality improvements in the calculation.
Life Expectancy (Lebenserwartung)
Synonyms: Lebenserwartung
Life expectancy is the statistically expected average remaining lifetime of a person of a given age, derived from a mortality table, and is a central actuarial assumption in life and annuity insurance.
Concept
Life expectancy is the statistically expected average remaining lifetime of a person of a given age, derived from a mortality table. It differs fundamentally from life expectancy at birth, which describes the average total lifespan of a newborn child under current mortality conditions.
Relevance for Actuarial Assumptions
Life expectancy forms the central basis for calculating life and annuity insurance products: it determines both the expected benefit duration of a life annuity and the probability of a death benefit becoming due within a given contract term.
Trends and Challenges
Life expectancy has risen continuously in almost all developed economies over recent decades, presenting insurers with the challenge of appropriately anticipating future mortality improvements already today in their actuarial assumptions (generational mortality tables), in order to adequately cover longevity risk in annuity insurance.
Benefit Escalation (Leistungsdynamik)
Synonyms: Leistungsdynamik, Annuity Indexation
Benefit escalation is a contractual provision under which an ongoing annuity benefit (e.g., from disability or pension insurance) is periodically increased by a fixed percentage or in line with inflation.
Concept
Benefit escalation is a contractual provision in annuity and disability insurance under which the agreed ongoing benefit is periodically increased (usually annually), during the payout period, by a fixed percentage or in line with an inflation index, in order to preserve the real purchasing power of the benefit over an extended period.
Distinction from Premium Escalation
Benefit escalation must be distinguished from premium escalation, which provides for an automatic increase in the ongoing premium (usually by the same percentage as the sum insured) during the accumulation phase of the contract; both mechanisms are frequently agreed together, in order to align coverage and premium levels with general income and price developments over the contract term.
Relevance for Annuity Calculation
When benefit escalation is agreed, the insurer must already account for future increases when calculating the required technical reserve, since the actual total benefit paid over the payout period can be significantly higher than the nominal starting amount of the benefit.
Mortality Risk (Mortalitätsrisiko)
Synonyms: Mortalitätsrisiko
Mortality risk is the risk that the actual mortality of an insured population under death benefit cover turns out higher than assumed when calculating the actuarial assumptions.
Concept
Mortality risk refers to the risk that the actual mortality of an insured population under death benefit cover – such as term life insurance – turns out higher than assumed when calculating the underlying mortality table, resulting in more death benefits being paid by the insurer than planned.
Inverse Relationship with Longevity Risk
Mortality risk is structurally the counterpart to longevity risk in annuity insurance: while unexpectedly low mortality leads to higher costs in annuity insurance (longevity risk), unexpectedly high mortality leads to higher costs in death benefit insurance (mortality risk). This inverse relationship allows insurers to partially offset both risks through natural hedging within a diversified portfolio.
Catastrophe Mortality Risk
In addition to general (trend) mortality risk, actuarial practice distinguishes catastrophe mortality risk, that is, the risk of a short-term, extreme increase in mortality due to events such as pandemics, natural catastrophes, or armed conflict; this is addressed under Solvency II as a distinct sub-module of insurance risk within the standard formula.
Zillmerisation
Synonyms: Zillmerung, Zillmering
Zillmerisation, named after actuary August Zillmer, is the premium calculation method used to finance a life insurance policy's acquisition costs through the ongoing premiums.
Historical approach
In regular-premium life insurance, high acquisition costs arise at inception due to distribution commissions, often exceeding the first annual premium. August Zillmer (1831–1893) solved this by calculating the premium as if the policyholder were one year older and the contract one year shorter; since the policy actually starts immediately, an additional year’s premium is effectively freed up to fund the acquisition costs.
Current design
Instead of a full year’s premium, a percentage of the sum of all future premiums is now applied – the Zillmer rate. The resulting amount is annuitised over the premium payment period and added to the net premiums as the Zillmer premium.
Practical relevance
Zillmerisation eases the insurer’s short-term liquidity but delays the policyholder’s wealth accumulation, since the compounding effect on the policy value only begins once acquisition costs are covered – an effect particularly noticeable in low-interest-rate periods and one that has fuelled the debate on acquisition cost transparency.
Zillmer Premium
Synonyms: Zillmerprämie
The Zillmer premium is the net premium of a life insurance policy, increased by the acquisition cost loading determined through zillmerisation and annuitised over the premium payment period.
Composition
The Zillmer premium consists of the actuarial net premium plus an acquisition cost loading, derived by annuitising the total acquisition costs determined through zillmerisation over the premium payment period. It therefore differs both from the pure net premium and from the gross premium paid by the customer, which additionally includes ongoing administrative cost loadings.
Function within the premium structure
After deducting the required risk components, the remaining parts of the Zillmer premium are used to cover acquisition costs until they are funded up to the amount of the Zillmer rate multiplied by the total premium sum. Only after that do the savings premiums flow into building the technical reserve.
Practical relevance
Precise knowledge of the Zillmer premium matters for assessing surrender value development in the early policy years, since during that phase a large share of the premium is used to amortise acquisition costs rather than to build wealth.
Zillmer Reserve
Synonyms: Zillmerreserve
The Zillmer reserve is the technical reserve of a life insurance policy built up using the Zillmer premium.
Concept
The Zillmer reserve is the technical reserve that results when a policy is valued on the basis of the Zillmer premium – that is, taking the acquisition cost loading into account. It is systematically lower than an un-zillmerised net reserve in the early policy years, because part of the premium remains tied up in amortising acquisition costs.
Development over the policy term
As the policy progresses, the Zillmer reserve converges towards the net reserve once acquisition costs have been fully amortised. Supervisory requirements ensure that the Zillmer reserve never falls below a minimum surrender value owed to the policyholder on early termination.
Practical relevance
For policyholders, the Zillmer reserve explains why the surrender value in the early policy years is noticeably below the sum of premiums paid. This transparency gap has repeatedly been the subject of consumer protection debate and supervisory caps on the Zillmer rate.
Zillmer Rate
Synonyms: Zillmersatz
The Zillmer rate is the supervisory-capped percentage used to calculate the acquisition cost loading in life insurance under zillmerisation.
Legal cap
For new-business tariffs, the Zillmer rate is expressed as a percentage of the sum of all premiums due over the policy term. Until 2014 the cap was 40 per mille; since 2015, section 4 of the German Regulation on Technical Reserves (DeckRV) has limited the rate to 25 per mille. A different cap of 35 per mille of the sum insured applies to legacy business.
Function
The Zillmer rate determines the maximum share of future total premiums that may be used to fund acquisition costs. It is therefore the central lever balancing the insurer’s short-term liquidity against the policyholder’s long-term wealth accumulation.
Practical relevance
The gradual reduction of the Zillmer rate since 2015 was a direct legislative response to criticism of opaque and policyholder-unfavourable acquisition cost structures, introduced through the Life Insurance Reform Act (LVRG).
Guaranteed Interest Rate
Synonyms: Zinsgarantie
The guaranteed interest rate is a life insurer's contractual obligation to provide a minimum return on the savings premiums of a policy.
Concept
In most life insurance contracts, the guaranteed rate is only indirectly visible to the customer: it does not apply to a transparent minimum rate on the gross premium, but to the savings premium remaining after deducting risk premiums and cost loadings. Premium calculation assumes that this savings premium accrues interest at the so-called technical interest rate.
Development
In a sustained low-interest-rate environment, the supervisory maximum technical interest rate must be lowered so insurers do not calculate the same benefit using unrealistic rate assumptions. This leads to noticeably higher required premiums for the same guaranteed benefit.
Practical relevance
Falling guaranteed rates increasingly challenge the traditional life insurance business model built on surplus participation, since the guaranteed technical rate alone is often no longer sufficient to deliver a positive overall return on the gross premium. Insurers are responding with new product generations offering reduced or variable guarantees.
Interest Surplus
Synonyms: Zinsgewinn
Interest surplus is the part of a life insurance portfolio's investment result that remains after deducting investment management expenses and the guaranteed interest owed to policyholders.
Calculation
Interest surplus is the difference between the ordinary and extraordinary investment income of a life insurance portfolio, reduced by the administrative expenses of managing those investments, on one hand, and the guaranteed interest owed to the portfolio, on the other.
Role in surplus decomposition
Interest surplus is one of the three classic sources of gross surplus in life insurance, alongside mortality surplus and expense surplus. It arises when the actual investment return achieved exceeds the guaranteed technical rate promised to policyholders.
Practical relevance
During periods of falling capital market rates, interest surplus structurally shrinks as the gap between achievable returns and the guaranteed rate narrows or even turns negative. This increases pressure to build additional interest reserves and to reduce policyholders’ ongoing surplus participation.
Life Settlement Secondary Market
Synonyms: Zweitmarkt für Lebensversicherungen
The life settlement secondary market is the market on which rights under existing life insurance policies are traded between policyholders and investors.
How it works
In the secondary market, either the policyholder assigns their rights and obligations directly to an investor who continues the policy unchanged, or the investor pays compensation and takes over the policyholder’s role. If the death benefit exceeds ordinary funeral costs and the life insured is not identical to the policyholder, contractual safeguards are required to protect the insured.
Relevance in the German market
Traded policies mostly originate from Anglo-Saxon countries; the secondary market plays almost no role under German law, since the statutory surrender value guaranteed by the Insurance Contract Act is usually close to what an investor would be willing to pay – once intermediary transaction costs are deducted, the economic incentive to sell largely disappears.
Practical relevance
In Anglo-Saxon markets, where statutory surrender values are lower, the secondary market is an established liquidity tool for policyholders and, at the same time, the basis for structured investment products aimed at institutional investors.
Interim Portfolio (Life Insurance)
Synonyms: Zwischenbestand
The interim portfolio is the stock of German life insurance policies concluded between 1 January 1995 and 1 January 1998, administered separately from the legacy and new portfolios.
Classification
German life insurance supervision traditionally distinguishes between the legacy portfolio (policies concluded before the 1994 deregulation), the new portfolio (policies concluded afterwards), and the interim portfolio for contracts from the transition period between 1 January 1995 and 1 January 1998. The interim portfolio is generally subject to the new supervisory regime.
Special feature
For period-consistent accounting, interim-portfolio contracts are administered separately, provided they were calculated using the same principles and technical bases as legacy-portfolio tariffs. Under the minimum-allocation regulation on surplus participation, they are then treated as legacy-portfolio contracts.
Practical relevance
The interim-portfolio classification matters for calculating the minimum allocation to surplus participation and for supervisory reporting by German life insurers, but it no longer plays any role for new business since the relevant period ended long ago.