Actuarial corporate interest rate in German private health insurance

Abstract

As part of the premium adjustment in private health insurance it is necessary to review and if applicable update the actuarial assumptions which include in accordance with § 2 Health Insurance Supervision Ordinance, among others, the actuarial interest rate.

According to § 2 Health Insurance Supervision Ordinance the actuarial interest rate is as important as other actuarial assumptions like claims amount per risk or mortality tables. It is necessary to justify the appropriateness of the actuarial interest rate in the so called Technical Bases of Calculation.

General requirements concerning the calculation method of the actuarial corporate interest rate are:

• The calculation method needs to be standardised and binding. There must be no arbitrary scope of interpretation.
• The forecasting reliability has to be quantified using statistical methods and the calculation method should provide a minimum interest rate which is likely to be achieved by the entire portfolio.

Starting point for the calculation of the actuarial corporate interest rate is an analysis of the (expected) investment portfolio at the end of the business year. The investment portfolio is separated according to certain asset classes that contain similar forms of investment and is furthermore divided into two components: The first component contains the part of the investment portfolio that was invested in former years and will be maintained in the current business year. The second component consists of the capital that will be new- or reinvested. The initial return of the investment portfolio in the current business year results from the modified gross average interest rate. The return of the new- and reinvestment is determined using a best estimate for the expected future market interest rate. The gross average interest rate needs to be modified in order to split up the extraordinary yield that is included in the current yield of special funds appropriate to the period.

The objective of the professional standard of practice is to determine an adequate method to mathematically evaluate the maximal actuarial interest rate that can be used by an individual private health insurance company. Actuaries are provided with a method to examine the sustainability of the individual return of a private health insurance company. Furthermore, the method enables the appointed actuary as well as the mathematical trustee, who is involved in the premium adjustment process, to determine an adequate and reliable interest rate for a given observation unit.

It is neither the objective of the professional standard of practice to emulate the actual investment success or even to optimise the profit situation of a health insurance company nor to point out an optimal investment strategy. It is not aimed at predicting the interest rate development, instead a lower limit for the return is actuarially determined.

The professional standard is reviewed on a regular basis.

Professional standards of practice are DAV publications that – together with the rules of professional conduct – set out the fundamental principles for the correct practice of actuarial activities. Professional standards of practice are characterised by their 

• treatment of specialist actuarial and professional issues, • fundamental significance and practical relevance for actuaries,
• professional legitimisation through a implementation process that allows all actuaries to be involved in such implementation,
• correct application, with members being professionally safeguarded by a disciplinary process. 

The professional standard of practice „ Der aktuarielle Unternehmenszins in der privaten Krankenversicherung (AUZ) (Actuarial corporate interest rate in German private health insurance)“ is a guideline. Guidelines are professional standards with regulations that, ex-cept in justifiable individual cases, may not be deviated from, and which standardise specific questions.