FINMA Circular 2024/2 Life Insurance

Laupenstrasse 27 3003 Bern Tel. +41 (0)31 327 91 00 www.finma.ch Circular 2024/2 Life Insurance Life Insurance Reference: FINMA-Circular 24/2 "Life Insurance" Issued: 26 June 2024 Entry into force: 1 September 2024 Concordance: formerly FINMA-Circular 16/6 "Life Insurance" of 3 December 2015 Legal Basis: FINMA Act Art. 7 para. 1 lit. b, 29 Insurance Supervision Act (VAG) Art. 4, 16, 25 para. 2, 36, 37 Insurance Contract Act (VVG) Art. 90, 91 Ordinance on Insurance Supervision (AVO) Art. 54–65, 117, 120-127, 130, 136–138, 140–153 Annex: Explanations of the formula for settlement values

Addressees BankG VAG FINIG FinfraG KAG GwG Others Banks Financial groups and conglomerates Persons under Art. 1b BankG Other intermediaries Insurers Insurance groups and conglomerates Intermediaries Asset managers Trustees Managers of collective assets Fund management Custodial securities firms Non-custodial securities firms Trading venues Central counterparties Central securities depositories Transaction registers Payment systems Participants SICAV KmG for KKA SICAF Custodian banks Representatives of foreign KKA Other intermediaries SRO SRO-supervised Audit firms Rating agencies X

Table of Contents 2/17 I. Subject matter II. Tariffing of life insurance contracts A. Allocation to insurance branches B. Principles of tariffing C. Mortality tables and statistical bases III. Calculation of settlement values upon conversion and repurchase of life insurance contracts outside occupational pension A. Settlement value a) Definition, principles, bases and calculation methods b) Deduction for unamortized acquisition costs c) Deduction for interest rate risk d) Guarantee e) Allocated surplus shares f) Approval of settlement values g) Pre-contractual information obligation regarding conversion and repurchase h) Information obligations B. Conversion of the insurance contract C. Repurchase of the insurance contract a) Principle b) Partial repurchase of an insurance contract c) Settlement of the final surplus share IV. Participation in surpluses in life insurance A. Surplus plan B. Surplus participation outside occupational pension a) Surplus fund b) Allocation of surplus shares c) Final surplus share d) Further details on surplus participation e) Information in the insurance terms f) Annual information to policyholders C. Surplus participation within occupational pension a) Surplus fund b) Allocation of surplus shares c) Information in the contract terms d) Annual information to policyholders D. Calculation of the target amounts of bound assets V. Example calculations for life insurance outside occupational pension Rz 1 2-10 2-7 8 9-10 11-59 11-25 26-29 30-31 30-31 32 33-35 36-37 38-44 45-52 53-54 55-59 55-56 57-58 59 60-102 62-65 66-85 66-67 68-72 73-74 75-76 77-78 79-85 86-100 87-88 89-92 93-94 95-100 101-102 103-105

3/17 VI. Additional information to the policyholder of a unit-linked life insurance VII. Activation of unamortized acquisition costs VIII. Transitional provisions Rz 106 107-111 112-116

4/17 I. Subject matter This circular applies to life insurance contracts of insurance branches A1, A2, A3, A6 and A7. It specifies Art. 54–65 and 120–153 AVO as well as the corresponding FINMA practice.

II. Tariffing of life insurance contracts A. Allocation to insurance branches The insurance company allocates life insurance contracts or contractual agreements, where the contractual benefits of the main component depend predominantly on the value development of securities, other assets or indices, to insurance branches A2, A6.1 or A6.2. The securities, other assets or indices must be known to the policyholder. In justified cases (e.g., hybrid contracts comprising a unit-linked and a classic part), allocation to different insurance branches is possible. The allocation of life insurance contracts to insurance branches is described in the tariffs of the main components of the insurance contracts. A life insurance contract has a minimal biometric risk if a significant benefit is provided for in the event of the realization of a biometric risk. The FINMA may make deviating classifications in justified individual cases. For a life insurance contract to be attributed to insurance branches A2, A3 or A7, a minimal biometric risk must be insured. A capitalization business (insurance branch A6) is a contractual agreement without a minimal biometric risk according to Rz 3 between a life insurance company and the policyholder concerning the takeover of assets and their management against a one-off, a fixed number or regularly recurring payments whose amount is determined or determinable in advance. It ends at an agreed time or upon the death of the insured person. In capitalization businesses (insurance branch A6), deviations from the original plan regarding contributions and additional payments are only permitted to a limited extent. The insurance company allocates a life insurance contract to tontine businesses (insurance branch A7) if the associated product contains a plan that provides for the capitalization of the contributions paid by the life insurance contracts associated with the product, and regulates how the resulting assets are distributed among the survivors or the legal successors of the deceased persons.

B. Principles of tariffing The insurance company uses only actuarially recognized tariffing models and tariffing bases, which are sufficient to ensure that the sub-processes of the products can finance themselves.

5/17 C. Mortality tables and statistical bases The measurement data for statistical bases determined from the company's own insurance portfolio must be compared with statistical bases recognized by the FINMA and, if necessary, adjusted using a suitable statistical procedure recognized by the FINMA. The bases derived therefrom must be prudent, taking into account any identified trends and measurement inaccuracies. The FINMA is to be consulted in the event of a segmentation of the statistical measurement data used.

III. Calculation of settlement values upon conversion and repurchase of life insurance contracts outside occupational pension A. Settlement value a) Definition, principles, bases and calculation methods A settlement value is appropriate if it takes into account the interests of the community of remaining policyholders and those of the policyholder to be settled in a balanced manner. Inventory coverage reserves include in particular: • the net coverage reserves (see definition in the Annex) plus the administrative cost coverage reserves, but without taking into account the acquisition cost coverage reserves, using the tariff bases (see mathematical clarification in the Annex). • for insurance contracts in insurance branches A2, A6.1, A6.2 the market values of the assets underlying the insurance contracts as well as the value of options and guarantees. The value of regulatory required guarantees for settlement values is excluded. • the premium parts compounded at the technical interest rate, which • were not included in the net coverage reserves (see definition in the Annex), • did not flow into the investments for insurance contracts in insurance branches A2, A6.1, A6.2, which serve the security of these insurance contracts, • but are provided for benefits and costs after the conversion or repurchase date. Upon conversion or repurchase of a life insurance contract, the settlement value corresponds to the inventory coverage reserves, minus any deduction for unamortized acquisition costs (settlement value upon conversion) and, in the case of repurchase, any additional deduction for interest rate risk (settlement value upon repurchase).

6/17 In the case of conversion or partial repurchase, the ratio of actually converted or repurchased contract parts to the remaining contract parts must be taken into account when determining the deduction. In the case of partial repurchase, the interest rate risk deduction is only permissible for the paid-out portion of the settlement value. No other costs than those listed in Art. 127 para. 2 lit. c AVO may be charged to the policyholders upon repurchase. In particular, the pass-through of other costs or costs or fees of third parties is inadmissible if, due to their specific design, it is possible that these costs do not arise to a comparable extent upon maturity of the policy and would not be charged to the policyholders. Upon request, all elements must be made available to the claimants in such a way that the amount of the interest rate risk deduction and the amount of the deduction for unamortized acquisition costs are comprehensible to experts. The insurance company includes every component of the insurance contract in the calculation, with the exception of the co-insured components of disability, loss of earning capacity, accident and health insurance. In the event of conversion or partial repurchase, a continuing disability pension continues, unless the insurance contract provides for a capital settlement. In the case of full repurchase, a continuing disability pension must be adequately taken into account in the settlement value, unless the insurance contract provides for the continuation of the continuing disability pension.

b) Deduction for unamortized acquisition costs The Zillmer rate, which forms the basis for the deduction for unamortized acquisition costs, refers to the gross premium present value. It must not exceed the acquisition cost rate included in the tariff. For capital-building insurance, this Zillmer rate is additionally limited to 5%. The gross premium present value is calculated using the same technical bases as the premium of the corresponding contract. For insurance contracts where the technical interest rate is not defined, the discount interest rate corresponds to the permissible maximum interest rate at contract conclusion according to Art. 121 AVO. Any repayment obligations for paid distribution remuneration/commissions in the event of early termination of the insurance contract (so-called repurchase liability of the distribution) must be taken into account when determining unamortized acquisition costs in such a way that the repayment amounts owed by distribution units or partners in the event of early contract termination are appropriately deducted. The procedure for determining the minimum settlement value is set out in the Annex.

c) Deduction for interest rate risk The interest rate risk deduction allows the insurance company, in the event of a repurchase, to compensate for losses incurred due to rising interest rates, which arose from the sale of assets. The interest rate risk deduction must not be higher than the expected interest loss for the contract in the event of cancellation. The remaining term of the contract and the remaining duration of the investment with which the premiums are invested in fixed-income investments must be taken into account appropriately. The interest rate risk deduction must not be applied in the case of repurchase of unit-linked insurance contracts without capital guarantee at contract maturity. The deduction is determined depending on the inventory coverage reserves.

d) Guarantee If the insurance company provides financial guarantees in a unit-linked life insurance contract, these guarantees must be adequately taken into account in the calculation of the settlement values. The value of regulatory required guarantees for settlement values is excluded.

e) Allocated surplus shares The settlement value of allocated surplus shares integrated into the coverage reserves of the original insurance is determined in the same way as the settlement value of the original insurance. If a guaranteed interest rate is used for the interest accumulation of the allocated surplus shares, this must be taken into account analogously in the event of an interest rate risk deduction. If no guaranteed interest is granted on the allocated surplus shares, no interest rate risk deduction may be applied.

f) Approval of settlement values To approve the settlement values, the FINMA must be submitted the tariff templates and general insurance terms required for assessment, as well as any fund prospectuses for fund-linked or hybrid insurance. In the case of adjustments to products whose settlement values have already been approved by the FINMA, the settlement values must only be submitted to the FINMA for approval again if the definition or parameters of the settlement values change, with the exception of biometric assumptions or technical interest rates.

g) Pre-contractual information obligation regarding conversion and repurchase The insurance company must inform the policyholder in writing before concluding the insurance contract about: • the modalities for conversion and repurchase and the corresponding legal consequences, • the designation of the biometric bases, the technical interest rate and the rules for determining the settlement value upon conversion and repurchase, • the method for calculating the deduction for interest rate risk, • the development of repurchase values and conversion values before the deduction for interest rate risk in all yield scenarios.

7/17 The insurance company must transparently demonstrate to the policyholders that the presented developments of the repurchase values do not show any potential deduction for interest rate risk. The designation of the biometric bases according to Rz 40 must be designed in such a way that the insured community on which the measurement data was collected and the measurement period can be clearly derived from it.

h) Information obligations If the claimant requests additional information for the determination of the repurchase value or conversion value, the following values must in particular also be communicated: • Inventory coverage reserves • Deduction for unamortized acquisition costs • Deduction for interest rate risk • Any accumulated surplus credit • Pro-rata share of the surplus share for the current insurance year • Unconsumed premium The information must be communicated in such a way that it is detailed and comprehensible to experts.

B. Conversion of the insurance contract Upon cessation of premium payment, the conversion value corresponds to the remaining premium-free insurance benefit. To calculate the conversion value, the settlement value upon conversion (Rz 19) is reduced by the due but still outstanding premiums and used as an inventory lump-sum contribution for the premium-free insurance benefit. The settlement value upon conversion and the inventory lump-sum contribution are calculated using the same technical bases that served the premium calculation of the previous contract.

C. Repurchase of the insurance contract a) Principle The payout amount corresponds to the settlement value upon repurchase reduced by the due but still outstanding premiums. When determining the payout amounts, any anti-selection effects may be taken into account. The payout amount must be at least as high as the minimum of the repurchase value and the sum of the benefits for events whose occurrence is certain. The portion of the settlement value upon repurchase that is not paid out due to Rz 55 must be converted. The provisions regarding conversion of the insurance contract apply to this portion.

8/17 b) Partial repurchase of an insurance contract In the case of partial repurchase of an insurance contract with a reduction of the premiums agreed at contract conclusion, Rz 21, 55 and 56 apply mutatis mutandis. The reduced premiums must not contain acquisition costs that have already been amortized by the partial repurchase. In the case of partial repurchase of an insurance contract without reduction of the premiums agreed at contract conclusion, the acquisition costs already amortized by the partial repurchase must be taken into account when determining the new insurance benefit.

c) Settlement of the final surplus share Upon repurchase or conversion of a capital-building insurance contract, the policyholder must be credited with a share of at least 50% of the final surplus reserve from half of the agreed contract term. This share increases at least linearly to 100% until the end of the agreed contract term.

IV. Participation in surpluses in life insurance A profit-dependent surplus participation may be contractually agreed in life insurance. The purpose of surplus participation is to allow policyholders to participate in the generated surpluses. Surplus participation is drawn from the surplus fund of the insurance company and allocated to the surplus-entitled insurance contracts. It can serve as a risk buffer under special conditions.

A. Surplus plan The distribution of surplus participation to policyholders must take place according to a surplus plan. To this end, the insurance company divides its portfolio of surplus-entitled life insurance contracts into sub-portfolios of similar coverages. It may differentiate according to technical interest rates, different risk types, investment bindings and other criteria. Each sub-portfolio must receive a share of the total surplus participation determined by recognized actuarial methods, which takes into account the contribution of the sub-portfolio to the result. The allocation to the individual insurance contracts within the sub-portfolios must not lead to any legally or actuarially unjustifiable significant unequal treatment (Art. 117 para. 2 AVO). The implementation of the surplus plan is described annually in a report. It contains in particular information on the division of the portfolio into sub-portfolios, the systematics of the distribution of the surplus to the sub-portfolios and within the sub-portfolios, the choice of surplus parameters and the amount of surplus allocation to the sub-portfolios. An estimation of the profit and loss sources must also be made. This can be done on a coarser division. The report can be requested by the FINMA.

9/17 B. Surplus participation outside occupational pension a) Surplus fund The insurance company may only make withdrawals from the surplus fund for contracts outside occupational pension for the purpose of surplus allocation or to cover deficits according to Art. 136 para. 5 AVO. Allocations to surplus-entitled insurance contracts, the amount of which the insurance company cannot directly influence, are credited to the surplus fund and immediately withdrawn from it.

b) Allocation of surplus shares The contributions of the sub-portfolios to profits and losses must be taken into account appropriately. Surplus participation consists of interest, risk and cost components, which must be determined for each sub-portfolio during surplus allocation. The surplus components can be negative and offset against each other. However, for each sub-portfolio and each contract, the sum of the surplus components as well as the share for current surplus participation and the share for final surplus must each be greater than or equal to zero. Within the sub-portfolios, the allocation of surplus participation to individual contracts is generally made proportionally to the reference sizes risk premium death and disability, cost premium and coverage reserves. For special reasons, for example technical (e.g., administration system) or systematic reasons (e.g., surplus pensions), other, perhaps also mechanical, procedures may be applied deviating from these principles. In any case, it must be ensured that no legally or actuarially unjustifiable significant unequal treatment occurs within the sub-portfolios during allocation to contracts (Art. 117 para. 2 AVO). During surplus allocation, the insurance company may take into account the product-specific alignment between insurance obligations and the assets assigned to them (Asset Liability Management), and in particular distinguish between single premiums and periodic premiums. Different guarantee costs, e.g., for high or low interest obligations, may also be quantified and credited by the insurance company.

c) Final surplus share The claim upon expiration of the full insurance duration corresponds to the contract-specific reserve for the final surplus share at the time of contract maturity. The contract-specific reserve cannot be reduced before contract maturity. The final surplus reserve is an obligation that counts towards the target amount of bound assets.

d) Further details on surplus participation Changes to the allocation modalities (e.g., the switch from current surplus participation to final surpluses or a change in the type of use) are considered system changes according to Art. 137 para. 3 AVO.

10/17 Advance surplus participation is permissible provided it refers to relatively stable variables. Advance surplus participation may only refer to one year and must be determined analogously to the arrears surplus regulation. An advance interest surplus is not possible, unless it was generated in the past and bound in the surplus fund.

e) Information in the insurance terms The insurance company provides the information according to Art. 130 AVO in its contract terms in a clear and understandable manner for the policyholders. The information on the modalities of surplus allocation includes in particular the description of the principles of allocating the surplus participation withdrawn from the surplus fund. Furthermore, the modalities for the payout of a final surplus share upon repurchase and death must be described.

f) Annual information to policyholders The insurance company must provide policyholders annually with a comprehensible statement on surplus participation. The statement contains in particular the following information: • the current bases for calculating surplus participation and the principles of its distribution, • the amount of surplus participation, • for contracts with final surplus: status of the minimum claim

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