Order on the Contribution Principle

Pursuant to Section 29, Paragraph 3, Section 30, Paragraph 7, Section 139, Paragraph 5, and Section 316, Paragraph 1, of Act No. 718 of 13 June 2023 on Insurance Undertakings, it is hereby prescribed:

Scope and Definitions

Section 1. This Order applies to life insurance companies and cross-border pension funds conducting life insurance business. The Order applies if the policyholders and other beneficiaries under the insurance contracts are entitled to bonuses, and it is not agreed that the realized result, cf. Section 29, Paragraph 1, No. 3, of the Act on Insurance Undertakings, is calculated and distributed according to another specified method.

Paragraph 2. The companies mentioned in Paragraph 1 are hereinafter referred to as life insurance companies.

Paragraph 3. In this Order, retrospective provisions, collective bonus potential, individual bonus potentials, accumulated value adjustments, and the profit margin on life insurance and investment contracts are understood in accordance with Annex 1 to the Order on Financial Reports for Insurance Companies and Cross-Border Pension Funds.

Realized Result

Section 2. By realized result, cf. Section 29, Paragraph 1, No. 3, of the Act on Insurance Undertakings, is meant the insurance technical result of the accounting period, adjusted in accordance with Paragraphs 2-7, and calculated in accordance with the rules in the Order on Financial Reports for Insurance Companies and Cross-Border Pension Funds.

Paragraph 2. The insurance technical result of the accounting period is adjusted for the following items, cf. the Order on Financial Reports for Insurance Companies and Cross-Border Pension Funds:

1) Transferred investment return.
2) Pension investment tax.
3) Accrual of bonus.
4) Changes in collective bonus potential and special bonus provisions (Type B).
5) Changes in individual bonus potential, made pursuant to Section 6, Paragraph 6, Section 8, Paragraph 2, or Section 9, Paragraph 1.
6) Changes in the profit margin, made pursuant to Section 6, Paragraph 6, Section 8, Paragraph 2, or Section 9, Paragraph 1.

Paragraph 3. The result after Paragraphs 1 and 2 is further adjusted for the following items, which according to Section 83, Paragraph 2, of the Order on Financial Reports for Insurance Companies and Cross-Border Pension Funds are recognized in other comprehensive income:

1) Increases in the revalued value of owner-occupied property and reversals of such increases.
2) Exchange rate differences arising from the translation of transactions and balance sheet items, including goodwill, in an entity with a functional currency different from the presentation currency.
3) Changes in the value of hedging instruments hedging fluctuations in the size of future cash flows.
4) Changes in the value of hedging instruments hedging the exchange rate risk on an investment in a foreign entity.
5) Changes resulting from the remeasurement of the size of net pension liabilities.

Paragraph 4. The insurance technical result of the accounting period is further adjusted for the effect of changes in the method of recognition, basis of measurement, or presentation currency, and for the effect of correction of material accounting errors, which are recognized in previous accounting periods in accordance with Sections 84 and 86 of the Order on Financial Reports for Insurance Companies and Cross-Border Pension Funds.

Paragraph 5. Adjustment of the insurance technical result pursuant to Paragraph 3 is made both at the time when the items are recognized in other comprehensive income and at the subsequent time when they may be recognized in the income statement.

Paragraph 6. The part of the items in the insurance technical result that does not relate to the insurance covered by this Order and the insurance where it is agreed that the realized result is calculated according to a specified method, is not included in the calculation of the realized result.

Paragraph 7. To the extent that the life insurance company's asset portfolio is divided such that the result of the investment activity regarding certain parts of the asset portfolio must be allocated to certain parts of the insurance portfolio or equity and special bonus provisions (Type B), the allocations are made according to Sections 3-9 accordingly.

Erhvervsmin., Finanstilsynet, j.nr. 24-019470 CQ003083

Division of Portfolio into Groups

Section 3. The portfolio of insurance is divided into groups for each of the elements interest, risk, and costs.

Paragraph 2. Each group has undistributed funds. By undistributed funds belonging to a risk or cost group is meant the group's collective bonus potential and profit margin. By undistributed funds belonging to an interest group is meant the group's collective bonus potential and the group's accumulated value adjustment, including the profit margin not contained in retrospective provisions belonging to the group.

Paragraph 3. An insurance policy can be included in one or more risk and cost groups, but only one interest group.

Paragraph 4. The division into groups for interest, risk, and costs respectively must lead to the insurance policies or parts of insurance policies included in a given group having characteristics that, according to objective criteria, ensure homogeneity with respect to the element defining the group, cf. however Paragraphs 5, 8, and 9. Division into interest groups must be made according to the original basis rate or weighted basis rate. The weighted basis rate for an insurance policy issued with several basis rates is calculated as a weighted average based on the retrospective provisions on the individual basis rates.

Paragraph 5. The requirement for homogeneity may be deviated from if another group division follows from a collective agreement. The life insurance company must inform the affected policyholders thereof, cf. the Order on Information on Life Insurance Contracts.

Paragraph 6. The division into groups must be reported to the Danish Financial Supervisory Authority. The report of the group division must contain the following:

1) A description of the objective division criteria used.
2) Documentation for the homogeneity of the groups.
3) An explanation of the distribution of undistributed funds to the groups.
4) An explanation of the reasonableness of the distribution of the undistributed funds to the groups.

Paragraph 7. The spread between the highest and lowest weighted basis rate on the insurance policies in an interest group may be at most 1 percentage point, cf. however Paragraph 8.

Paragraph 8. If an interest group in an accounting year contains insurance policies where the spread between the highest and lowest weighted basis rate is higher than 1 percentage point, the actuary's report for the relevant accounting year must explain whether the deviation results in redistribution of significant economic magnitude beyond what follows from the risk coverages included in the insurance policies. If the deviation results in redistribution of significant economic magnitude, an adjustment of the group division must be made.

Paragraph 9. If a risk or cost group contains insurance policies that imply that the reported homogeneity requirements are not met, the actuary's report for the relevant accounting year must explain whether the deviation results in redistribution of significant economic magnitude beyond what follows from the risk coverages included in the insurance policies. If the deviation results in redistribution of significant economic magnitude, an adjustment of the group division must be made.

Paragraph 10. If the division into groups is changed, the changed group division must be reported to the Danish Financial Supervisory Authority, including the changed distribution of profit margin, collective bonus potentials, and accumulated value adjustments belonging to the groups, cf. Section 29, Paragraph 1, second sentence, of the Act on Insurance Undertakings. The report must contain an explanation of the reasonableness of the distribution of collective bonus potential and accumulated value adjustment to the groups.

Paragraph 11. If insurance policies are moved from one group to another group, rules regarding this must be reported to the Danish Financial Supervisory Authority.

The Contribution Principle

Section 4. Based on the realized result calculated according to Section 2, a calculation must be made of the part of the realized result that belongs to the groups in accordance with the mathematical contribution principle, cf. Section 6. This part of the realized result is added to provisions for insurance and investment contracts and distributed according to the distributional contribution principle, cf. Section 7. If the realized result is negative, provisions for insurance and investment contracts may be reduced by this part to the extent this is possible, cf. Section 8.

Section 5. Establishment costs and ongoing costs must be distributed according to the Order on Payment of Certain Costs for Life Insurance Business both under the mathematical contribution principle and the distributional contribution principle.

The Mathematical Contribution Principle

Distribution of Realized Result between Groups and Equity

Section 6. The part of the realized result that belongs to the individual group must be calculated such that the group is allocated a share thereof, which is reasonable in relation to how the group has contributed to this result, cf. Section 30, Paragraph 2, of the Act on Insurance Undertakings. The rules for the distribution between the groups must be reported to the Danish Financial Supervisory Authority prior to the accounting year. The report must contain an explanation of the reasonableness of the distribution.

Paragraph 2. The life insurance company must, in accordance with Section 29, Paragraph 1, No. 3, of the Act on Insurance Undertakings, report rules to the Danish Financial Supervisory Authority for the calculation of the part of the groups' realized results that belongs to equity. Return on special bonus provisions (Type B) is treated like equity.

Paragraph 3. The life insurance company must, upon reporting according to Paragraph 2, state equity's and special bonus provisions' (Type B) share of the realized result, which relates to the return on equity and special bonus provisions (Type B).

Paragraph 4. The life insurance company must report payment to equity and special bonus provisions (Type B) from the individual groups, cf. Section 29, Paragraph 1, No. 3, of the Act on Insurance Undertakings.

Paragraph 5. Upon reporting according to Paragraph 4, the life insurance company must explain that the size of the reported payment from the individual groups is reasonable, and that homogeneous insurance policies are treated equally.

Paragraph 6. The life insurance company may collect payments according to Paragraph 4 in the individual groups' collective bonus potential and in the profit margin not contained in retrospective provisions. If the collective bonus potential and profit margin not contained in retrospective provisions are insufficient in an interest group, the life insurance company may collect the customers' payment to equity and special bonus provisions (Type B) in the group's individual bonus potentials and profit margin contained in retrospective provisions by writing down the individual bonus potentials and profit margin contained in retrospective provisions using a negative deposit rate or other corresponding method.

Paragraph 7. If the life insurance company has used equity's funds or special bonus provisions (Type B) to cover advances for the individual groups in the accounting year, the life insurance company must, in accordance with Section 29, Paragraph 1, No. 3, of the Act on Insurance Undertakings, report in the following accounting year the amount that can be transferred from the individual groups. Reporting must take place no later than eight days after the board of directors has approved the annual accounts.

Paragraph 8. Advances from equity or special bonus provisions (Type B) are transferred in the following accounting year from the groups' collective bonus potential and from the profit margin not contained in retrospective provisions. The funds are transferred, after another share has been collected for the life insurance company, cf. Paragraph 6. A maximum amount may be transferred from the group in an accounting year corresponding to the group's collective bonus potential and profit margin not contained in retrospective provisions, after collecting another share for the life insurance company, cf. Paragraph 6. If equity's and special bonus provisions' (Type B) claims in the group continue to exceed the group's remaining collective bonus potential and profit margin not contained in retrospective provisions, the claims may only be transferred from the group's future collective bonus potential and profit margin not contained in retrospective provisions upon reporting this in the following accounting year, cf. Paragraph 7.

Paragraph 9. If the life insurance company reports to the Danish Financial Supervisory Authority that it will transfer a smaller amount from the groups' collective bonus potential than the advances for the groups to the life insurance company, cf. Paragraph 7, the right to later transfer the full advance is forfeited.

Paragraph 10. In the calculation of the share of the realized result to the groups respectively equity and special bonus provisions (Type B), the following must be taken into account:

1) The addition to provisions for insurance and investment contracts, which has already been made in the period as a result of the assumptions regarding interest, risk, and costs contained in the basis for the calculation of premiums.
2) The adjustment of equity, which has been made in accordance with Section 2, Paragraph 3.
3) The part of the adjustment according to Section 2, Paragraph 3, which has been transferred to provisions for insurance and investment contracts, cf. Section 83, Paragraph 2, of the Order on Financial Reports for Insurance Companies and Cross-Border Pension Funds.

Paragraph 11. Apart from what follows from the risk coverages included in the insurance policies, there must be no redistribution of significant economic magnitude between the insurance policies in the individual group in connection with the reversal of advances to equity and special bonus provisions (Type B) and in collecting in the accounting year payments according to Paragraph 4 in relation to the individual groups, cf. Paragraphs 6, 8, and 9.

Paragraph 12. The sum of advances to cover losses in the groups, where the company via reporting is entitled to correct the distribution in future accounting years by reversing the advances to equity and special bonus provisions (Type B), earns no return.

The Distributional Contribution Principle

Distribution of Realized Result within Groups

Section 7. A group's collective bonus potential can, apart from application according to Section 6, only be distributed to insurance policies in the group.

Paragraph 2. The distribution of funds to the individual insurance policy must reflect how the insurance policy has contributed to the group's realized results. Rules for the distribution must be reported to the Danish Financial Supervisory Authority prior to the accounting year. The report must contain an explanation of the reasonableness of the distribution.

Paragraph 3. The distributional contribution principle must be fulfilled over a number of years, as the distribution in the individual accounting year must be made with due regard to the distribution of previous accounting years as well as the intended distribution of bonus to the individual insurance policies in a group in future accounting years. There must be no redistribution of significant economic magnitude between the insurance policies in a group, including between generations, beyond what follows from the risk coverages included in the insurance policies.

Paragraph 4. Calculation and change of the profit margin must not result in a redistribution of significant economic magnitude between the insurance policies in a group beyond what follows from the risk coverages included in the insurance policies.

Paragraph 5. The distribution to the insurance policies in a group can be made during the accounting year based on the accounting year's expected realized result and collective bonus potential for the group. In accordance with Section 29, Paragraph 1, No. 3, of the Act on Insurance Undertakings, the life insurance company must in such case report rules to the Danish Financial Supervisory Authority for how the life insurance company will act if a share of the realized result is allocated to the insurance policies in a group that exceeds what the group's realized result gives rise to.

Negative Realized Result after Bonus

Section 8. If a cost or risk group's realized result after bonus is negative, and if this result cannot be covered by the group's collective bonus potential, the profit margin belonging to the group may be used. Further losses must be covered by equity and special bonus provisions (Type B).

Paragraph 2. If an interest group's realized result after bonus is negative, and if this result cannot be covered by the group's collective bonus potential and profit margin not contained in retrospective provisions, the group's individual bonus potentials and profit margin contained in retrospective provisions may be used. Further losses must be covered by equity and special bonus provisions (Type B).

Paragraph 3. The responsible actuary must immediately report to the Danish Financial Supervisory Authority, cf. Section 138, Paragraph 3, and Section 139, Paragraph 4, of the Act on Insurance Undertakings, if a cost or risk group's realized result after bonus is negative, and if this result cannot be covered in accordance with the contribution principle by using the group's collective bonus potential, the group's profit margin, or by using the life insurance company's equity and special bonus provisions (Type B), while the life insurance company complies with the solvency capital requirement for Group 1 insurance companies according to Section 154 of the Act on Insurance Undertakings and the individual solvency requirement for Group 2 insurance companies in Section 156 of the Act on Insurance Undertakings.

Paragraph 4. The responsible actuary must immediately report to the Danish Financial Supervisory Authority, cf. Section 138, Paragraph 3, and Section 139, Paragraph 4, of the Act on Insurance Undertakings, if an interest group's realized result after bonus is negative, and if this result cannot be covered in accordance with the contribution principle by using the group's collective bonus potential, the group's profit margin not contained in retrospective provisions, the group's individual bonus potentials, the group's profit margin contained in retrospective provisions, or by using the life insurance company's equity and special bonus provisions (Type B), while the life insurance company complies with the solvency capital requirement for Group 1 insurance companies in Section 154 of the Act on Insurance Undertakings and the individual solvency requirement for Group 2 insurance companies in Section 156 of the Act on Insurance Undertakings.

Re-establishment of Individual Bonus Potentials and Profit Margin Contained in Retrospective Provisions for Interest Groups

Section 9. If, as stated in Section 8, Paragraph 2, it has been necessary to use individual bonus potentials or profit margin contained in retrospective provisions for the insurance policies in an interest group, a subsequent positive realized result to the interest group must be used to re-establish individual bonus potentials or profit margin contained in retrospective provisions, belonging to the interest group's insurance policies, before any other use, except for use according to Section 6, Paragraphs 6-8.

Paragraph 2. In the re-establishment of individual bonus potentials and profit margin contained in retrospective provisions, cf. Paragraph 1, there must be no redistribution of significant economic magnitude between the insurance policies in the individual group beyond what follows from the risk coverages included in the insurance policies.

Paragraph 3. Life insurance companies that have used individual bonus potentials and profit margin contained in retrospective provisions, cf. Section 8, Paragraph 2, may, regardless of Paragraph 1, distribute interest bonus in an interest group during the accounting year, cf. Section 7, Paragraph 5, if the life insurance company's solvency coverage measured in relation to the calculated solvency capital requirement prior to the beginning of the accounting year exceeds 150 percent.

Taxation

Section 10. The calculations of realized result and contributions thereto stated in Sections 2-9 are made before taxation, including corporation tax and pension investment taxation. Taxation is subsequently distributed to the relevant shares.

Penal Provisions

Section 11. Intentional or grossly negligent violation of Section 2, Paragraphs 2-7, Section 3, Paragraph 1, and Paragraphs 3-11, Section 4, first and second sentences, Section 5, Section 6, Paragraphs 2-5, 7, 8, and 10-12, Section 7, Paragraphs 1-4 and Paragraph 5, second sentence, Section 8, Paragraph 1, second sentence, Paragraph 2, second sentence, Paragraphs 3 and 4, Section 9, Paragraphs 1 and 2, and Section 10, is punishable by fine.

Paragraph 2. Companies and other legal persons may be subject to criminal liability according to the rules in Chapter 5 of the Criminal Code.

Entry into Force

Section 12. This Order enters into force on 1 January 2025.

Paragraph 2. Order No. 1457 of 11 December 2017 on the Contribution Principle is repealed.

The Danish Financial Supervisory Authority, 5 December 2024

Louise Mogensen
/ Line Bergmann