Whether an insurance contract qualifies as an IBIP is decisive for the regulatory regime it will be subject to from 2018 onwards. In the future, insurance-based investment products will not only be subject to the obligation to prepare a key information document pursuant to the PRIIPs Regulation but also to additional requirements for distribution stipulated in the IDD Implementing Act (only available in German) (see BaFinJournal March 2017 - only available in German), which apply to the advice and sales process. These requirements enter into effect on 23 February 2018.

There is no easy answer to the question of which contracts are to be classified as insurance-based investment products. The present article explains why and outlines BaFin's current assessment of the insurance contracts that are customary in the German market. It cannot, however, substitute the individual assessment by the manufacturer.

What is an IBIP?

Under the PRIIPs Regulation, an IBIP is an insurance product which offers "a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations". Certain financial products are expressly exempted from the scope of application.

European legislators have therefore not defined insurance-based investment products in detail but decided to merely determine a set of product criteria. The reason for this lies in the heterogeneity of the European IBIP market which makes naming every single IBIP virtually impossible. The classification of a contract as an IBIP therefore depends on how the legal provisions are interpreted.

In July, the European Commission published Guidelines on this matter. According to these Guidelines, manufacturers of retail investment and insurance products and persons advising on, or selling, those products to retail investors are responsible for assessing which products must comply with the provisions of the PRIIPs Regulation. This assessment must take into account, in particular, the specific economic features and contractual terms and conditions of each product.

Endowment insurance

The range of products in the German market typically classified by BaFin as IBIPs includes all types of endowment policies. In the explanatory statements to the proposal of the PRIIPs Regulation, the EU Commission had already made clear that it would be considered irrelevant whether retail investors are directly exposed to the risk of capital loss. The decisive aspect is whether IBIPs are, directly or indirectly, subject to market fluctuations. This applies both to traditional capital life insurance and unit-linked life insurance, as well as to hybrid products, which means that no differentiation is to be made between these types of products. The Regulation targets those kinds of products where customers do not directly purchase the financial product itself but rather in the form of a package, i.e. as an integral part of an insurance policy. Choosing a specific investment or a specific portfolio of investments is therefore not a criterion for eligibility as a PRIIP. IBIPs offering a range of investment options have a special status; here the PRIIPs Regulation permits the respective key information documents to contain different information.

The classification of endowment insurance products as IBIPs does not depend on whether premiums are paid regularly or as a single premium. The key factor is whether the product contains a maturity or surrender value which, in whole or in part, is directly or indirectly exposed to market fluctuations. This is the case with unit-linked life insurance policies, whose maturity or surrender value depends on the fluctuations of the value of the fund units, as well as with insurance contracts with profit participation based on investment income. Non-unit-linked contracts without profit participation based on investment income, however, are not to be classified as IBIPs.

Private pension insurance

The criteria for qualification as an IBIP that apply to endowment insurance also apply to private deferred annuity insurance that is part of the third layer of the German pension insurance system²⁾ as German lawmakers refrained from opting to create a national exemption for products whose primary purpose is to provide for an income in retirement.

Privileged treatment under tax law, however, is not sufficient for a product to qualify as an IBIP, particularly since such treatment is not a general product feature but depends on the taxpayer's individual circumstances and contract.

Immediate life annuities and temporary life annuities

By contrast, immediate life annuities (with or without withdrawal option) and immediate temporary life annuities do not qualify as IBIPs since, unlike investment products, they do not feature a savings component.

In these forms of insurance, the paid-in capital is used entirely to pay annuities rather than to generate capital growth.

Term life insurance

The EU regulations also expressly exclude pure term life insurance products without surrender value from the IBIP scope. These include temporary life insurance as well as widowhood insurance and insurance for surviving dependants as standalone products.

From BaFin's point of view, life insurance contracts that cover a certain risk and offer a surrender value when terminated prematurely, such as occupational disability insurance and funeral expenses insurance, are to be classified as follows:

Surrender values that are subject to market fluctuations are not a criterion for qualification as an IBIP in the case of products that do not include a savings process or the chance to generate profits. The surrender value of otherwise pure disability insurance products, such as occupational disability insurance or dread disease insurance³⁾ without maturity payment, or funeral expenses insurance products is based on a reserve held by the insurer to smooth out premiums. If such contracts are terminated prematurely, the surrender value constitutes the value of overpaid premiums that are refunded.

In addition to death benefits, survival benefits (payment upon maturity) are another criterion for qualification as an IBIP. Otherwise pure term life insurance contracts where benefits are paid only upon occurrence of the insured event and maturity payments are expressly excluded are not considered IBIPs. If maturity payments are included, qualification as an IBIP depends on whether the product is based on a savings process and can therefore – from the consumers' point of view – be used as a substitute for other investment products under the PRIIPs Regulation. One example for this are whole life insurance products where profit participation is used to terminate the contract prematurely if necessary, i.e. during the insured persons' lifetime (the profit participation components are used to reduce the maturity).

Instead of being linked to the event of survival, the savings process may also be linked to other conditions, as is the case with insurance products that end on a predefined date (term fix insurance). These are usually considered IBIPs.

Pension products

Pursuant to Article 2(2)(f) of the PRIIPs Regulation and Article 2(1)(17)(d) of the IDD, occupational pension schemes do not explicitly qualify as IBIPs. Thus, not only Pensionskassen and Pensionsfonds but also direct life insurance products are excluded from the scope of application. The wording of Article 2(2)(e) of the PRIIPs Regulation also excludes certified products under the German Pension Contracts Certification Act (Altersvorsorgeverträge-Zertifizierungsgesetz – AltZertG - only available in German), i.e. the Riester pension and basic pension products. The recognition of Riester pensions and basic pension products under national law as products having the primary purpose of providing the investor with retirement income is based on the fact that they are certified by the German government, offer tax benefits and – in the case of Riester – are subsidised by the government.

If an employer makes a pension commitment to his employees based on a support fund (Unterstützungskasse), this does not mean that the employee has purchased an investment within the meaning of an IBIP, since a support fund operates merely as an extended arm of the employer. Pursuant to section 1b (4) of the German Occupational Pensions Act (Betriebsrentengesetz – BetrAVG - only available in German), employees have no legal rights to benefits granted under support funds. They are, however, legally entitled to receive benefits from their employer, irrespective of whether the accumulated benefits have been funded by the employer or by way of deferred compensation. For this reason, insolvency protection is tied to the solvency of the employer and not to that of the support fund.

Employers take out pension liability insurance to secure the funding of their occupational pension commitments. This type of insurance is considered a financial assistance and, where applicable, a transfer of the risks associated with the payment of benefits under occupational pension schemes. It is not based on a savings process and thus does not qualify as an IBIP. This reasoning is also backed by the purpose and intention of the exemptions under the PRIIPs Regulation, which as a rule exclude occupational pension products that involve contributions from the employer. This rationale applies to employer's pension liability insurance products irrespective of their purpose, i.e. not only to pension liability policies for support funds but also to policies for direct pension commitments/Pensionskassen and for partial retirement and time value accounts.

By contrast, pension plans provided by pension schemes for liberal professions are based on mandatory membership. It is therefore justified to interpret the exemption of Article 2(2)(g) of the PRIIPs Regulation and Article 2(1)(17)(e) of the IDD more broadly. This means that individual pension products which, under national law, require a financial contribution from the employer and where neither the employer nor the employee has a choice as to the product or provider, are not considered IBIPs. Self-employed persons are themselves responsible for their old-age provision, which means that, analogously, they are responsible for paying not only their own part of financial contributions but the employers' part as well.

Capital redemption operations

Capital redemption operations– also known as saving through insurance – are a segment of life insurance that is governed by the provisions of the Solvency II Directive. From a supervisory point of view, they are therefore equivalent to insurance products.

From the regulatory and economic perspective stipulated by the guidelines of the EU Commission capital redemption operations therefore qualify as insurance-based investment products if they offer profit participation in an amount that is still unknown when the contract is concluded. If capital redemption operations do not provide for participation in profits from investment income or if the amount of profit participation is already known upon conclusion of the contract, they are not considered IBIPs.

Non-life insurance products

Insurance contracts classified as non-life insurance products under the Solvency II Directive are explicitly exempt from the IBIP scope. Health insurance in all its product manifestations, including optional tariffs in statutory health insurance, is therefore not considered an IBIP. The same applies to accident insurance, including accident insurance with premium refund.

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