People enquiring about pension insurance often ask first: “Guaranteed?” Behind the question there is usually the National Deposit Insurance Fund (OBA) that protects bank deposits – people are looking for a similar external safety net for their insurance savings too. Policy conditions, however, use the word “guaranteed” for something quite different: they use it to denote a calculation rule whose exact content differs from insurer to insurer and from product to product. As a broker, I see that a large part of the misunderstandings stems from this: the word sounds familiar, but its meaning is decided by the wording of the conditions. This article shows what the conditions call “guaranteed”, what the word does not cover, what its actual content depends on, what the law says about the technical interest rate, and within what supervisory framework the insurer's solvency operates.
- Policy conditions use the word “guaranteed” for the benefit amount calculated with the technical interest rate: classic products and the classic part of mixed products have such an amount, the unit-linked part does not – except for a “guaranteed” fund at investment-fund level, described in a separate information document.
- The word does not apply to costs, inflation, the surrender value, the effect of premium payments not being made or the prices of investment funds; the excess-return refund (profit sharing) is not “guaranteed” either.
- The upper limit of the technical interest rate is set by a decree of the MNB (Hungary's central bank and financial supervisor); the insurer's solvency is framed by the Solvency II-based rules of the Insurance Act (Bit.) and by MNB supervision – there is no deposit insurance like the OBA (the National Deposit Insurance Fund for bank deposits) for life insurance – and therefore pension insurance – contracts.
What do the conditions call “guaranteed”?
In classic (traditional) pension insurance, the insurer holds the part of the premiums paid that remains after the deduction of costs as a premium reserve, and increases this reserve by the technical interest rate set in the policy conditions. This calculation produces the benefit amount – in the conditions it is typically called the “guaranteed” or “minimum” maturity or survival sum, or the sum “calculated at the technical interest rate” – that the insurer pays at the end of the term if the conditions are met, regardless of how the investment of the reserve has performed in the meantime. If the investment performs better than the technical interest rate, the insurer credits a share of the difference, as defined in the conditions, back to the contract; this excess-return refund (profit sharing), however, is not “guaranteed”: its level depends on the actual return from year to year, and in some years it may be zero. The article on classic products describes this mechanism in detail.
In unit-linked pension insurance (linked to investment units), there is no such “guaranteed” part: the savings work in the investment funds you choose, and the investment risk – including a fall in unit prices – is borne by the policyholder; the Pénzügyi Navigátor (Financial Navigator) information booklets of the MNB (Hungary's central bank and financial supervisor) also point this out. The only exception is where the insurer's range of funds includes a fund named “guaranteed” or “capital-protected” in the conditions. Here the “guarantee” applies not to the contract but to the redemption of that particular fund at a specified price on a specified date, and, according to the fund's own information document, it is provided by the insurer or by a third party – its terms and duration can only be read from that fund's own document. Mixed products combine the two worlds: in them, the “guaranteed” element applies exclusively to the classic part, not to the fund-based part – the article on mixed products draws this boundary.
What does the word “guaranteed” not cover?
There are five things for which the conditions do not provide a “guarantee”, even if the word appears in the product's name. The first is costs: the “guaranteed” maturity sum is based on the reserve after costs have been deducted, so the costs set in the conditions are already part of the calculation, and if the conditions give the insurer the right to change costs, this may also affect the future value – the article on cost elements lists what is worth checking. The second is inflation: the “guaranteed” amount is a nominal forint or euro amount, and the conditions do not protect its purchasing power; the means of keeping pace with inflation is indexation on the policy anniversary (renewal date), which is a separate decision every year. The third is the surrender value: the “guaranteed” benefit applies to the end of the term and to the events defined in the conditions; if the contract is terminated during the term, the value according to the surrender table is payable – which may even be lower than the total of the premiums paid – and, in the case of pension insurance, the tax credits claimed must also be repaid, increased by 20 per cent (under Section 44/C of the Personal Income Tax Act (Szja tv.), with the exceptions set out in the Act). The fourth is premium payment: the “guaranteed” amount applies on the basis of continuous premium payment as set in the conditions; if the policy is made paid-up or the premium is reduced, the insurer recalculates the benefit under the rules of the conditions, and the benefit will then typically be lower. The fifth is the price of investment funds: in unit-linked and mixed products, there is no contractual protection of any kind for the value of funds that are not “guaranteed”.
What determines what the “guaranteed” part is worth?
The content of the word depends on four factors that can be found in the wording of the conditions. The first is the insurer and the specific product: each insurer sets the level of the technical interest rate itself – within the statutory ceiling – and there may also be conditions in which the technical interest rate is zero per cent; in that case the “guaranteed” amount essentially means the payments reduced by costs. The second is the exact wording of the conditions: where the amount calculated with the technical interest rate appears in the benefit table, and to which events – maturity, death, impairment of health – it applies. The third is the term: the effect of the technical interest rate is greater over a longer term, but so is the burden of committing to premium payments for a longer period. The fourth is continuity of premium payment and indexation: for the part of the premium added by the increase at the renewal date, the conditions may apply either the technical interest rate in force when the contract was concluded or the one in force at the time of indexation – insurers regulate this differently. The crash course on reading policy conditions shows where to find these points.
The statutory ceiling on the technical interest rate
The technical interest rate is not a promise the insurer is free to make at will: its upper limit is set by law. Under the authorisation in Section 439 i) of Act LXXXVIII of 2014 on the business of insurance (the Insurance Act, Bit.), the Governor of the Magyar Nemzeti Bank (MNB) sets the maximum technical interest rate by decree. MNB Decree 54/2015. (XII. 21.) on the maximum technical interest rate, currently in force – in its text as amended by MNB Decree 55/2022. (XII. 13.) with effect from 14 December 2022 – sets the highest technical interest rate that may be used in the premium calculation and in the calculation of the premium reserve of life and health insurance products as follows: in forints, 4 per cent a year for regular-premium products regardless of term, 7 per cent a year for single-premium products with a term of no more than five years and 4 per cent a year for longer single-premium products; in euros, 1.5 per cent a year. This is a ceiling, not a mandatory rate: the insurer may also calculate with a lower – even zero – technical interest rate, and your own contract is governed by the figure set in its conditions. Furthermore, the decree concerns the insurer's premium calculation and reserving, not a return promised to the customer: the actual investment result may differ from the technical interest rate in either direction, and the difference is dealt with by the excess-return refund rule.
Who supervises whether the insurer is able to pay?
The other common question: what protects the savings if it is not the investment but the insurer itself that gets into trouble? Objectively speaking: in Hungary, there is no statutory compensation fund for life insurance contracts – and therefore for pension insurance contracts – similar to the OBA for bank deposits or the BEVA (Investor Protection Fund) for investment service providers (the Compensation Fund under the Gfbt., the act on compulsory motor third-party liability (MTPL) insurance, does not extend to life insurance). The protection follows a different logic. The Bit. transposes the European Union's Solvency II framework, which requires insurers to hold own funds (solvency capital) in line with the risks they have taken on, to build reserves, to manage risks and to report regularly; compliance is monitored by the MNB as the supervisory authority, which can take action where necessary. The aim of the system is for the insurer to be able to meet its obligations even in bad years; the Bit. contains separate rules on transferring an insurance portfolio to another insurer. What happens to the contract if the insurer gets into financial difficulty or ceases to exist is summarised under the question “What happens to my contract if the insurer gets into financial difficulty or ceases to exist?” on the FAQ page – the essence: the supervisory framework regulates the insurer's operation, but it is not deposit insurance and not an external payment commitment for individual contracts.
What should you do before relying on the word “guaranteed”?
- Ask for the benefit table of the conditions and find in it the maturity sum calculated with the technical interest rate – the one referred to in the conditions as “guaranteed” or “minimum” – as well as the level of the technical interest rate; if that is zero, the word only denotes the payments after costs.
- Look at the surrender table and the rule on making the policy paid-up: the “guaranteed” amount applies to the end of the term, not to leaving the contract early.
- With a unit-linked or mixed product, read the separate information document of the “guaranteed” or “capital-protected” fund: who provides it, for how long, on what terms – and what happens to the other, unprotected funds.
- When comparing, look at the TKM (total cost indicator) over the same term alongside the “guaranteed” amount, because the technical interest rate and the costs together give the actual picture.
- If a point in the wording of the conditions is unclear, ask the insurer in writing; if you let me know, I prepare the comparison of the offers.
As a broker, I can help with clarifying the concepts and with the comparison – but I cannot promise the outcome of any product. The insurer pays only for what is an insured event under your contract, and the “guaranteed” part, too, is worth exactly what your own conditions say about it.
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Sources
- The Insurance Act (Bit., Act LXXXVIII of 2014 on the business of insurance) – Section 439 i) (authorisation for the MNB Governor to set the maximum technical interest rate by decree), the capital, reserving and supervisory rules under Solvency II, portfolio transfer
- MNB Decree 54/2015. (XII. 21.) on the maximum technical interest rate – Section 1 (1), text as amended by MNB Decree 55/2022. (XII. 13.) with effect from 14 December 2022
- MNB Pénzügyi Navigátor (Financial Navigator) – Pension insurance (information booklet)
- MNB Pénzügyi Navigátor (Financial Navigator) – Unit-linked life insurance (information booklet)
- UNIQA Biztosító Zrt. – Policy conditions of the Harmónia Classic pension insurance (13 December 2024) – terminology of the technical interest rate and of the benefit calculated with the technical interest rate, as an example of a classic product
- Personal Income Tax Act (Szja tv., Act CXVII of 1995 on personal income tax) – Section 44/C (tax credit for pension insurance; repayment of the credit increased by 20 per cent on a withdrawal that does not qualify as a pension benefit)
- Gfbt. (Act LXII of 2009 on compulsory motor third-party liability insurance) – the Compensation Fund (compensation for injured parties of an MTPL insurer under liquidation); does not extend to life insurance
