Broker liability: Do UK insurers also bill correctly ?

By Dipl.-Math. Peter Schramm, Actuary DAV, actuarial expert publicly appointed and sworn by the IHK Frankfurt am Main for actuarial mathematics in private health insurance and Johannes Fiala Lawyer, Master of Business Administration, Master of Mediation, Banker (IHK) Certified Financial and Investment Advisor (A.F.A.),www.fiala.de
Liability for crashed profit participation?
The weakness of the capital markets is having a dramatic effect on long-term life insurance policies and private pension insurance in particular. Compared with the sample calculations published in advertising just a few years ago, the maturity benefits that can realistically still be achieved today have fallen by a third or more, and the achievable monthly pensions, including the increasingly smaller surplus pensions, have fallen to almost half of those originally promised.
A look across the Channel shows that this problem has also affected the British – even earlier and to a greater extent than in Germany. This is mainly because the capital market situation has a more direct impact here due to the lower guarantees and the higher share of equities in the so-called ?with profits policies? Private old-age provision is more important in the United Kingdom than in Germany. In addition, these life insurance policies have been taken out on a large scale as repayment substitutes for mortgage loans for tax reasons.
Today, it turns out that when the life insurance matures, there is a significant gap in coverage. We are already hearing of life insurance customers who have had to move out of their homes and into caravans. As Britons are quick to hold their independent financial adviser responsible for ‘misselling’ in the event of such a mishap happening to them, the number of complaints handled by insurers in recent years runs into tens of thousands.
So what is the experience gained from this?
The customers’ accusation is usually that the risks of such a financing model were not pointed out and that the customer’s willingness to take risks was not questioned. At insurer Prudential, for example, some 200 staff have been involved in dealing with 10,000 complaints from Prudential customers and a further 14,000 cases from the acquired Scottish Amicable since the systematic complaints handling programme began in 2000. The majority of complaints are resolved “satisfactorily” according to the insurer’s assessment.
Around 10 % of customers still turn to the ombudsman, who, however, does not follow the insurer’s decision in only 4 % of these cases. Customers also feel trapped in their policies in particular by the substantial so-called ‘market price adjustments’. Although the value of the policy is guaranteed at maturity, in the event of an early exit, market price adjustments can be made to reflect fallen share prices ? for example, of around 25% ? which mean that the customer loses some of the capital he has invested. Thus, he has to decide between Scylla and Charybdis: hold out the policy without currently seeing an improvement in profit declarations, or exit prematurely with a substantial loss?
Most of the time, customers are offered ? also from independent consultants ? recommended to hold out on the policy until the situation improves: because when share prices rise, market price adjustments will fall and the value of the policy will rise again. Scottish Mutual, for example, has stated that in the next few years it will first reduce market price adjustments, even at the expense of an increase in the current interest rate. At the latest on expiry, or even earlier depending on the conditions, the market price adjustments cease to apply and the guarantees and terminal bonuses become effective. In the current situation, an exit will therefore only be recommended in an extreme emergency.
For clients trapped in their policies, it is difficult to successfully sue their financial advisor. Because even if the investment in the British policy was sold as a ?safe investment? ? at the latest in the small print, the limited guarantees and the possibility of market price adjustments were pointed out. And the extreme decline in share prices, which led to such high market price adjustments in the first place, could not have been foreseen anyway. In order to make the financial advisor a ? legally relevant ?reproach, thus aggravating must be added. But to present this, requires an expert knowledge, which the customer does not have usually. Who would like to have examined on the court way the computation of its surplus sharing, will be disappointed in general. This is because surpluses or profit annuities are not contractually guaranteed. They depend on the surpluses generated by the insurance company. A policyholder therefore had to accept a pension reduction of 40% from 2003 onwards and, in addition, had his claim for information regarding the pension calculation dismissed at the Munich Regional Court. The insurance company explained the reduction to him by stating that the profit annuity was dependent on the earnings achieved on the capital market and that the earnings situation had deteriorated. This was also followed by the Munich Regional Court I: the plaintiff had been expressly informed upon conclusion of the contract and in the notices on the pension amount that the profit annuity could not be guaranteed as it depended on the annual profit declaration. The plaintiff could therefore not rely on an insurance-contractual promise of a certain monthly profit annuity. In the court’s opinion, the insurance company had also fulfilled its duty to provide information. It was not obliged to provide the plaintiff with a precise financial calculation for determining the profit participation, as this would be difficult for an average policyholder to understand (judgment of the Munich I Regional Court of 25 August 2004, file number: 26 O 1034/04).
Without sufficient substantiation ? the mere reference to the customer to inexplicably high reductions of the surpluses is not enough ? the court is unlikely to appoint an expert ? purely investigative evidence is not admissible in Germany.
Only if ? z. e.g. by a private opinion of an expert ? sufficient grounds are presented to cast doubt on the calculation of the profit participation ? or of surrender values, annuities, maturity benefits and lump-sum settlements ? the court will take further evidence, if necessary by means of a further court expert opinion, in which the private expert opinion must then also be taken into account. Experience has shown that a life insurance company is more likely to provide the necessary information to a publicly appointed and sworn actuarial expert commissioned by the customer with a private expert opinion to verify the insurer’s calculations. However, even without these internal calculation bases, the course of the policy and the profit participation can be reconstructed with sufficient actuarial accuracy from generally accessible documents.
For example, after the new 94R mortality table was drawn up, insurers continued to advertise with outdated mortality tables for some time. This could be proven on the basis of the relevant technical ? actuarial ? documents. documents. After the introduction of the new mortality table, the insurers wanted to reduce the pensions. Judicially the enterprises were forced however regarding the complaining customers to continue to pay the originally in prospect pensions. Without substantial technical background knowledge and expert consultation ? for the production of the ?weapon equality? ? policyholders will find it difficult to enforce liability in court, at least vis-à-vis insurance companies (and their own intermediaries), who can rely on a staff of qualified experts. The chances are better vis-à-vis independent agents, brokers and financial advisors, who themselves do not have the concentrated expertise of the insurers at their disposal. In liability cases, they should therefore be advised to seek expert advice and qualified legal assistance from specialists as soon as possible.
Broker Duties:
The insurance broker is the fiduciary and trustee of his client. This means that he also has the duty to monitor the object risk ? including the relevant insurance cover. The broker’s fiduciary duty does not end with the expiry of a life insurance policy ? even the correct accounting of the insurer has to be checked regularly. Finally, the insurance broker is in the client’s camp, quasi the ?lawyer in insurance matters? in this area ? including the follow-up obligations arising from this role.
The central yardstick for the duty position of the insurance broker is the BGH judgement of 22.05.1985 (Sachwalterurteil): The insurance broker is entitled to accompany out of court every case of damage or every insurance process ? this allows the insurance broker to act in lieu of legal counsel, as it were. There is also a duty to do so as long as the brokerage agreement is in place here. This does not change even if the insurance broker is integrated into a structural or sales organisation.
Tax Advisor Duties:
What is right for the insurance broker can only be cheap for the tax advisor. Particularly in the area of accounting for company pension schemes, there are considerable deficits in practice, because the current employment contract and tax regulations often do not (or no longer) match the original concept. Incorrect balance sheets and gaps in coverage are the result. In this respect, not only the tax advisor but also the insurance broker has a duty to observe, warn and protect the client.
Status: 15.07.2005

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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