In recent years, foreign insurers have increasingly sought to enter the German market – in a variety of ways: In September 2013, for example, BaFin counted a total of 216 branches and branch offices of foreign institutions in Germany. The GdV reported at the end of September 2013 that primary insurers whose head office is abroad account for around 20 percent of gross premiums paid in Germany. Cross-border insurance products score points due to their greater legal flexibility compared to purely domestic products; in this respect, both insurance wrappers and unit-linked life insurance policies with foreign funds are well-known in the life insurance sector.
Especially in the case of cross-border insurance business, foreign insurers are increasingly relying on domestic insurance brokers, distributors and pools, as well as on sales through credit institutions. Many end customers have not yet become aware of the wide range of products offered by the European single market, so that completely new business opportunities are opening up for insurance intermediaries there. At the same time, however, it is precisely in this area that the greatest caution is advisable for intermediaries: different legal standards and legal opinions in the countries involved give rise to a large number of liability risks which can more than compensate for the opportunities of these transactions for intermediaries.
In October 2010, for example, the Swiss Financial Market Supervisory Authority FINMA identified two primary risk areas in its position paper on legal and reputational risks in the cross-border financial services business: “One concerns the cross-border provision of financial services, the other the cross-border offering of financial products. Both are subject to restrictive conditions (e.g. physical presence, registration) in many jurisdictions. In the area of tax and criminal law, there is a risk that a financial intermediary or its employees may become criminal participants (e.g. aids or abettors) in tax offences committed by foreign clients under foreign law. In addition, frequent cross-border activities and the repeated physical presence of institutional representatives in individual countries can trigger a tax liability for the financial intermediary itself. Further legal and reputational risks may arise from foreign money laundering law as well as from civil, collision and procedural law standards; likewise from the other commercial law of certain countries”.
As always, it is therefore important to take advantage of the opportunities and to avoid the risks as far as possible through prudence, expertise and diligence. An example of how this can be done is presented in this paper.
Numerous advantages for customers
Very attractive insurance products from abroad are increasingly available to German private or corporate customers:
- For example, a newly established foreign office of a medium-sized company can greatly optimise the insurance cover in the property sector for the entire company. This is because, in terms of conditions and premiums, different regulations often apply abroad, which are more favourable for the customer.
- Life insurance policies from Great Britain, for example, are attractive, where insurers have not (been allowed to) pay commissions or brokerage fees for years, i.e. they offer much more favourable net policies – although these are still favourable even in conjunction with fee-based advice. No unisex calculation is prescribed for Swiss life insurance policies. Therefore, more than 20% higher maturity benefits can be expected for male policyholders.
- Younger, lower-income private health insurance customers are interested in health insurance from abroad, for example, because these often do not include any age reserves in the premium and therefore appear to be cheaper.
- It is also conceivable that a foreign legal system is chosen for the insurance contract, which, for example, provides better protection for the insurer’s assets (actuarial reserves) from creditors in the event of bankruptcy or insolvency; a stricter insurance secrecy is also often offered.
Risks for intermediaries
Risk carriers abroad rarely deal in a qualified manner with the needs, requirements and necessities that have to be observed by German clients, for example in tax law. In the case of cross-border insurance transactions, the intermediary (as a fee-based advisor) is therefore often given the role of a coordinator who also organises the specialist tax, legal and actuarial advice and cover for the customer. And this coordinator then also bears the placement risks:
- One of the unpleasant surprises for German customers is when the tax office gets in touch because a life insurance policy from Belize or Liechtenstein is suspected of being fiscally unclean.
- Or beneficiaries of a life insurance policy are disappointed when German beneficiaries of a compulsory portion have been passed over and therefore such an arrangement does not stand up in court in Germany.
So what appears to be fair and cheap abroad, and is perfectly legal and legitimate there, need not be sustainable at home. The disappointed customer then likes to claim the financial damage resulting from these risks from the (domestic) intermediary; this will always be easier than navigating the thin ice of foreign law.
In view of this, one could come up with the idea of subjecting an insurance contract to foreign law. However, in the case of insurance from Switzerland, for example, this already fails if any (domestic or foreign) intermediary such as a sales service partner, broker or agent is involved in the conclusion or initiation of the contract. Some intermediaries, for example, reckoned with “British fairness in accounting and English consumer protection” in the case of life insurance policies from England, not realising that the German Insurance Contract Act was already applicable from the beginning of the contract.
In addition to liability risks, intermediaries even run the risk of being penalised under the Insurance Supervision Act if foreign insurance products are designed in such a way that they would not be authorised for distribution in Germany. Or, in the case of divorces or inheritances, the tax court and the public prosecutor’s office could regard the mediation as preparation for later deception.
If an intermediary wants to minimise these risks by doing business with foreign countries, then he has to check very carefully the legality and legitimacy in Germany, i.e. for example whether a tax-saving policy from abroad is also recognised in Germany; included in this check is the question of the effectiveness of a customer’s decision for foreign law. The cost advantages of foreign insurance offers are therefore usually offset by the expense.
Legally compliant mediation models
This expense can be limited if mediation models are chosen that avoid the risks mentioned from the outset. If, for example, the contract with the foreign financial institution or insurer were, as it were, a travel souvenir of the customer, there would be no intermediation; in that case, the question of whether the product may be distributed domestically would not arise either. For example, shortly after China opened up for investment in the renminbi, the first asset managers organized trips for their clients to speed-date with bank staff in Hong Kong. An alternative would be hiking trips to the Swiss Alps with a stop in mountain huts of selected insurers.
A less tourism-oriented but nevertheless interesting alternative brokerage model is available from Switzerland, especially in the case of life insurance: there, the tendering and initiation of contracts may not be carried out via insurance brokers, but via legal advisors. For an intermediary, the role of a moderator is appropriate, who – possibly together with an actuarial expert – compares the offers in order to show the customer the differences to domestic alternatives. Although this constitutes fee-based advice, it is not a brokerage service. The “facilitator” slips into the role of advisor and not that of a “cross-border middle person”.
From this it can be seen that there are ways of carrying out cross-border transactions that are legally secure for the customer and the intermediary. Of course, the brokering of foreign products can also be completely legal, which can usually be assumed in the case of products from the political euro area. However, one should not blindly trust in this: German supervisory authorities have repeatedly been presented with inadmissible sales models of domestic broker pools for examination, for example from the area of brokering foreign health insurance policies. Consultation with a legal advisor who is competent in cross-border transactions is advisable in any case, at least in the preparation of these transactions.
by Dr. Johannes Fiala and Prof. Dr. Hans Jürgen Ott
by courtesy of
http://www.allgemeiner-Fachverlag.de (Insurance Journal 01/2014)
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About the author
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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