english life insurance: profit participation

Liability for crashed profit participations
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 pension provision is more important in the United Kingdom than in the Federal Republic. In addition, for tax reasons, these life insurance policies were taken out on a large scale as repayment substitutes for mortgage loans. Today, it turns out that there is a significant gap in coverage when the life insurance matures. We’re already hearing from life insurance customers who have had to move out of their homes and into trailers. Since the British 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 handling 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. Most complaints are resolved “satisfactorily” according to the insurer’s assessment. Around 10% of customers still turn to the ombudsman, but in only 4% of these cases does the ombudsman not follow the insurer’s decision. Customers also feel trapped in their policies, especially due to the substantial so-called “market price adjustments”. Although the value of the policy is guaranteed at maturity, market price adjustments to reflect fallen share prices – for example, of around 25% – may be made on early exit, causing the client to lose some of their invested capital. So he has to decide between Scylla and Charybdis: hold out on the policy without currently seeing any improvement in profit declarations, or get out early at a substantial loss? In most cases, clients are advised – even by independent advisors – 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’s hard 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, reference was made to the limited guarantees and the possibility of market price adjustments. And the extreme decline in share prices, which led to such high market price adjustments in the first place, was in any case unforeseeable. In order to make a – legally relevant – accusation against the financial advisor, aggravating factors must therefore be added. But to set this out requires a level of expertise that the customer does not usually have. Those who want to have the calculation of their surplus share checked in court will generally be disappointed. This is because surpluses or profit annuities are not contractually guaranteed. They are dependent on the surpluses generated by the insurance company. A policyholder therefore had to accept a pension reduction of 40 % as from 2003 and, in addition, his action for information regarding the pension calculation was also dismissed at the Regional Court of Munich. The insurance company explained the reduction to him by stating that the profit annuity was dependent on the returns 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 was dependent on the annual profit declaration. The plaintiff could therefore not rely on an insurance contract promise of a specific monthly profit annuity. According to the court, the insurance company 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 (judgement of the Munich I Regional Court of 25.08.2004, file number: 26 O 1034/04). Without sufficient substantiation – the mere reference to high reductions in surpluses that are inexplicable to the customer is not sufficient – the court will hardly commission an expert – purely investigative evidence is not admissible in Germany. Only if – e.g. by means of a private expert opinion – sufficient reasons are brought forward to substantiate doubts about the calculation of the profit participation – or of surrender values, annuities, maturity benefits and lump-sum settlements – will the court 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 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 demonstrated on the basis of the relevant technical – actuarial – documentation. After the introduction of the new mortality table, insurers wanted to cut pensions. However, the companies were forced by the courts to continue to pay the pensions originally promised to the customers who filed the lawsuits. Without considerable technical background knowledge and expert advice – to establish “equality of arms” – 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 odds are better against independent agents, brokers and financial advisors, who themselves cannot draw on the concentrated expertise of insurers. 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 expiration of a life insurance policy – even the correct billing of the insurer has to be checked regularly by the broker. After all, the insurance broker is in the client’s camp, effectively the “insurance lawyer” in this area – including the downstream 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 – thus the insurance broker may, as it were, act instead of a legal adviser. 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.
(finanztip.de)
Courtesy ofwww.finanztip.de.

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About the author

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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