How does case law help financial institutions to pass on miscalculations?
The regulations on the elimination of the basis of business in the German Civil Code (BGB) can be an approach to reorganize financial institutions in distress. For example, when building societies terminate the higher-interest deposits – sometimes with success. An insurer could terminate or adjust its contracts (on an individual contract basis, but en masse) because the basis for the transaction no longer applies – thus reducing guarantees – and thus reduce maturity benefits and annuities or increase premiums. A large life insurer, for example, had already halved bindingly declared terminal bonuses for contracts terminated in 2008 – only recognisable to the expert – and justified this with the change in the basis of business in accordance with the German Civil Code (BGB) as a result of the introduction of the statutory half participation in the valuation reserves – only a few (well advised) customers even noticed this.
Calculation error or speculation with customer funds?
When an entrepreneur invests in a machine, he should consider financing at matching maturities – i.e. financing and calculating his investment in such a way that the money is at least paid off over time until the machine becomes worthless.
For example, if a bank such as HRE has sufficient credit for 30 years, it should have deposits with a suitable time horizon, for example by issuing bonds for refinancing purposes. If it is different because you are greedy, or want to increase your own bonus, you become a casino banker(s) and borrow the money on the markets for a shorter period of time – because it seems cheaper at times until the price of the money changes and then inevitably bankruptcy occurs.
No one has effectively and lastingly prohibited speculation with the money of insurance customers under criminal law – it is then the insurer’s own money, not the customer’s money. If the insurer’s casino bet goes wrong, a solution is sought to reduce the legal claims of the insurance customers: For this, the “loss of business basis” seems to be the best solution.
Building societies and insurers lose confidence
Recently, some building societies have increasingly terminated their long-term customer contracts with comparatively high interest rates. The jurisprudence of the higher regional courts is inconsistent – the legislator has not reacted; one is probably waiting to see what the BGH will say. Thus, for example, the Higher Regional Court (OLG) Hamm (judgement of 30.12.2015, file no. 31 U 191/15) stated that contracts which are ready for allocation can be terminated at any time after 10 years of an allocation period, because according to § 489 I no. 2 BGB, the “presumed complete receipt of the loan value date … in a bauspar case is equal to the allocation maturity which has occurred”. Those affected might think that a judge is raising his suspicions against the legislator – in order to have this suspicion decided later by the constitutional court.
Buyers of life insurance portfolios (the expert speaks of a “run-off”) could also use this argument towards policyholders in order to maximise their own added value – naturally in favour of security and thus of the policyholders’ collective.
In case of doubt, this motivates customers of building societies and insurance companies to realise their contracts more quickly, for example by terminating or selling them. Especially when the trust is gone.
And even if, in the end, a court ruling that the basis of the transaction no longer applies, perhaps only less than 1 percent of those affected will sue – this is an invitation.
Building society financing in combination with life insurance
Building societies have strengthened their sales activities by cooperating with insurance companies. The result is an expensive variant in which the customer first pays high interest for years via a fixed loan – without repayment – and then saves the (partial) repayment with a building society or investment funds with an uncertain return. In comparison to an annuity loan, this is almost always a secure loss transaction.
Some building societies or banks also live from ongoing shifts in investments due to acquisition costs or changes in building society and loan agreements to poorer conditions.
Restructuring of life insurers and policy purchasers
The loss of the business basis can reorganise insurers and insurance buyers. Management board members who are unfamiliar with this instrument run straight to the guns of state supervision and legal monitoring because they are bleeding their company dry. It is therefore a question of acting responsibly – especially the continuation of the contracts under increasingly difficult conditions is irresponsible. Waiting for the contract to be amended or terminated can mean being accused of abusively contradicting oneself later, for example by continuing the contracts for years.
It is already sufficient that many BoDs are busy revoking insurance contracts and therefore owe the UN up to more than twice the surrender value – without a serious and expert assessment, but in the event of revocation, pay out up to less than half the surrender value or even demand money back. At best, the BoD will have to dispose of its loss risks promptly – to the benefit of its group of insured persons and, where applicable, its shareholders.
However, the fact that disregarding the golden rule for balance sheets or financing with matching maturities is within the financial house’s sphere of risk speaks against the loss of the basis for the transaction. There would have to be no contractual and statutory risk distribution (BGH NJW 2006, 899). More often than not, only the responsible board members were overburdened or simply not well advised.
Alternatives to the loss of the basis of the business?
Insurers have numerous opportunities to adapt to the low interest rate phase. The reduction of profit participation and – limited to one year each – of the guaranteed surrender values is only a first step. In the end, the supervisory authority reduces the guarantee payments in order to avoid insolvency, even in the event of a takeover by the protection scheme Protektor.
It would be a mistake on the part of the Executive Board if it did not take § 313 BGB into consideration. He could be liable if he therefore sells too cheaply to a run-off buyer.
It is also possible to pay customers – voluntarily – a severance payment, even for pensions that are already running without a contractual surrender value claim. Some pensioners will gratefully accept the offered final one-off payment – as corresponding offers in the case of direct commitments from employers show. Insured persons can also be persuaded to switch to contracts with lower guarantees but better chances of success with increased risk – for them, but not for the insurer.
Duty of the board of directors leads to liability
BaFin recently clarified that it is the duty of the Board of Management to prevent or reduce burdens. So also to get rid of the old customers in tariffs with high guaranteed interest rates as far as possible. Management Board members who fail to do so in breach of duty may be held liable by their successor or the Supervisory Board. According to BaFin, the companies must inform their customers “comprehensively” about these conversion offers, “so that the consumer can make informed and independent decisions … The customers must be informed comprehensively about the opportunities and risks of new products”.
The sale of the holdings to a run-off investor should also be considered – BaFin is also open to such measures.
A member of the Management Board who, in breach of his duties, fails to take such measures without an audit, must expect to be held liable by his successor at the latest.
Suggestion for revocation
The insurer can persuade the customer to cancel the contract simply by issuing an effective cancellation policy with a corresponding period of notice for the first time years after the start of the contract, gladly pre-formulated for signing and returned by enclosed postage paid envelope. With the revocation, all contractual claims such as those to the surrender value and to information are then destroyed. Some insurers then claim – truthfully – that they unfortunately do not know how to calculate a withdrawal and pay nothing at all. Others do some calculations and then pay up to less than half of the surrender value that would have been due in the event of termination.
The incriminating contract is successfully destroyed in any case. Claims from revocation are not directed against the secured cover capital but against the insolvency estate, with the hope of a quota. This leaves more for the remaining customers – and with each further withdrawal, the insurer’s contractual obligations decrease and are thus better protected.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.experten.de (published on 21.12.2016)
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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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