On 27 April 2007, the Federal Ministry of Justice presented the draft of the “Ordinance on Information Duties in Insurance Contracts”. For the intermediary, this means that he must disclose his remuneration.
Insurance intermediaries will soon have to show their success fee in euros and cents before the contract is concluded – initially for life, occupational disability and accident insurance. One insurance association has countered this proposal by calling for only a percentage statement – but this too harbours the danger of intransparency.
Abolition of commission and brokerage in Europe
The conflict of interest of the insurance intermediary stems in particular from the system whereby the intermediary receives his “salary” from the insurance undertaking. In Norway, Sweden, Finland and Denmark, commission or brokerage as a remuneration model has already been abolished by law following an affair involving cartel agreements. As a result, around 50 percent of insurance brokers ceased their activities. Trend towards transparency The report published by the EU Commission in January 2007 means that the abolition of brokerage fees and commissions is on the agenda in Europe. The intermediary is in a conflict of interest solely because he receives his remuneration from the insurer – and thus, according to the EU Commission’s impression, competition is hindered by non-transparent remuneration.
Strategy of the insurance brokers?
Not only have numerous brokers been prophesying for months: “In 2010 there will only be fee-based advice and net tariffs” – the activities of the EU Commission could act as a “turbo” for this. The paradigm shift will not only favour a selection of intermediaries, but will also stimulate the education and training market. While the overall political importance of insurance companies appears to be declining, the reputation of strategically and professionally fit intermediaries will tend to increase. There are already innovative sales companies that have begun to establish fee-based advisory services, even in the private client segment. And large distributors are in a position to choose an interchangeable insurer as risk carrier for their own ready-made products. Insurers could then soon find themselves in a role similar to that of suppliers to the automotive industry – dependent on independent distributors.
Shortcomings of the insurance intermediary
The EU Insurance Mediation Directive is making customers more critical and, in view of the statutory minimum insurance requirements, more willing to sue. Quality management, further training, own archives with information about customers and from product providers, networking and specialisation become essential for survival.
Deficits in insurance sales
Even endowment insurance entails serious liability risks for insurers and brokers. Many a supervisor of insurance intermediaries thus also gets into the direct line of fire of customers and “his” intermediaries when he is accused of “intentional immoral damage” through incorrect training.
Transparency only in the case of absolute acquisition costs
The proposal on the part of the insurers to show the acquisition costs as a percentage only leads to further intransparency. Whether a contract with a monthly premium of 100 euros over 40 years has acquisition costs totalling 1,920 euros in the first five years or monthly acquisition costs of only 0.067 per cent of the premium sum in the first five years, the result is the same and hardly any customer will recognise this. Only the indication of the commission/courtage in absolute amount is suitable to give the customer the right idea.
Dr. Johannes Fiala, lawyer (www.fiala.de) and Peter A. Schramm, actuary DAV (www.pkv-gutachter.de).
(versicherungsmagazin 8/2007, 49)
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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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