Guarantees are not safe either

by Detlef Pohl
After the first Protektor case, the question of life insurance guarantees also arises. How secure are the guaranteed benefits? Not only the future participation in surplus, but also the sum insured calculated with a guaranteed interest rate is by no means secure in the event of an unfavourable development of the capital markets. This is what Peter Schramm, an expert for actuarial mathematics appointed by the IHK Frankfurt/Main, says.
The point of departure for the criticism is the industry’s advertising claim that endowment life insurance offers a minimum interest rate on the savings paid in for the entire term of the contract and that the insurer takes the investment risk off the customer’s hands. In fact, however, no customer can feel completely secure, because he bears a certain risk, as the expert points out in VersicherungsJournal. Because only the insurer itself is liable for the guarantees ? with the cover capital and all its assets. If this is no longer sufficient and the insurer is therefore threatened with insolvency, even guaranteed benefits can be reduced ? not to mention the profit sharing. What is safe and what is not Since the sum insured is calculated with the guaranteed interest rate and corresponds to the required coverage capital at maturity, in the event of a permanent decline in the actual interest rate below the guaranteed interest rate or a sharp decline in the value of the actual coverage capital in the meantime (e.g. shortly before insolvency), the customer would receive significantly less money than agreed. In extreme cases, the paid-in contributions (the savings portion!) are also at risk, as are all the surpluses credited to date. The insurer calculates to finance the sum insured at maturity from the premiums, the respective  available cover capital and interest in the amount of the guaranteed interest rate. This calculation does not work out if the actual capital no longer corresponds to the coverage capital actually required for calculation purposes or if the guaranteed interest can no longer be earned in the future.  Consequence: The insurance sum – which corresponds to the cover capital at the end of the contract – can no longer be financed by the insurer. If the insured sum then remained as contractually owed, insolvency might have to be filed due to over-indebtedness if the insurer’s equity capital no longer covered the financing gap. Mechanisms in the event of insolvency First, the insurer itself will try to end the insolvency. This has happened quite often in recent times. Reinsurers have been brought on board to a greater extent, but it is not uncommon for the parent companies as owners to inject additional money. In addition, more and more companies are trying to increase the share of the final profit at the expense of the current interest (VersicherungsJournal 24.2.2003). The industry has set up a multi-level safety net to prevent such a scenario. – First of all, supervisory measures are taken to ensure that the company itself succeeds in restructuring (monitoring, restructuring plan, solvency plan if necessary, appointment of a special representative). – If this is not enough, another life insurer is sought to take over the distressed company (participation, merger, portfolio transfer). – If this is not successful, the rescue company Protektor comes into play (VersicherungsJournal 1.4.2003). Then the policy portfolio is transferred to Protektor. Later, it is sold to an interested company. Losses possible despite Protektor The mere existence of Protektor Lebensversicherungs-AG cannot, however, ultimately prevent the guarantees from being worth nothing, Schramm points out. There is no law that prescribes the takeover of distressed life insurers. This could theoretically have already happened with Mannheimer Leben. Contractually agreed guarantees in insurance terms and conditions are therefore worth just as much as the current and future creditworthiness of the insurer, explains Schramm. However, this is largely suppressed and plays practically no role at all in advice. The situation would be different if there were a deposit protection fund, as is the case with banks. Supervisory authority can reduce benefits What happens if the insurer is no longer able to perform is not regulated in the insurance conditions, but is laid down by law (in particular § 89 of the Insurance Supervision Act).
What the Insurance Supervision Act stipulates § 89: Prohibition of payment; reduction of benefits (1) If the examination of the management and financial situation of an undertaking reveals that it is no longer able to meet its obligations in the long term, but that the avoidance of insolvency proceedings appears necessary for the benefit of the insured persons, the supervisory authority may order what is necessary for this … (2) ?if necessary, reduce the obligations of a life insurance undertaking arising from its insurance policies in proportion to its assets. In so doing, the supervisory authority may proceed unevenly where special circumstances so justify, in particular where, in the case of several classes of insurance, the undertaking’s distress is due more to one than to another. In the event of a reduction, if there are actuarial reserves for the individual insurance contracts, the actuarial reserves shall first be reduced and then the sums insured shall be redetermined, otherwise they shall be reduced immediately. The obligation of the policyholders to continue to pay the insurance premiums in the previous amount shall not be affected by the reduction.   Less guaranteed benefit for the same money Consequence: The originally guaranteed benefits  can therefore be reduced if the insurer’s financial situation so requires. Guarantees ? in particular the guaranteed interest rate ? can even promote an imbalance, as the insurer cannot easily withdraw from current contracts. In order to limit the adhesion, mediators should refer clearly to the character of the ?warranties ?of German life insurers and the legally possible restrictions ?, recommend attorney Johannes Fiala of the Kanzlei Fiala, Freiesleben & weber (Munich), right and patent lawyers, chartered accoutants and tax counsels. Risk reference with consultation attach The warranties are neither ?absolutely ?nor for instance nationally secured, also not by reinsurers or someone else guaranteed ? only by the life insurer. In an emergency, the customer also bears the risk of a failed investment policy or unexpected price collapses on the stock market in endowment life insurance. Who does not say this to the customer as an intermediary, runs the risk to be taken up if necessary once because of the promised guarantee ?, fears Fiala.

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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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