British with-profits policies provide for lower guarantees than the endowment policies offered by German life insurers. These guarantees also cover the scheduled expiry date and therefore usually do not apply in the event of premature termination or partial termination, wrongly so.
British life insurers invest mainly in equities; in the past, with a share of 50 to 70 per cent, they invested on average around five times as much as German life insurers. The focus is on achieving a high return, for which a higher risk is also accepted. To cushion the higher investment risk for the customer, British insurers apply a smoothing procedure. Within the framework of the so-called “smoothing”, reserves are to be formed for worse years. During a bull market, for example, companies do not pass on all their price gains to customers in order to build up a buffer for times of crisis.
The security capital consists to a large extent of the funds already generated, which have not yet been definitively guaranteed and passed on to the customer. However, in the event of premature sale of the shares, these guarantees are generally not applicable at all or only to a very limited extent.
Then the guarantees given on the expiration date are completely lost, because when the policy is sold, the value of the policy is adjusted to the actual value of the underlying securities through market price adjustments. Many customers feel that the calculation of this is incomprehensible, arbitrary or unfair. Use of British methods contravenes German law A common misconception among brokers and insurance customers is that British insurers can “settle what and how they want” under the mostly unknown British law. It is correct, however, that German insurance contract law (VVG) is to be applied. However, the method used by the British is not in line with German law, which prescribes a so-called “current value” (possibly less appropriate and agreed actuarial cancellation deductions) as the minimum surrender value, which must be calculated in a completely different way.
British methods differ from fair value calculation
In the case of the British so-called “with profits” policies sold in Germany, German law is generally agreed. These policies are therefore subject to German insurance contract law.
From 1995 to 2007, this law provided in § 176 VVG that the insurer must reimburse the surrender value on termination of an endowment insurance policy, which “in accordance with the recognised rules of actuarial mathematics … to be calculated as the current market value of the insurance”. The current value of a policy is not simply the “surrender value” of the contract, which is ultimately determined by the British by adjusting the market price from the value of the underlying investments. Because the benefits and also the duration of the payment of contributions depend on the occurrence of certain events (death or survival of the expiry date) and must be discounted to the time of surrender, standard actuarial methods and bases of calculation come into play.
At maturity, the UK policies provide for certain guarantees, in addition to future current surpluses and the expected “smoothed” maturity bonus. Not only the minimum guarantees achieved, but everything that can realistically be expected at maturity must also be included in the statutory fair value – just as with German policies, a non-guaranteed terminal bonus is also included in the fair value.
Example: In a non-contributory British policy, 148,000 euros are already guaranteed one year before the expiry date. In addition, there are 2,000 euros in current surpluses and a maturity bonus of 50,000 euros, smoothed by smoothing, which is currently expected but not yet guaranteed. Together, this amounts to EUR 200 000. Due to a weak stock market, however, only 140,000 euros will be paid out – even by means of market price adjustments – if the guarantee is terminated one year before its expiry – in which case guarantees do not apply. But even if the expected 200,000 euros were discounted at 7 percent to the termination date because of the remaining uncertainties, at least almost 187,000 euros would have to be paid out.
Customers are entitled to the fair value of their insurance
Under German law, therefore, the customer is entitled to the actual fair “current market value” of his contract, which, as a result of the guarantees at maturity, is also significantly higher one year before maturity than what the British insurer calculated on the basis of the current weak capital market situation. The customer therefore has – if not yet statute-barred – a corresponding claim for subsequent payment. Differing calculations of the British do not comply with German law – the customer is entitled to the full market value (current value) of his policy. The main market-dependent factor here is the discount rate, which is used to calculate the fair value from the benefits expected in particular at maturity, and which depends on the capital market situation.
Even if the British should not have taken this to heart – the statutory minimum surrender value – i.e. full current value – they cannot get around the German insurance contract law in force from mid-1994 to 2007.
The current market value is determined exclusively on the basis of the claims and obligations of the policyholder vis-à-vis the insurer, regardless of what happens internally within the insurer.
The entire effect of future profit participation, including the future profit participation, is to be taken into account. maturity bonus, the guarantees on expiry and any other promised performance.
Customers who feel unfairly treated by the surrender values calculated by British insurers should therefore first ask the insurer to recalculate the benefit as current value in accordance with the law.
Reasons given by British insurers that the value of the investments had fallen and that market price adjustments were therefore to be made are completely beside the point under German law and are therefore irrelevant if this leads to lower benefits than the statutory current value.
By Dr. Johannes Fiala, Dipl.-Math. Peter Schramm, Dipl.-Jur. Univ. Thomas Keppel
Published in Versicherungsvertrieb 04/2008, page 34
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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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