In the purchase lies the profit – customer advantages by commission levy

The commission levy by the cash-back insurance broker as an alternative to the net tariff. How insurance brokers give up to more than 40% of insurance premiums to their clients


More and more intermediaries are waiving their commissions, not only in the case of insurance brokerage, but also in the case of open-ended investment funds up to a 5% issue surcharge or in the case of closed-end investments up to more than a 5% premium. As a discount, customers are often already reimbursed some of the internal commission (up to more than 10% in the case of closed investments). Brokerage fees are then explicitly waived, and the free custody account management, the free change of intermediary and the free transfer of custody accounts are advertised. If cleverly structured, these rebates can be fully or partially tax-free. These intermediaries are no longer dependent on net tariffs, i.e. products calculated without commissions or brokerage fees. Sometimes it is also claimed that the client will be reimbursed for all kick-backs or retrocessions at a later date.


A ruling by the Administrative Court of Frankfurt/Main makes this possible

By decision of the Administrative Court (VG) Frankfurt am Main (dated 24.10.2011, ref. 9 K 105/11.F) on the commission fee ban, a prohibition order of the Federal Financial Supervisory Authority (BaFin) had been lifted, § 81 II 4 Insurance Supervision Act (VAG). BaFin had initially filed a jump appeal, but later withdrew it.

Some insurers do not even distribute their products through agents, representatives or brokers, but through employees or via the Internet, so that there are no commissions to pass on.


More difficult times for independent agents and consultants

In the insurance intermediary sector, up to more than half have left the market since regulation in 2007. In the case of financial investment brokers of open-ended and closed-end funds as well as tipsters, up to more than 80% are expected to disappear from the market as a result of regulation in 2013. Independent financial service providers, i.e. advisors and brokers, are increasingly burdened by the issues of passing on commissions and net tariffs after providing intensive advice to new customers on certain products.


Cash-Back: Without consulting up to more than 90% of the brokerage or commission back to the client

BaFin claimed that “the prohibition of commission payments is therefore not lifted per se”. (SZ of 19.06.2013), although the VG judged the commission levy ban to be unlawful. What is certain is that BaFin can no longer or does not want to enforce the commission levy in court because it has been judicially judged to be unlawful. What is more, BaFin stated that it would review the ban in principle and would not initiate any further proceedings for violations of the commission levy ban until then. It must be left to the policyholder or investor to decide whether he wants advice or a discount product or “execution only”. There are already online brokers for shares, why should this be different for insurance?


Only about one per thousand of clients want to pay a fee for advice

Insurance brokers and other advisors and intermediaries run the risk of online brokers – not just Google – cutting into their business opportunities. Some discounters would also be in a position, without any infringement of competition, to provide not only sweets at the checkout and applications for mobile tariffs but also applications for insurance cover, for example for the members of a customer club, as long as this club and not the customer himself becomes the policyholder and therefore – as BaFin also confirms – there is no insurance mediation at all.


Advice is worth to very few insurance customers what it actually costs, as can be seen from fee-based advice. There are around a quarter of a million intermediaries compared with just a few hundred pension and insurance (fee) advisors. Of course, as a non-advisory broker, you have to be very clear about how things are going in order for the activity to work without advisor liability. Clients who do their own research do not need an advisor. Up to now, the consultation was included in the price anyway and was recognizable to the customer at no extra cost. But that is now changing.


Without a consulting promise and professional image, no consulting waiver necessary

It is therefore the client’s decision to forego advice from the outset at his own risk. In the case of insurance, there is sometimes a misconception that the legislator attaches great importance to citizens being well insured. However, the legislator only wants that whoever thinks he has to engage an intermediary should at least expect qualified advice, in the case of a broker even better. But it is not forced upon him. The principle of personal responsibility also applies here.


Information via the Internet

Increasingly, brokers are using the Internet not only to present their expertise and persuade customers to call them, but also to give them all the essential information they need to formulate their needs and desired insurance cover precisely in a form, but otherwise to dispense with advice. This means that products can be offered with significantly lower calculated commissions – alternatively, the customer can also receive individual advice on request in return for a fee or with more expensive rates subject to brokerage. In this way, brokers can also position themselves successfully between the direct insurers and Google, the premiums for customers with a low self-assessed need for advice become cheaper and the demographic change with fewer young people can also be successfully implemented in the intermediary community.


Commission fee ban apparently violates EU antitrust law

The insurance industry has joined forces in the “Wiesbaden Association”. Their task is to enforce the ban on commission payments in a cartel-like manner. The Treaty on the Functioning of the European Union (TFEU) regulates the prohibition of RPM (Article 4 TFEU). A prohibition to reduce the price for contract brokering by (possibly partially) passing on the commission – in order to reduce the costs of the insurance company – is obviously anti-competitive (Article 101 TFEU). Only if insurance intermediaries were as important to the state as notaries, for example, would the aspect of a remuneration cartel, which is prohibited under EU law, not come into play. Only the formal adherence to a prohibition on commission payments, which has been judicially declared ineffective and has in fact no longer been enforced, still stands in the way of the suspicion of a cartel. In any case, broker associations have already been prohibited by antitrust law from including in their professional guidelines the prohibition on commission payments, which has not yet been expressly and formally repealed by law.


Future obligation to disclose previously “hidden” remuneration

In addition, the future Article 24 of the EU MiFID Directive (Market in Financial Instruments Directive) is to prohibit, as of 2014, independent intermediaries from receiving remuneration from third parties (initiators, banks, insurance companies, other financial institutions) behind the customer’s back. This will then also make reversals due to concealed kick-backs superfluous, so that other reasons for reversals may have to be considered. The future independent financial advisor will be allowed to negotiate his remuneration with the client. Independent financial service providers will thus be forced to present the added value of their advice.


When insurance customers start doing the math

Increasingly, customers are also looking around for offers from abroad and then comparing these with domestic products from the point of view of terms and conditions. Thus, a public liability abroad can save up to more than 60% in insurance premiums. Or a foreign pension scheme in a non-EEA country with BiSex calculation offers up to 20% more in pension for men. Health insurance from abroad can be calculated entirely without age provisions, which can save up to more than 50% of the premium initially. Even tenders for insurance cover can be organised abroad as soon as a higher five- or six-figure premium volume is involved over the years.


Managing director must check commission levy or foreign insurance

Managing directors who pay prices demanded unseen in the market may be liable for damages. Therefore, a managing director is forced not only to choose a cheap business insurance even abroad, but he must also work for a commission levy or conclusion through discount brokers. A managing director who does not charge a commission fee or charges too little for a company property insurance policy or for the conclusion of direct and deferred compensation insurance policies in the company pension scheme, who does not check foreign offers or who concludes a policy via a distribution channel that is too expensive, is liable to pay damages to the company owners. This can go as far as accusations of criminal breach of trust, if he allows an intermediary to collect and keep undeservedly high commissions compared to the actual expenditure, or accepts it if the intermediary simply excludes foreign tariffs from his offer from the outset. When hiring insurance advisors, care must also be taken to ensure that they actually include all offers available abroad in their advice.


by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm


published in P.T.Magazine on 16.02.2015

and (published on 11/02/2015 under the headline: Cash back or net tariff?)

and (March 2015 issue under the heading: Commission levy by cash-back insurance broker).


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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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