– How can insured persons react to the increased risk of insolvency? –
Up to more than one million English life insurance policies (with-profit products) are to be transferred to Ireland. However, on closer inspection it is completely unnecessary to leave Great Britain (GB) for the existing policies.
Existing contracts need not be affected by the brexite
Only for new business does Brexit eliminate the simple possibility of concluding new insurance contracts from the UK across borders in the entire EU by means of a local licence.
Existing business relations with policyholders (UN) can be maintained by almost any insurer (BoD) worldwide, even if it is based outside the political Europe (EU). After all, no one in Germany will accept if his insurance contracts with German insurers are no longer fulfilled after his move to the USA and he can neither pay premiums nor receive benefits.
That – as quite a few people report – existing insurance contracts become “theoretically unfeasible” because of the brexite seems about as likely (i.e. impossible) as the fact that GB theoretically sinks into the sea in a day and a night, which not only makes insurance contracts unfeasible, but also leads one to ask oneself later “Did the island of Britain really exist – where was it and why did it sink?
Lovers of conspiracy theories will ask the question:
Is there perhaps another reason to part with the contracts, using brexite as a pretext?
Reverse transaction, revocation or opposition – or wait for transfer to Ireland?
British insurers are faced with the risk of having to unwind en masse due to incorrect revocation instructions. However, the money for this is not sufficiently available in the actuarial reserve (DK), as this only covers contractual claims. In Ireland, the risk would then have been limited to the limited policy reserve of the Irish insurer transferred there – the remaining British insurer would no longer have to pay for it with its capital. If there are too many revocations, the threat of insolvency is imminent – in Ireland probably more likely than if the contracts remained in the UK?
Guarantee fund secures (only) contractual claims of the UN
It is correct that the actuarial reserve only secures the contractual claims, although not their full contractual fulfilment. However, claims for the unwinding of revoked life insurance policies under enrichment law are not contractual claims and therefore cannot be secured by the actuarial reserve. In case of insolvency, the revokers may not receive anything at all, the others share the existing DK.
However, the contracts end, and with them all guarantees of expiry and all claims to current payments, for example for pensions. There is then something close to the low surrender value after the conclusion of the insolvency proceedings, which is reasonably certain, but often at a significant loss. In any case, in the event of insolvency, the contractual entitlement (for example, also to an insured occupational disability pension) ceases to exist, and the insolvency administrator settles (somehow, not necessarily according to the contract) what is still available. This means that there is only one severance payment for occupational disability (BU) and other pensions, and if the BU is imminent, there may be nothing left for it.
Deposit protection through Financial Services Compensation Scheme (FSCS)
It is precisely because of the transfer to Ireland that revocations could be even more likely. As long as no transfer to an Irish company with perhaps a much lower credit rating has yet been made, the statutory deposit insurance FSCS in the UK will apply to personal insurance policies, and for years now has been offering coverage for life insurance and pensions, which was recently increased from 90% to 100%.
Revocation before the Brexit ?
Some UN members hope, not without good reason, that the rapid revocation of their British life insurance policy will prevent the transfer to Ireland – and that their demand for unwinding under enrichment law will then be directed against the presumably more solvent British insurer. Because only insurance contracts are transferred to Ireland – the timely revocation destroys the contract before it can be transferred and transforms it into an enrichment-related reverse transaction relationship. Also, hardly any customer of British life insurance policies or investment pools would like to do without the deposit insurance of the FSCS with regard to his contractual claims. However, the FSCS is unlikely to cover non-contractual claims arising from unjust enrichment in the event of revocation.
What if the brexite is only a pretext for the treaties to be moved to Ireland?
Inevitably, the even hard brexite will not change anything for the UN. However, the transfer of the policies to a VR in Ireland leads to the loss of GB insolvency protection, without any real clear customer benefit. German law continues to apply anyway, if only because it is regularly explicitly agreed in the contracts.
Change of debtor with the approval of the court and/or the Financial Market Authority
The normal case in private law is that nobody has to have a new debtor or contracting party put under his nose; sections 414 et seq. BGB. There is a good reason for this, as the new contracting party may be less well supervised, or, for example, financially weaker.
An exception to this rule is the transfer of insurance portfolios with the blessing of the financial services regulator. However, it is more than questionable whether, in addition to the ability to fulfil the insurance contracts, it will also be examined whether the new insurer is also in a position to fulfil mass claims for restitution under enrichment law after revocation. This makes it all the more reasonable to declare a possible revocation before the transfer.
The transfer to Ireland appears to be an unnecessary actionism for the holdings, to their detriment, if only because of the loss of protection from the state guarantee scheme FSCS. However, there may be a reason for this which has so far been concealed by the parties involved – e.g. in order to separate themselves in the UK from the identified risks and costs, such as the mass reversal of the transaction or other known and unknown expensive legal risks which also threaten under EU law. The brexite would then only be a welcome pretext to convince customers and the UK court that the route across the Irish Sea is necessary because there is supposedly no future for them in the UK – without them realising that they simply want to get rid of the contracts as useless and risky.
Revocation only after the brexit together with transfer of the contract to Ireland?
It is in the stars whether British parent companies will lend their good creditworthiness to a new Irish BoD by means of a hard letter of comfort, as it were? It is also questionable whether British parent companies will compensate their Irish subsidiaries for future unwinding costs of revoked contracts? If the purpose of the transfer to Ireland is also to separate the company from these expensive legal risks, there is of course little point in continuing to pay for this from GB.
Greyhound principle: first come, first served?
The solvency rule of Solvency II also includes provisions for legal risks for some insurers – for reversals measured by the observed utilisation and a possibly increasing trend for the future. However, not all of them, if only because they are so difficult to quantify. Certainly not, however, if there is an unexpectedly strong increase, possibly caused by brexite-related irritations, questions and consultations with the consequence of mass repurchases with subsequent revocation. As some lawyers are currently promoting with their brexite information. Then it makes a lot of sense for the contracts to be handled in a limited-capitalised Irish company – purely economically and solely for the benefit of the British company, which may just be exempting itself rather than having to pay dearly for it? It appears that some questions have not yet been put to the insurers concerned and therefore await an answer?
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.juraforum.de (published on 03.04.2019)
www.paderzeitung.de (published on April 3, 2019)
www.pt-magazin.de (published on 23.05.2019)
www.experten.de (published in ExpertenReport 07/2019, pages 60-62)
www.experten.de (published on 31.07.2019)
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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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