Financial Services (Univ.Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Lecturer in Civil Law and Insurance Law (Berufsakademie Heidenheim, Univ. of Cooperative Education), Banker (www.fiala.de) and Dipl.-Math. Peter A. Schramm (Diethardt), Actuary DAV, Expert for Actuarial Science, publicly appointed and sworn by the IHK Frankfurt am Main for Actuarial Science in Private Health Insurance (www.pkv-gutachter.de).
Disclosure of brokerage fees and commissions are only the beginning
Already on 27.04.2007 the Federal Ministry of Justice presented the draft of the “Ordinance on Information Duties for Insurance Contracts”: According to this, insurance intermediaries are to disclose their performance-related remuneration in euros and cents prior to the conclusion of the contract. Initially, only life insurance, occupational disability and accident insurance are to be affected. Property insurance and private health insurance are left out for the time being. An insurance association has apparently done almost nothing to oppose this proposal, apart from calling for a percentage statement – but that too carries the risk of non-transparency.
Prosecutor sues insurance broker
In October 2004, New York Attorney General Spitzer sued Marsh & McLennan, the world’s largest insurance broker, for commission gouging. His accusation: Instead of choosing the best offer for the customer, the dishonest insurance broker was guided by the amount of commission. The daily press also reported on the concealment of the commission amount. As evidence of unfairness, bogus offers were also obtained, as reported by DIE ZEIT, among others.
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, about 50% of the insurance brokers ceased their activities. Dr. Marc Surminski (son of the ombudsman for private health insurance) recently reported on this in the Zeitschrift für Versicherungswesen (ZfW, 8/2007, p. 240 f.).
Trend towards transparency – from the distribution of brokerage fees to their abolition
The brokerage fee is also already being discussed in other European countries. Consequences that have been taken or are imminent range from the distribution of brokerage fees for life insurance policies over 10 years to total abolition. The report published by the EU Commission in January 2007 also puts the abolition of brokerage fees and commissions on the agenda in Europe. The insurance 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 (e.g. via net policies and transparent remuneration directly from the customer) is hindered. Already today, the question arises whether the prohibition of commission fees is still compatible with the legal situation in Europe.
Strategies of the insurance companies?
Traditionally, the insurance industry has always relied on “stalling resistance”, says the ZfW: “… the German insurers no longer have too many friends in politics and in the authorities either”. This is also the line taken by journalists when they suspect behind closed doors that “… at the X conference the slogan was issued �continue to drive through red lights, but don’t get caught�”. All just bad rumors? Basically, the question arises as to which insurance companies will still be attractive for intermediaries in the future: For as soon as the intermediaries, and especially the brokers, have realised that it is they who bring in the business, the “distribution of brokerage fees according to the lord of the manor” will find its natural limits. Insurers who do not strategically prepare for this will also have to more or less withdraw from the market.
Strategy in the training market
Regardless of which strategy a broker or an exclusive sales force adopts – in any case, the demands on the competence and personality of the intermediary are greatly increased. Corresponding qualification offers are rare. One of the rare examples of the mediation of appropriate entry qualifications into the market is – with the award of an academic Bachelor degree also interesting for highly gifted – the course of studies “Insurance” with the focus “Insurance Sales and Financial Consulting” at the Berufsakademie-Heidenheim (http://www.ba-heidenheim.de/vers), the emphasis is on the mediation of (applied) theory AND practice. The lecturer Ralf W. Barth, http://www.exactus-ag.de/index.php? id=7, from home management consultant and VSH broker formulates the crucial questions for practice and study, as follows: Status determination: what, how, where, as what and with whom am I currently working (scope – target group – market – environment – product range – depth etc.) What of this makes economic sense? What is future-oriented and has prospects for further growth (standing still is regression – those who don’t grow die!) What will the industry look like in 10 years? Why wait for that? Better to position yourself today (hedgehog strategy!) So what do I have to change? In which direction with which partners / advisors etc. to do it professionally enough? How do I stand out from the competition (what makes me so unique) and does my client want that at all (eco-car is a great idea – but no one wants to pay the price for it!) Which market strategy can my client understand, indeed does he really want from me? If fee-based consulting is the right direction, what is the right way to get there? The BA-Heidenheim has opened its practical courses also for external guest students from the intermediary community.
Strategy of the insurance brokers?
Not only that for months numerous brokers have been prophesying “In 2010 there will only be fee-based advice and net tariffs” – the activities of the EU Commission could, as it were, act as a “turbo” for such a development. 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 seems to have declined, the reputation of strategically and professionally fit (and then probably very well surviving) intermediaries will tend to increase. There are already young, innovative sales companies that have begun to establish fee-based advisory services, even in the private customer segment. And large distributors are in a position to choose an interchangeable insurer as risk carrier for their own finished products. Insurers could then soon find themselves in a role similar to that of suppliers to the automotive industry.
Shortcomings of the insurance intermediary
The EU Insurance Mediation Directive will ensure that customers become increasingly critical and, in view of the statutory minimum insurance, more willing to sue. According to the motto “The broker gave me wrong advice – but he is well insured” not only lawsuits will increase, but also the premiums for the pecuniary loss liability insurance (VSH). The VVG reform will in future also grant the intermediary’s client a direct claim against the VSH insurer: The restructuring of an intermediary’s VSH contract can economically cost the existence. All this can lead to a focus on quality management, further training, own archives with information about customers and product providers, networking and specialisation. Also noteworthy is the recent statement by the ex-chief executive of an insurer that around 96% of all software offers for pensions “miscalculate” – regardless of whether they were provided directly by the software house, by the insurer or by a credit institution. Similarly suboptimal is mostly the form system equipped: Ineffective clauses in the brokerage contract, void sample templates for the documentation and consultation waiver, and uniform documentation software without suitability in the liability case seem to be the rule. The cheap samples often prove useless in court.
Deficits in insurance sales
The insurance intermediary suspects that he is in doubt on the front line – as soon as he has the first liability suit on his hands, this becomes a certainty. Yet endowment insurance alone offers serious liability potential for insurers and brokers: Interest inflation through combination of fixed-rate credit and CLI Leverage transactions, immediate annuities, credit-financed annuities BOND judgement: long-term capital investment, although it was just in the room that the investor will not hold out for the duration, for the premium payment … Surrender value too low in case of early termination, lapse deductions too high, etc. Incorrect information in printed matter: e.g. on tax exemption or exemption from SI contributions Unrealistic promises: False forecasts (either wrong data basis with embellished forecasts [siehe BaFin Berichte] or incorrect calculation methods, as is also the case with the IRR of closed investments). Liability for “binding” advertising statements Liability for unclear clauses, § 307 BGB, unclear contract costs lack of transparency, see also the BdV test cases Liability for faulty documentation forms Advertising with non-existent or different legal opinions on alleged liability security in occupational pension schemes, etc.etc. 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. The networks of intermediaries will also contribute to the fact that individual training managers will only leave behind “scorched earth” – and new business will migrate.
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. It makes a difference in transparency for the customer whether the insurer says that for a contract with a monthly premium of EUR 100 over 40 years, acquisition costs totalling EUR 1,920 will be charged in the first five years or whether he only has to say that monthly acquisition costs amounting to only 0.067% of the premium sum will be charged in the first five years. Who does the math to make this the same amount. Only the indication of the commission/courtage in absolute amount is suitable to give the customer the right idea.
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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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