*by Peter Schramm, expert and Johannes Fiala, lawyer
Two decisions from 2005 will massively change the contracts of life insurers and the settlement practice in the future in favour of consumers: These are the BGH rulings of 12.10.2005 (Ref. IV ZR 162/03, 177/03, 245/03) and the Constitutional Court with its decision of 26.07.2005 (Ref. 1 BvR 80/95).
Accusation of the Verbraucherschützer: For many years the account practice of the insurers stands in the crossfire of the criticism, and this not only because the lobbying of the financial groups in their favor numerous legal easements interspersed. Already before years a judgement (Az. 74 047/83, LG Hamburg), which permitted ?life insurance to the age pension is legal fraud? to express. Who canceled his life insurance already after approximately two years, had to determine that the surrender value amounts to ?zero? The paid premiums were settled in particular with conclusion costs (selling costs inclusive mediator commission) and a cancellation departure. Factually the money was not gone ? it had only someone else (kept). The courts now no longer want to leave it at that.
Agents are also liable: Experts say that more than half of all life insurance policies are terminated before the originally planned term is reached. This increases the acquisition costs pro rata temporis, because the commission remains the same amount ? even if the contract term and thus the customer’s payments are much lower in the end. A adhesion of the financial advisor for incorrect consultation can come thereby into question, in addition, an immoral too high brokerage and/or commission. Banks and insurance mediators combine the life insurance gladly with the financing with a fixed credit ? in particular with the own home construction financing this has substantial economic disadvantages to the consequence. Finally then the paying off of the own four walls lasts according to experience ten years longer and costs besides substantially more than with the annuity loan: Many a builder lost his home in a forced sale due to such additional charges. Also these so-called ?interest inflation and/or leverage transactions? are for years a hanger, mediators to the payment of damages to condemn.
Expropriation of the insured: From the protection of property by the constitution, also from the freedom of action with the protection against unequal negotiating position, the constitutional court concluded that the legislator had to formulate a legal regulation for the participation of the insured in factually existing, with insurance premiums acquired assets of the insurers, by the end of 2007. In practice, insurers can depreciate their securities and real estate under commercial law ? the insurance customer is then insufficiently involved in this. Also the so-called ?cross settlements? of the insurers are intransparent. Insurance supervision does not sufficiently protect insurance customers from disadvantages.
Repayment of the cancellation deduction to insurance customers: In the opinion of the Federal Court of Justice, clauses concerning the cancellation deduction, i.e. cancellation costs (?penalty fee?), were not transparent enough and therefore invalid. Consumers could therefore have a check carried out (even in the case of contracts that have long since been terminated) as to whether the insurer still has to pay something in arrears.
Repayment of acquisition costs to insurance customers: Acquisition costs are usually distribution costs ? depending on the contract and company, also depending on whether it is a foreign or domestic insurance, the acquisition costs can be 7% or significantly more. These costs were usually offset against the premiums from the first two years of the customer’s premium payment. The Federal Court of Justice has put an end to this practice and, by judicial interpretation of the contract, has stipulated that the insurance customer must as a rule get back at least just under half of the premiums paid in when the contract is terminated (rule of thumb). This means that even in the case of insurance contracts that have already been terminated and settled, the insured person is often entitled to additional substantial back payments in individual cases.
15 million contracts affected: The BGH means 10 ? 15 million contracts could be concerned by its judgements. When the legislator (by the end of 2007) will make a regulation is open ? the insurance industry now has the task of developing ?transparent? clauses for future contracts, i.e. clauses that are comprehensible to the consumer from the outset. The requirements of the Constitutional Court will also have to be taken into account.
Examine operational age precaution: The labor court Stuttgart (Az. 19 Ca 3152/04) went in its judgement of 17.01.2005 still another step further: Afterwards employees have to accept with a salary conversion no load with conclusion costs at all! Here the employee is protected still more, than the ?normal? insurance customer. Insurance customer, because the employee has always requirement on a surrender value computed from the sum of paid premiums ? without departure of conclusion costs, switching commission etc.. Employers with deferred compensation models for employees are affected by this.
New lawsuits ? unsolved problems: Also by the jurisdiction of the higher courts it does not remain spared to the consumer as a rule to let examine the recalculations of the insurers expertly by an expert. Particularly since for the consumer ?still more is in it?, than so far judged, because on the current market value it depends legally. If the clauses are invalid, the law applies – in this case § 176 VVG in the case of termination (and § 174 VVG in the case of premium exemption). This states that the surrender value is the current value of the contract. Deductions (cancellation deductions) may then be made from this current value, insofar as these are agreed and appropriate. The BGH now states that these deductions are not effectively agreed. Whether or not this is the case remains to be seen. If the BGH only attributes this to the lack of transparency of the clause on offsetting the acquisition costs by Zillmerisation, this would actually be irrelevant for the agreement of the cancellation deductions, because the cancellation deductions have nothing whatsoever to do with the Zillmerisation of the acquisition costs. Rather, the zillmerisation is already included in the calculation of the current value before the cancellation deductions are deducted from the surrender value.
Fallacy of the BGH: The BGH apparently assumes – as do most customers, by the way – that the current value is calculated from the premiums paid after deducting costs, including acquisition costs, and taking into account interest and risk premiums. In other words, like the development of a savings account – this is called a retrospective calculation. However, the German Insurance Contract Act (VVG) provides for a present value calculation, and this is carried out prospectively, i.e. on the basis of the promised insurance benefit and the premiums still to be paid. As a simple example, let’s look at this – without any costs other than acquisition costs and without interest. If the contract provides for EUR 1000 in premiums to be paid annually for 20 years and EUR 18,000 to be paid out at the end, because – regardless of how non-transparent and whether agreed at all – the first two annual premiums were offset against the acquisition costs – then the customer receives a surrender value – current value – of EUR 0 after 2 years, even though he has paid EUR 2000. The BGH now believes that this deduction from the EUR 2000 paid is inadmissible because the deduction of the acquisition costs was not agreed transparently. But that is not the point: according to the law, the surrender value is calculated as the current market value. And that means: the premiums still to be paid for 18 years – also EUR 18,000 – are deducted from the agreed benefit of EUR 18,000, leaving EUR 0 as the current value. These 0 EUR are at the same time the so-called zillmerized actuarial reserve – 2000 EUR are the zillmerized acquisition costs. However, the fact that this result is ultimately caused by the offsetting of the acquisition costs does not even have to be explained or otherwise agreed according to this legally compliant method of determining the surrender value/time value. Any statement to the effect that acquisition costs will be charged would be purely descriptive with no direct effect – it is not needed for the outcome. The invalidity of a clause describing this circumstance is therefore completely irrelevant; the statutory provision alone is sufficient.
Insurers’ risk of action: But what is the current value of a contract? In any case, a discount rate must also be taken into account. The current value of a non-contributory contract, for example, which provides for a benefit of EUR 100,000 in 20 years, is by no means EUR 100,000 at the present time. The insurers discount here with the actuarial interest rate of the contract, i.e. depending on the start of the contract with 4%, 3.5%, 3.25%, 3% or 2.75%. This means that a non-contributory contract providing for a benefit of EUR 100,000 in 20 years has a present value of, for example, EUR 45,639 (at an actuarial interest rate of 4 %) or EUR 58,125 (at an actuarial interest rate of 2.75 %). Whether these large differences are justified depends on whether there may still be compensation from other sources, e.g. through surplus interest. Because without any further surplus, EUR 100,000 paid in 20 years is worth the same today and does not depend on what interest rate the insurer has calculated. Even in the case of a zero bond, which provides for EUR 100,000 at maturity in 20 years, the current market value does not depend on when the bond (fixed-income security) was originally issued and at what interest rate; rather, it is discounted at a uniformly determinable capital market interest rate today.
Financial mathematics and judicial logic: flagrant violations of the laws of reasoning in judgments can render decisions vulnerable to challenge before the Constitutional Court, because logic is an integral part of the constitutional legal system. In particular, consumers could, with expert assistance, also bring the current market value into the field according to the German Insurance Contract Act (VVG) and calculate it in advance in order to achieve additional payouts in the event of premature termination of the contract. However, if the insurers had put too much emphasis on this legally prescribed calculation method vis-à-vis the BGH, the very question of the adequate calculation of a current value would have arisen. And thus the clearly determinable and usually used – but in principle not always doubtlessly resulting from the law – starting basis “zillmerised actuarial reserve” would have had to be questioned. In view of the current capital market situation, however, this could be even more disadvantageous if insurers were no longer required to calculate the surrender value/time value of contracts with an actuarial interest rate of 4 %, for example, but with a capital market interest rate of perhaps only 3 % or less in the near future.
Control is important: If you do not trust the insurer to have calculated the surrender value correctly and transparently, you can have its calculations checked by an independent mathematical expert. This does not require a lawsuit to begin with. But the insurance customer must, also with long since settled and/or canceled contracts, with the insurer a new account first of all require, if he does not want to do without his good money.
Peter Schramm, Dipl.-Math. Peter Schramm, Actuary DAV Expert for actuarial mathematics in private health insurance publicly appointed and sworn by the IHK Frankfurt am Main Actuarial office and postal address: Am Rauschenberg 7, 56355 Diethardt Tel.: 06772-962568 – Fax: 06772-962569 – eMail:firstname.lastname@example.org Internet:http://www.pkv-gutachter.de Johannes Fiala, Lawyer, MBA (Univ.Wales), MM (Univ.) Banker (IHK), Certified Financial and Investment Advisor (A.F.A.) De-la-Paz-Str.37, 80639 Munich Tel. 089-17 90 90-0 ? Fax: 089-17 90 90-70 ? eMail:email@example.com Internet:https://www.fiala.de
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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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