With its recent rulings, the Federal Court of Justice (BGH) has stipulated the introduction of minimum surrender values in the event of termination of endowment life insurance policies (VersicherungsJournal 13.10.2005). However, the judges were under a misapprehension about the calculation of the surrender value, say insurance experts Peter Schramm and lawyer Johannes Fiala.
The Federal Court of Justice apparently assumes that the current market value is calculated from the premiums paid less costs (including acquisition costs) and taking into account interest and risk premiums. This is like the development of a savings account – a so-called retrospective calculation.
BGH has ignored legal fair value calculation
However, the Insurance Contract Act (VVG) provides for a calculation of the current value, and this is done prospectively, i.e. “starting from the promised insurance benefits and the premiums still to be paid”, says Schramm. He gives a simplified example:
If the contract stipulates that 1,000 euros in premiums are paid annually for 20 years and 18,000 euros are paid out at the end because the first two annual premiums were offset against acquisition costs, the customer receives a surrender value – current value – of 0 euros after two years, even though he has paid in 2,000 euros.
Confusion using an example
The BGH now believes that this deduction from the 2,000 euros paid is inadmissible because the deduction of the acquisition costs for contracts between 1994 and 2001 was not agreed in a transparent manner. But that is not the point: “According to the law, the surrender value is calculated as the current market value,” argues Schramm.
This means that the premiums still to be paid for 18 years (also 18,000 euros) are deducted from the agreed benefit (18,000 euros), leaving a fair value of 0 euros. This is also the so-called zillmerised actuarial reserve (the zillmerised acquisition costs amount to EUR 2,000).
Legal provisions applicable
The fact that this result is ultimately caused by the allocation of the acquisition costs does not have to be explained or otherwise agreed upon according to this legally compliant method, says Fiala. Any statement that acquisition costs are charged would be purely descriptive without direct effect. The invalidity of a clause is therefore completely irrelevant; the statutory provision is sufficient. But what is the time value?
A discounting interest rate should also be taken into account. The insurers discount here with the actuarial interest rate, i.e. at the beginning of the contract in 2005 at 2.75 percent. This means that a non-contributory contract, which provides for a benefit of 100,000 euros in 20 years, has a current value of 58,125 euros.
Hope for higher surrender values by law
The legal provisions give customers the opportunity to increase surrender values. “If clauses are ineffective, the law takes effect,” Fiala explains. Because it always depends on the current market value (surrender value). Deductions (cancellation deductions) may then still be made from this amount, provided that these are agreed and reasonable (§ 176
VVG in case of termination; § 174 VVG in case of exemption from contributions).
In order to protect property, the Constitutional Court has also instructed the legislator to improve the legal position of customers by the end of 2007 and to share in de facto existing assets of insurers built up from premiums. This should lead to a further increase in surrender values.
Does BGH violate applicable law?
However, Schramm and Fiala see blatant violations of the law in the most recent BGH rulings. “The current BGH requirement contradicts the legal regulations and is unlikely to hold up before the Federal Constitutional Court,” she concludes. Some insurers are probably also flirting with the constitutional review of the BGH rulings, but had only received an ordinary rebuff from the highest constitutional judges in the summer because of the lack of transparency in their profit participation (VersicherungsJournal 27.7.2005).
Insurers not eager for a clear definition?
If the insurers had more strongly argued before the BGH for the legally prescribed calculation method, the question of the adequate calculation of a fair value would have arisen. This would have made it necessary to question the clearly identifiable and generally used starting point of “zillmerised actuarial reserve”. Apparently no one wanted to risk this, Schramm believes.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.versicherungsjournal.de (published on 31.10.2015)
