Johannes Fiala Press Release No. 2/2005
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). Reproach of the consumer protectors: 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 favour have pushed through numerous legal easements. Already years ago a judgement (Az. 74 047/ 83, LG Hamburg) was issued, which allowed to say “Life insurance for old age provision is legal fraud”. Those who cancelled their life insurance after only about two years had to realize that the surrender value was “zero”. The paid premiums were particularly charged with acquisition costs (sales costs incl. agent commission) and a cancellation deduction. In fact, the money was not gone – it had just been (kept) by someone else. The courts do not want to leave it now any longer thereby. Also mediators are responsible: Experts speak of the fact that more than half of all life insurances are terminated before reaching the originally intended running time. Pro rata temporis the conclusion costs increase thereby, because the commission remains amount-wise the same high – even if the contract running time and thus the payments of the customer are at the end much smaller. A liability of the financial advisor for incorrect consultation can come thereby into question, in addition, an immorally too high brokerage and/or commission. Banks and insurance brokers like to combine life insurance with a fixed loan when financing – especially when financing the construction of a home, this results in considerable economic disadvantages. 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 auction due to such additional charges. Also these so-called “interest inflation or leverage transactions” are for years a hanger-on to condemn intermediaries to compensation. 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 assets of the insurers, acquired with insurance premiums, 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. The so-called “cross-charges” of the insurers are also intransparent. Insurance supervision does not sufficiently protect the insurance customer from being disadvantaged. Repayment of lapse deduction to insurance customers: In the opinion of the Federal Court of Justice, clauses on 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 says 10 – 15 million contracts could be affected by its rulings. It remains to be seen when the legislator will pass a regulation (by the end of 2007) – 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. Checking company pension schemes: The Stuttgart Labour Court (Case No. 19 Ca 3152/04) went one step further in its ruling of 17.01.2005: according to this ruling, employees do not have to accept any burden at all with acquisition costs in the case of salary conversion! Here the employee is protected still more, than the “normal” 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: Even through the case law of the higher courts, the consumer is generally not spared the need to have the insurers’ recalculations expertly examined 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 waiver). 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, roughly like the development of a savings account – this is known as a retrospective calculation. However, the Insurance Contract Act (VVG) provides for a current 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, this can be explained – without further costs other than acquisition costs and without interest. If the contract provides that for 20 years EUR 1,000 per year in premiums are paid and at the end EUR 18,000 are paid out, because – no matter how non-transparent and whether agreed at all – the first two annual premiums were offset against the acquisition costs – then after 2 years the customer receives a surrender value – current value – of EUR 0, although he has paid EUR 2,000. The BGH now believes that this deduction from the 2000 EUR paid is inadmissible because the deduction of the acquisition costs has not been agreed transparently. But this is not the point: according to the law, the surrender value is calculated as the current market value. And that means: from the agreed upon achievement at a value of 18,000 EUR the still to be paid contributions for 18 years – likewise 18,000 EUR – are deducted, so that as time value 0 EUR remain. These 0 EUR are at the same time the so-called zillmerised actuarial reserve – 2000 EUR are the zillmerised acquisition costs. The fact that this result is ultimately caused by the offsetting of the acquisition costs does not have to be explained or otherwise agreed at all according to this legally compliant method of determining the surrender value/time value. Any statement to the effect that acquisition costs are offset would only have a purely descriptive character without direct effect – it is not required for the result. The invalidity of a clause describing this fact 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 4% actuarial interest) or EUR 58,125 (at 2.75% actuarial interest). Whether these strong differences are justified depends on whether compensation is perhaps still provided from other sources – e.g. through surplus interest. After all, 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, today’s current 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 court logic: Blatant violations of the laws of reasoning in judgments can make decisions vulnerable to challenge before the Constitutional Court, because logic is part of the constitutional legal system. In particular, consumers could, with expert help, also use financial mathematics to bring the current value into the field in accordance with the German Insurance Contract Act (VVG) and recalculate it in order to achieve additional payouts in the event of premature termination of the contract, if necessary. But if the insurers had put this legally prescribed calculation method too much into the field vis-à-vis the BGH, precisely the 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: email@example.com 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: firstname.lastname@example.org Internet: https://www.fiala.de
(Press release rws.de (25.10.2005))
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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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