Reduction of surplus in case of advertising with inflated example calculation inadmissible

– More than EUR 50 billion in additional claims possible for reduced maturity benefits –

– Around 20 million affected with an average additional claim of up to more than EUR 10,000 per contract.

Low interest rates destroy investment hopes for endowment life insurance policies

For almost 10 years now, all investors in life insurance policies have had to put up with interest rates on their savings capital of up to less than 4% per annum. For contracts concluded between 1995 and mid-2000, for example, there is then often only the guaranteed interest rate of 4 % at the time and thus no longer any interest surpluses at all. However, they were often advertised with the prospect of an annual 7 % to more than 8 % – the missing 3 % to 4 % add up to an annual revenue shortfall of a good EUR 15 billion, with an upward trend. So far, a good EUR 200 billion is already missing with compound interest – by the time the contracts expire, the shortfall will have multiplied to up to more than EUR 1,000 billion. Regrettable, but understandable in principle, because life insurers cannot distribute anything they have not previously earned.

Insurer liable for excessive advertising promises

MIf, however, the insurer knew that it would not be able to keep its advertising promises, it is nevertheless liable to that extent. However, he is only liable for the increase that he must have been aware of at the time of the conclusion of the contract – he is not liable for any further reduction due to unforeseeable developments in the interest rate level at a later date. In the case of every second endowment life or annuity insurance policy taken out from around 1995 onwards, up to more than half of the surplus reductions may prove to be inadmissible – this results in a claim for arrears of up to more than EUR 50 billion already accrued today.

Advertising with excessive sample calculations

Until the beginning of this millennium, insurers advertised maturity benefits for life insurance policies in so-called “non-binding sample calculations” that would have required investment returns of up to more than 8% during the policy term. In the following years, investors had to experience how these profit expectations melted away like snow in the sun, to meanwhile often less than 4 % interest. As a result, maturity benefits dropped significantly, often to only about half of what the insurer, its software or insurance intermediaries had predicted. Instead of a not infrequently promised doubling of benefits from surpluses, many customers today no longer receive any interest surpluses at all. The insurers should have been warned, however, because the current yield on German bearer bonds had already fallen to only around 5 % since the beginning of 1997 – at the beginning of 1999 it was only around 3,5 %. Insurers were still not aware of the fact that this development could not be compensated for in the long term by share price gains, even after shares had already fallen sharply from the year 2000 onwards.

Evidence decision of the Düsseldorf Regional Court confirms liability for excessive sample invoices

From the beginning of 1998 to the end of 1999, an investor had taken out several large life insurance policies for real estate financing with terms of 12 to 20 years with Victoria Lebensversicherung AG (Ergo). A private actuarial report commissioned because of the sharp decline in maturity benefits came to the conclusion that the insurer had assumed an interest rate of around 7.3 % for the entire term, including a current interest rate of 6.9 % alone, although only a current interest rate of 5 % would have been achievable in the long term. The customer therefore demanded the interest, which had allegedly been overestimated from the outset and later reduced by the insurer, in the amount of the difference of 1.9% per annum in addition, which would lead to around 15% higher maturity benefits. To the insurer’s surprise, the Düsseldorf Regional Court considered this to be sufficiently substantiated and therefore decided on 12.04.2012 (Ref.: 11 O 423/10) to commission a court expert opinion on the matter.

Wording of the order of the Düsseldorf Regional Court to take evidence

“Evidence is to be taken of the plaintiff’s allegations that the defendant had advertised the four life insurance policies named in his application … at the time of their respective conclusion with maturity benefits which – from an ex ante point of view – were based on considerably excessive surplus participations. The defendant’s forecasts were substantially inflated. The defendant apparently ignored the uncertain profit expectations which it had recognised and assumed without further ado that the figures for the last financial year would remain constant for a period of up to 20 years. Under no circumstances should the defendant have used the extremely high interest rate of 7 % over a period of 12 to 20 years.
In fact, from an ex ante perspective, it was not realistic that the extremely high surpluses on which the defendant’s performance overviews were based could be maintained. The defendant could not have assumed that the current surplus participation “preserved” in the performance overviews would be realized in the long term. …“

Chance of additional claims for millions of insured persons

This is the first time that a German court has addressed the question of the extent to which life insurers are liable for excessive and unrealistic interest profit forecasts. With regard to advertising with unrealistic mortality tables, there have already been judgements (OLG Düsseldorf of 15.08.2000 – Ref.: 4 U 139/99; OLG Koblenz of 26.05.2000 – Ref.: 10 U 1342/99), but insurers have repeatedly claimed that these are not transferable to unrealistic interest assumptions in sample calculations. The Düsseldorf Regional Court now sees this differently. This affects life insurance policies taken out between 1998 and 2003, for example, which are suffering badly from declining interest profits. This also applies to annuity policies for which the promised annuity amount has been greatly reduced, and also to policies that have already expired or been terminated. The fact that the insurer had pointed out the non-binding nature of its sample calculations was of no use to it here, as this did not constitute carte blanche to advertise profit prospects already known to the insurer to be excessive.

BGH confirms liability for advertising with excessive interest surpluses

Shortly before, the Federal Court of Justice (BGH ruling of 18.04.2012 Az.: IV ZR 193/10) had already expressed its opinion with regard to the advertising of a British life insurer with excessive interest surpluses:
“While the insurer is generally not required to provide individual disclosures about its business policies. If, however, as here, he advertises with surplus shares from the past, he must inform the interested party if it becomes apparent at the time of conclusion of the contract that the surpluses achieved in the past are unlikely or even impossible, e. g. due to changes in average life expectancy (Senate decision of February 2012 loc. cit.e.g. due to a change in average life expectancy are unlikely or even impossible (Senate judgment of 15 February 2012 loc.cit., para. 38; OLG Düsseldorf VersR 2001, 705; cf. also OLG Koblenz VersR 2000, 1357; MünchKomm-VVG/Wandt, supra §§ 6, 7 para. 50). The indication that surpluses from the past could not be guaranteed or that forecasts of future developments were not binding is not sufficient for this purpose.”
By further judgement of 18.04.2012, Az.: IV ZR 147/10 the BGH has underlined this view.

Rating firms and regulator issued early warnings

Since the end of the 1990s, experts have had no shortage of warnings about excessive interest surpluses. For example, the Insurance Supervisory Authority (BAV) expressed its views in a press colloquium on 17 June 1999:
“Especially in times of falling interest rates, however, the question arises as to whether advertising claims – even if they are formally non-binding – really give a realistic picture of the actual surplus power of a life insurance company (LVU). If an insurance company issues benefit presentations that are based on unrealistic assumptions about future surplus participation, the concerns of the insured are affected. A blatant example is the case where the necessity of a reduction in surplus participation in the future is already becoming apparent, but nevertheless sample calculations are still being made on the basis of the currently declared surplus participation rates.
Particularly in times of low returns on capital, there is a danger that, for competitive reasons alone, life insurance companies will issue presentations of future developments that could no longer be classified as realistic but as misleading within the meaning of the Act against Unfair Competition. The FOT’s job is to stop consumers from being misled.”

Accordingly, in a subsequent circular (R2 issued in 2000), the supervisor commented as follows:

“Misleading representations of future benefits under a life insurance contract may mislead a large number of policyholders into concluding contracts that are unsuitable or unfavourable for them. Furthermore, such a practice can lead to the fact that the fulfilment of the contracts is no longer guaranteed (§ 81 para. 1 sentence 5 VAG). If the information provided by the life insurance company is likely to mislead, the policyholder may have claims based on the right of withdrawal under § 13a UWG as well as claims for damages based on the legal institution of culpa in contrahendo. In this case, the amount of the claim for damages may exceed the guaranteed benefit plus the surplus participation advised in the advertisement, since the amount of the claims from culpa in contrahendo is not limited by the positive interest. There is also a significant risk that case law will subject such benefit representations to the requirements of the AGB Act. Finally, an improper presentation of the surplus participation could be regarded as a binding promise of performance by the insurance company and thus as an integral part of the contract. In this case, the ICE would be obliged to provide the “promised” benefit in accordance with the contract.”

BaFin does not offer legal protection in individual cases

BaFin was therefore aware of the irregularities. Nevertheless, complaints from policyholders to BaFin about misleading representations in insurers’ sample calculations have regularly led to BaFin not pursuing these complaints. BaFin does not see itself as representing the interests of individual policyholders, but of the collective and the performance of insurers in fulfilling their contracts. The background to this is also that, from BaFin’s point of view, every advantage awarded to individual policyholders, e.g. by the courts, must lead to less being distributed as surplus for the others. To the extent that these have already ceased to exist due to the insurer’s financial situation, the survival of the insurer itself would even be at risk.

Rulings on pension insurance transferable to interest surpluses

With its new evidentiary ruling, the Düsseldorf Regional Court confirms that it considers an earlier ruling by the Düsseldorf Higher Regional Court on pension insurance to be transferable to the issue of interest surpluses. On this subject, the Düsseldorf Higher Regional Court states succinctly in a judgement of 15 August 2000 (Ref.: 4 U 139/99) as a guiding principle:
“An insurer who advertises an annuity insurance model with profit shares that are no longer realistic as a result of increasing life expectancy is liable to the policyholder from the point of view of culpa in contrahendo. After termination of the insurance contract, the policyholder is entitled to reimbursement of the premiums paid by him. In addition, he is also to be compensated for the loss of interest which he has incurred because he has not invested the premium amounts paid profitably elsewhere.”

Also the OLG Koblenz states a.a.O. in its leading sentence:

“The insurer may not advertise surplus shares when it knows that it cannot grant them for the future.”
In the case of the OLG Koblenz, an insurer had agreed a monthly annuity of DM 2,515.20 with the policyholder and granted a supplementary annuity of DM 1,350 from surplus participations. He had made it clear that this supplementary pension could not be guaranteed for the entire pension period. However, this calculation was based on an outdated mortality table, which the insurer concealed, as well as the fact that a reduction in profit participation was already foreseeable as a result. The insurer then wanted to reduce the supplementary pension from surpluses because of the already known change in the life expectancy of the population. Both the Regional Court and the Higher Regional Court of Koblenz upheld the policyholder’s claim for payment of the original supplementary annuity. The plaintiff had a contractual claim for performance for payment of this annuity and was in particular not limited to the assertion of claims for damages from pre-contractual breach of duty (culpa in contrahendo).

Protection and warning obligations for current insurance contracts

It is recognised in case law that it may be necessary to inform the business partner even after the execution of a contract (i.e. post-contractually), for example about insufficient mortality provisions and a resulting investor deception.
Such duties of disclosure exist always and constantly, during the ongoing contractual relationship. If an insurer advertises with surpluses from the past, or if it allows these unrealistic data to be used in its sales software and in the training of its insurance intermediaries, case law forces it, out of consideration, to provide information about the fact that, for example, due to changes in average life expectancy, the surpluses are unlikely or even impossible. This also applies if the customer can demand reversal as compensation for damages.

Mostly out-of-court settlement

Judgments in relevant cases are rare because insurers offer last-minute out-of-court settlements. In the experience of the authors, reversals regularly take place if, for example, an expert opinion proves the extent to which the surpluses promised at the beginning of the contract were to be regarded as excessive from the point of view of the time. According to the BGH, the statute of limitations begins to run when the policyholder becomes aware of the excess of surpluses, e.g. through an expert opinion. However, in the case of contracts that have already been paid out, the statute of limitations is threatening – in the case of endowment or annuity insurance policies that are still in force, including current annuities, it is necessary to examine the extent to which the insurer had actually advertised – in particular from 1998 to approx. 2003 – with known excessive surpluses when the contract was concluded or before the start of the annuity.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of


Helmut Richardi Verlag | Finanzen & Steuern (under the heading: Supply promises – shortening of the surplus with advertisement with exaggerated example calculation inadmissibly)

and (published in Surgical General, March 2012 under the headline: Life Insurance: Reduction of surpluses is impermissible)

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Dr. Johannes Fiala Dr. Johannes Fiala

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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