– How risk costs destroy the refund in case of insufficient cancellation instructions –
According to the BGH, if a life or pension insurance policy taken out between 1994 and 2007 is revoked, the premiums plus of all uses less the risk costs consumed for the risk must be repaid by the insurer.
By risk costs the BGH would like to understand (e.g. judgements of 29.07.2015, Az. IV ZR 384/14 and 448/14) for example the contributions used up for the insured death benefit, furthermore those for an insured benefit in the case of occupational disability – pensions or even just exemption from contributions in the case of occupational disability.
Dogma, as if there were a savings component with interest
This is based on the idea that the premium of an endowment insurance policy contains a savings component, which is paid out with interest on maturity. In addition, a risk share for the sum insured in excess of the saved capital, which in the event of death is paid out as a benefit in addition to the savings portions already saved with interest.
Naturally, even in the event of revocation after death, repayment is still due in addition to the death benefit already received, since the death benefit has already been paid with the deducted risk costs. This means that it does not matter at all whether the risk has occurred when revoking the contract – if, for example, an insured annuity due to occupational disability is already running, it will still have to be paid despite revocation.
Actuarial theory shows error of the BGH
However, this commonly held notion lies alongside the actuarial principles that every actuary learns.
In fact, an endowment insurance policy covers two different risks.
One risk is death before the expiry of the life insurance policy. The full sum insured is then due in the event of death, not just a difference on supposedly saved savings portions. Death contributions must be calculated for this purpose. Since the premiums of an endowment insurance policy should be constant, but the mortality risk increases with age, these death premiums initially also include a “savings portion” from which a mathematical reserve is built up. This is then used to finance the risk contributions, which increase with age, until they fall back to zero at maturity because they have been used up.
This risk premium (but perhaps not the calculated risk profits and costs) remains with the insurer – despite revocation; in other words, the policyholder may retain the corresponding benefit from the insurer despite the occurrence of the risk. The indemnification of the insurer due to the occurrence of risk is therefore without influence on the amount of the compensation owed according to the right of enrichment after a revocation or objection.
The other risk is the case that the insured person reaches the agreed expiry date alive without dying first. This is more or less likely, at least never certain. Here too, premiums – the endowment contributions – must be calculated. These also contain a savings component, from which a mathematical reserve is built up. Until expiry, this rises to the endowment sum agreed for the endowment. If the policyholder dies before this date, this actuarial reserve lapses in full because the insured risk of survival of the expiry has not occurred. This is already taken into account in the endowment contributions to reduce the calculation.
In an endowment insurance policy, there is no savings component in addition to a risk component in the premiums, but two premiums for two different insured risks – one for death and one for survival – stand side by side.
The complete contributions are to be deducted as risk contributions
If, according to the Federal Court of Justice, risk premiums are therefore to be deducted on revocation, then it is justified to deduct the entire premiums, i.e. risk premiums for death and thus also those for survival.
A simple example to illustrate
The fact that the risk premiums for survival are also to be deducted becomes clear from an example:
A policyholder pays a single premium of EUR 100,000 per 10 persons into a life insurance policy (or pension insurance policy) that does not provide benefits in the event of death, but pays EUR 1 million in the event of survival – which is only 10% likely to occur -. Other costs and interest are neglected for the sake of simplicity, as well as possible uses. This is a realistic assumption given the current ECB policy.
Now 9 people die as planned, for whom no death benefit is due. For the tenth survivor, the policyholder receives the EUR 1 million agreed endowment payment. This is neutral for the insurer, since it has received the EUR 900,000 of the previous deceased in addition to the EUR 100,000 paid in for the survivor. EUR 100,000 risk contribution for the agreed endowment sum was finally sufficient.
Now, however, the policyholder cancels all of these endowment policies except for the survivor’s, for which he has already received EUR 1 million – only the others were bad business. According to the BGH, he is now preparing the bill:
Premiums paid in each case of EUR 100,000, plus benefits of zero, and minus risk premiums of zero for the – uninsured – death benefit, results in a balance of EUR 100,000 repayment due to cancellation. So a total of EUR 900,000 in repayments for the nine revoked policies plus EUR 1 million for one paid out on survival makes a payment of EUR 1.9 million for the insurer out of EUR 1 million in premiums paid to him.
This does not change even if two die and eight survive, each of whom receives EUR 125,000 in endowment benefits, totalling EUR 1 million.
How the Federal Court of Justice opened a milkmaid’s account
The solution could now be for all life insurers to pay until they are broke. Or they can let themselves be caught by Protektor, be rescued by the state, or report their impending insolvency to BaFin. Or in recognising where the error of reasoning of the BGH lies.
This is obvious from the above example: the EUR 100,000 paid in premiums were not “savings premiums” but risk premiums for the risk of experiencing the expiry date. Contributions for the insured survival benefit. These premiums – not only those for a death risk – must therefore also be deducted for the insured survival risk. The endowment contributions are required and consumed in the group for the risk that the insured person experiences the endowment date. They are not any kind of freely available savings contributions like on a savings book, even if naive minds may imagine it that way or are spread as a legend at vocational schools for bankers.
The invoice for the revoked contracts will then be as follows:
Premiums paid in each case of EUR 100,000, plus benefits of zero, and less risk premiums for the insured survival benefit of EUR 100,000, results in zero repayment on balance due to revocation. For life insurance policies from 2008, the legislator has already regulated it accordingly, §§ 9, 152 VVG.
Risk and opportunity are the same
There is no mathematical difference between risk and opportunity. In roulette there is a risk of red or black. Only when someone bets on red will he see one as an opportunity according to his preferences and the other as a risk. The casino would have to see it the other way around, just like the person who bets on black.
Thus, the probability of dying is only the complement of the probability of survival. However, just because many see survival as an opportunity rather than a risk according to their preferences, it is not justified to regard the premiums required for the survival risk as savings and only those required for the death risk as risk premiums.
For example, the Federal Court of Justice (BGH) says in its judgment of 11.11.2015, Az. IV ZR 513/14, that “in the case of the unwinding under unjust enrichment law, the insurance cover enjoyed in any case de facto up to the objection is to be credited. The value of the insurance cover can be measured by taking the premium calculation into account; in the case of life insurance, for example, the risk portion can be significant. But then, however, he then quite inconsistently focuses only on death insurance cover, not at all on survival insurance cover, as if no insurance cover had been promised at all. Apparently, the BGH has simply not thought this through to the end.
How is the rescission of the contract to be expected in case of revocation?
It is hardly to be expected that the Federal Court of Justice will be convinced by actuaries or lawyers of the insurers that he has sat on a milkmaid’s bill. This would mean overstretching expectations of the persuasiveness of actuaries and insurance lawyers. You don’t always get justice in court, you just get a verdict. The naive idea of risk premiums for death benefits and completely different types of savings premiums has become too deeply entrenched everywhere. In this respect, it is quite clear that expert opinions by an actuarial expert in accordance with the requirements of the Federal Court of Justice naturally result in the 100,000 EUR paid in each of the above nine deaths being calculated as a recovery. However, this is unlikely to cause problems for insurers, as experience shows that over 99 percent of insurance customers are far too lazy to make any serious effort to withdraw. In this respect, the alleged collateral damage caused by the Federal Court of Justice’s violation of thinking laws for life insurers is limited.
However, it has not yet been determined whether the VVG 2008 violates the effectiveness requirement under EU law in consumer protection by failing to provide for a noticeable sanction in the event of a lack of or incorrect information on the right of withdrawal. Because after one year there is as much or as little in the case of revocation as in the case of termination. In addition, courts also deal with unwinding of claims under enrichment law from revocation cases for life insurance policies taken out up to 1994. It is also far from certain to what extent, even in the case of pure term life insurance or occupational disability insurance (independent or as supplementary insurance), repayment of parts of the premium – such as costs and actuarially calculated but actually unused safety margins in the risk premium – and, if applicable, benefits must be made upon cancellation.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
with friendly permission of www.allgemeiner-fachverlag.de
published in “Zeitschrift für Versicherungswesen” issue 05/2016, pages 147-148
Library of the Federal Court of Justice – new articles 25.04.2016 – 29.04.2016
Reversal through revocation – despite cancellation or contract expiry in the KLV and RV?
published in the “Zeitschrift für Versicherungswesen 67(2016), S. 250-252
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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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