– What life insurance companies and pension funds are hiding from premium payers –
Life insurance policies for occupational (bAV) and private (pAV) pensions, but also pension schemes, can provide far fewer benefits than promised or promised on paper. However, policyholders often have a claim for damages against the intermediaries and advisors or product providers, because the failure to explain the context is obviously often akin to deception by omission when the contract was concluded. However, many consultants do not know any better, because only clear appearing – in reality unclear – terminology almost inevitably leads to deception – however, this does not stand in the way of liability.
Benefit reductions of up to more than 50%
Ratings are often used in the sale of life insurance policies, including those based on the erroneous assumption that the fact that guaranteed benefits are not guaranteed, which is concealed in the ratings, affects all products or tariffs equally and is therefore irrelevant. This is similar to a television salesman explaining all the differences between the devices on offer in detail by means of a comparative product test, but not mentioning the fact that each of the devices explodes after 5,000 hours of use, because all devices are affected by this in the same way and this is therefore irrelevant for the customer’s decision between the offers, which is why it does not have to be mentioned in the product test. Even the use of such unscientific ratings will allow the policyholder to reverse.
The frequent dissemination of the incorrect claim that the guaranteed minimum pension is guaranteed is then misleading for insurance customers in the pAV, but also for employees and employers in the occupational pension system. At best, this is also based on ignorance, and can lead to a challenge on the part of the policyholder on the grounds of error or deception.
Lehman Brothers Bank guarantee
There were insurers who advertised the guarantee of a minimum maturity benefit in unit-linked policies. Later, it was not provided, and the insurer said that it had no problem with this because it was clearly stated in the contract that only Lehman offered the guarantee. The intermediary had not asked himself the questions about the creditworthiness of the debtor and a risk protection in this respect because he considered the guarantee to be unlimited and absolute. And so he then told investors, speaking in his own words of a guaranteed or safe minimum benefit. Then it is no longer important for liability whether a restriction arises somewhere from the small print – or even only from laws. The policyholder will ask the court to find that the product was not suitable for retirement because it was speculative in a similar way to a closed-end mutual fund or entrepreneurial investment.
Riester premium guarantee and other misconceptions
Even the premium guarantee for Riester policies is as little certain as the guaranteed maturity benefit, lump-sum settlement, annuity, guaranteed surrender value or guaranteed interest rate, even if brokers like to claim this and often believe it themselves. Intermediaries then speculate about these terms, for example that it is stated in the law that the insurer must guarantee this, and in the case of Riester this has even been certified by the supervisory authority. However, the latter only checks whether the contribution guarantee required by law at the start of the pension is on paper in the Riester contracts submitted to it and then certifies this by means of a certificate. This is despite the fact that BaFin of course knows full well that it will itself reduce these guarantee payments if the insurer can no longer afford them at a later date. Some intermediaries also suspect that the state might be liable because of the guarantees: if the guaranteed interest rate is nevertheless – supposedly – in the law, it would obviously have to be guaranteed by the state. Such already rather droll views go then into the customer consultation and secure thereby in any case guaranteed the adhesion of the mediator.
Pension funds can reduce benefits to less than 50 percent
Chambers of pensions or pension funds cannot become insolvent in and of themselves. According to their statutes, they can reduce benefits at any time, even for pensions already in progress. This will soon be unavoidable simply because of the low-interest phase since the 1990s – the first pension schemes have already reduced current pensions. The situation is similar with pension funds, but with the pleasant consequence for employees that employers thereby become liable for default and have to pay the difference themselves. It only becomes unpleasant for the employee if the employer is then also no longer able to pay because it becomes insolvent – because due to the admittedly uncertain direct claim to the pension fund, the Pension Security Association also pays nothing if the employer defaults. Hardly any occupational pension broker or adviser will have provided actuarial and liability advice on alternative solutions that would have promised less liability for the employer and foreseeably higher benefits for the beneficiaries.
Options in the event of a deterioration in the financial position of the life insurer
The various possibilities for reducing benefits, even below any promised guarantee, also exist in combination for the insurer. A look into the torture chamber for previously deceived policyholders and their agents:
Frequent failure to inform customers about the risk of loss in life insurance policies
It should be the exception if an intermediary has fully explained these risks of loss to the client. This can then result in liability claims against intermediaries for incorrect advice, for which the insurer is regularly jointly liable in the case of insurance agents. This is so important for the customer’s investment decision precisely because the possibilities of reducing the insurer’s benefit – despite the so-called guarantees given – are also possible in combination, and their explanation would therefore be necessary for error-free advice on the investment risk.
(a) the insurer may proceed to a reduction of the future current profit participation. This means a reduction in maturity benefits from surpluses, surplus annuities and non-guaranteed premium amounts, insofar as these are offset against surpluses.
b) The reduction of the final surpluses that have not yet been bindingly committed could also be considered – up to the last contract year and down to zero.
c) In addition, hidden reserves (valuation reserves) may be released with the consequence of a reduction in the statutory participation in the valuation reserves and a reduction in the interest surpluses.
d) In addition, reinsurance may be used to generate reinsurance commissions that are recognised in profit or loss, with a negative effect on future cost surpluses.
e) Pursuant to § 163 of the German Insurance Contract Act (VVG), premium increases (including the guaranteed premium) or reductions in future and current guaranteed benefits are conceivable, insofar as they are provided for by law and not excluded by contract.
f) The insurance board may, pursuant to § 169 para. 6 VVG for a limited period of one year, the insurance company may also decide to reduce the guaranteed surrender values without further ado if the contracts commenced from 2008 onwards. In the case of contracts concluded between 1995 and 2007, a reduction to the so-called current value is permissible depending on the capital market situation, unless a guaranteed minimum surrender value has been voluntarily agreed, which can then only be reduced for other reasons.
g) Shareholders’ contributions – capital increase: not only this can lead to an increase in the shareholders’ share of the surplus, leaving less for the insured. An increased solvency requirement at the insurance association can also lead to reduced surpluses.
(h) there may be a transfer of some or all of the insurance portfolio to another insurer, or to a financial investor seeking to maximise profits from the run-off of the acquired policy portfolio.
i) The distress of an insurer leads to the transfer of the insurance portfolios to Protektor, if necessary with a reduction of the guaranteed benefits in accordance with § 125 para. 5 Insurance Supervision Act (VAG) by up to 5 % – condition: if at all fundable by the industry).
j) It is also conceivable that a provisional payment ban may be imposed by order of the supervisory authority pursuant to section 89 para. 1 ISA.
k) It is also possible for the supervisory authority to reduce the guaranteed insurance benefits to the extent necessary, in accordance with the actuarial reserve that is actually still available in terms of value, section 89(1). 2 ISA. In this way, the insurer itself is reorganised by the assets of the policyholders (formed there by the payment of premiums by the policyholders) if, for example, the investments have fallen more sharply in value. An expropriation of insurance savers for the common good.
l) Insolvency may occur, with termination of the insurance contracts if necessary and payment of the cover funds still available in each case. Only the Federal Financial Supervisory Authority (BaFin) is entitled to file an application with the insolvency court.
m) There would then also be the reallocation of terminal bonuses to a basic participation in the valuation reserves, whereby the reallocated parts would simply disappear in the statutory valuation reserves paid anyway,
n) as well as the planned statutory reduction of the valuation reserves themselves.
o) Guarantees that do not originate from the insurer depend on the performance of external providers: for example, only Lehman was liable for some guarantees.
p) Some “guarantees” – as in the declaration of current surpluses – relate only to the current year – after which they can be completely redefined.
q) Some so-called guarantees are in fact only a basic obligation – moreover, often only related to the collective as a whole – but are open in terms of amount and timing as well as allocation to individual contracts. A “guaranteed chance to win” so to speak.
r) The statutory minimum allocation of surpluses to the provision for insured persons may be undercut, e.g. in the event of capital requirements on the part of the insurer, with BaFin approval.
s) In emergency situations, the insurer may also cover its capital requirements by withdrawals from the surpluses already allocated – but not yet distributed – for the insured persons.
t) If necessary, the surplus funds from the provision pot for the insured persons can also be used instead of increasing the surpluses to increase the provisions for financing the benefits that are guaranteed anyway.
The Understanding Guarantee:
One should also correctly understand the understanding guarantee of some advertisements. For example, if the customer doesn’t get a service, you tell them so that they get it right off the bat. It’s not called a guarantee of understanding.
Sometimes there are simply misunderstandings, such as with the admission guarantee without a health check and without a waiting period. If the client then wants something for the treatment he has started, the exclusion for claims already in progress kicks in, which is something else again. At the stake, many a heretic has pondered whether the promise of a fair trial and free escort to the stake was kept.
Once the policyholder understands these details, they may join the ranks of those looking for alternatives and question the content of the mediation and usually incomplete advice. The documentation about the consultation, which has to be handed over to the customer by the intermediary by law since 22.05.2007, will make it easier for the policyholder to provide evidence, up to and including the reversal of the burden of proof. Employees can also turn to their employer for incorrect advice given by an intermediary sent by the employer – because the employer is also liable under employment law for assistants commissioned by him.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
http://www.innovationundtechnik.de (Issue 1, January 2014)
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About the author
PhD, MBA, MM
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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