Stress test by financial regulator leads life insurance company into insolvency

– What are the scenarios of settlement in insurance due to low interest rates ? –

Customers of life insurers are shaken: on 16.12.2014, the business press reported that a Swiss life insurer had now filed for insolvency, and had become a victim of low interest rates. The 13,000 policies were taken over by a rescue company. Due to their higher capitalisation, life insurance companies from Switzerland are considered to be
are generally considered to be statistically about twice as safe as those from Germany.

Financial supervisor approves portfolio transfer

If a life insurer in Germany is on the verge of bankruptcy, the Federal Financial Supervisory Authority (BaFin) can authorise the transfer of the insurance policies to another insurer, a consortium or a rescue company. If Pfefferminzia has speculated, the customer can only take note in the end that his contract is now
will be continued at the Banania. In the process, not only the insurance contracts but also the associated investments are transferred to the new risk carrier.

Transfer of stock by insolvency administrator contestable

In the event of the insolvency of a life insurer, the subsequent insolvency administrator could well contest the transfer of the insurance portfolios together with the associated investments for the actuarial reserve on the grounds of creditor disadvantage. The fact that the transfer of the portfolio takes place on the basis of a contract between the transferring (later insolvent) insurer and the receiving insurer, which was expressly approved by the supervisory authority, does not change this. Because this approval is only an additional requirement, makes the whole thing
but not incontestable.

Creditor disadvantage by giving away future profits

The premiums – which are now collected by the new insurer – also include administrative costs and safety or profit margins, etc., so that profits are also generated from these.
which the other creditors miss out on. If, at the latest, a measurable loss can be determined by an expert for the previous, i.e. ceding, insurer, the following are to be taken into account
the parties involved are exposed to the risk of criminal liability for an insolvency offence or breach of trust. This can lead to personal responsibility, as can the accusation of an intervention that destroys the company’s existence, which could also relate to decisions made by the management and the responsible actuary some time ago – for example, if the actuary had endangered the company by proposing a surplus participation that was too high.

Approval by the Financial Supervisory Authority does not mean carte blanche

The supervisory approval itself is not contestable because approval does not mean that there is no longer any legal objection to its implementation by the insurer. It does not exempt those implementing the permit from examining whether the implementation is lawful. This has always been the view of the courts – and the supervisory authority also refers objections to its approvals to the ordinary courts, where the insurer is to be sued, but never the supervisory authority.

Symbolic purchase price in the case of stock transfer as an indication

Even a symbolic purchase price in the case of a portfolio transfer is not sufficient to eliminate the suspicion of a partial or mixed gift at the expense of the other creditors – the facts of the so-called creditor disadvantage. The contestability of the transfer of the portfolio results for the creditors before the insolvency from § 4 Anfechtungsgesetz (AnfG) and from
of insolvency by the insolvency administrator under section 134 of the Insolvency Code (InsO).

If the portfolio of insurance contracts is to be transferred along with the associated actuarial reserves, the hidden reserves and hidden liabilities will also be transferred.
must be taken into account, i.e. also economic assets off the balance sheet. And also the inventory itself, including the customer relationships already acquired with it,
is worth something, after all, because future profits can be generated from it.

Four-year contestation period in Germany – one year in Switzerland

In the case of mixed, i.e. partial, gifts, the contestation period is four years. In Switzerland, the time limit for such so-called Paulian challenges is only one year. Approval by BaFin may thus ultimately prove worthless in protecting policyholders from becoming part of the insolvency proceedings after all. Legal
The rule is reversal, i.e. the transfer of the insurance contracts back to the previous or former insurer. A supplementary payment or compensation for lost value would at best be
in the alternative.

Settlement of life insurance contracts by insolvency administrators

In the case of financial institutions, i.e. banks and insurance companies, BaFin has the sole right to file for insolvency proceedings. As soon as the transferring, former insurer transfers its portfolios
no supervision and also no BaFin licence is required any more and the licence to conduct insurance business expires. However, this means that the management itself is entitled and, if necessary, obliged to file for insolvency, because the BaFin authorisation no longer applies.

As soon as an insolvency administrator becomes active after the transfer of the portfolio, BaFin is therefore regularly left out in the cold and no longer has the possibility, for example, to adjust the debts to the insurer’s remaining capital by reducing the obligations – including the guarantees of the life insurance company vis-à-vis insurance customers and
to avert insolvency.

The insolvency administrator will terminate all these contracts after contesting the transfer of the portfolio and reversing the transaction. The licence to conduct insurance business had already expired with the transfer of the portfolio and was not revived by its contestation. The actuarial reserve is then available to the policyholders, insofar as it is still available, but without further interest and, if applicable, less what the insolvency administrator is legally allowed to deduct in fees from its realisation. These are in particular
9% as assessment and realisation costs, as well as any value added tax owed to the tax office. This again reduces the amount that can be used for the insured. It’s
After all, it involves work to convert the real estate, equity interests, building loans and other financial assets into cash that can then at some point be transferred to the policyholders for their long terminated contracts.

The hope, assumed to be almost certain, that in the event of an imminent insolvency situation someone would be found who would simply take over the existing life insurance policies and continue them without disadvantage, then proves to be a fiction.

Personal liability of the actuary

The responsible actuary is required by law to review the financial situation of the life insurer on an ongoing basis, in particular with regard to the permanent fulfillment of the insurance contracts, taking into account the financial situation of the insurer – for this purpose he is legally entitled to all information from the Board of Management. In the event of errors, the employee does not have to expect the recovery of his salary payments, only in the worst case scenario the loss of his legal entitlement to an occupational pension, but certainly claims for damages.

Insurances are not safe even with the protection fund or protector

If the life insurance contracts are transferred by order of the supervisory authority to the hive-off vehicle “Protektor” or the state guarantee fund entirely without a portfolio transfer agreement, the guaranteed claims may be reduced by up to 5% if the assets in the cover pool are insufficient to meet the commitments and guarantees. Is it always enough then
is not yet sufficient, the Guarantee Fund shall nevertheless only be liable up to the amount of its assets earmarked for this purpose. It is therefore by no means certain that the protection fund will not have used up its earmarked resources at some point and that the remaining policyholders will receive nothing at all, because neither the state nor the rest of the insurance industry would like to be liable for this indefinitely.

Surpluses for policyholders will no longer accrue in any case until the insurance portfolio is subsequently restructured by the security fund, so they will be used to finance the guarantee benefits until further notice. Potential terminators can be deterred by a reduction in their guaranteed surrender values or by a ban on termination. However, the portfolio is not deemed to have been restructured until all the funds compulsorily made available to the protection fund by the other insurers paying for it have also been repaid. The insurance portfolio that may one day remain should then be legally transferred to an insurance company after the possible successful restructuring – provided that an interested party can be found.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

Our office in Munich

You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.

About the author

Dr. Johannes Fiala
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.
»More about Dr. Johannes Fiala

On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.