Termination without notice of non-cancellable insurance policies

Insurance contracts can be terminated if the insurer’s financial position is poor.

The Federal Supervisory Office for Financial Services (BaFin) has found out in a “stress test” that 31 out of more than one hundred insurance companies would be threatened with insolvency in the event of a crisis.

Which 31 insurers are involved has remained a secret ever since. Customers and intermediaries would have to analyse the risks inside and outside the insurer’s balance sheets, just as large industrial companies do in risk management.

With its general ruling of 19 September 2008, BaFin has now banned “short selling” of 11 financial securities – including insurance and reinsurance companies.

“In the current market situation, short-selling can drive financial firms to ruin,” BaFin President Jochen Sanio said.

This is a clear signal of how BaFin views “internal” risks. Because, especially according to short-sellers, the problem is not short-selling, but poor management. Not only since a fundamental decision of the Federal Court of Justice of 04.04.1951 has it been recognised that insurance customers can terminate their contract without notice if the performance of the contract has become uncertain.

It is sufficient for this if the economic fundamentals change significantly to the detriment of the insurance customer. This may be due to “financial speculation” on the part of the insurer, the collapse of the stock market or the demise of the reinsurer, which BaFin would like to prevent.

In this case, it is no longer reasonable for the customer to adhere to the contract. And this is not only the case if the insurer has purchased guarantees of maturity benefits via now worthless certificates from Lehmann at the risk of the customer. Even if the ordinary right of termination is contractually excluded, for example in the case of Rüruprenten, a deterioration in the insurer’s financial position may entitle it to terminate the contract without notice – for cause.

The insurer cannot then merely carry out a “premium waiver” – as is sometimes claimed – because no one has to leave their good money with the bad insurer. Finally, “guaranteed” benefits can also be reduced by BaFin under supervisory law – even if the insurer is affiliated to the “Protektor” protection system. However, the customer or its insolvency administrator is also entitled to extraordinary termination – i.e. termination without notice – in the event of an “emergency situation” of the customer. Thus, private life insurance policies with a lump-sum settlement, but also future or current insurance annuities, can be terminated without notice due to the deteriorated financial situation of the insurance customer, even if the ordinary termination would be contractually excluded.

It should be clear anyway that the insolvency administrator, in the event of a deterioration in the insurer’s creditworthiness, does not have to resign himself to waiting for the uncertain annuity payment that may one day commence or to trusting in the insurer’s continued solvency in the case of annuities already in payment. In the event of such termination, the customer is entitled to settlement and payment of the surrender value or actuarial reserve.

In the case of a private pension insurance or a Rürup pension, for example, the so-called cash value of the current pensions would also be completely cancelled and thus also seized. The current “financial market crisis” shows that some financial directors believed for years that they were allowed to run a “legal casino” with the money of shareholders and customers. If the stakes are then lost and the equity disappears, such insurers need not be surprised if cautious customers turn their backs on them. Initially, some foreign insurers may be affected – but BaFin believes that domestic reinsurers and insurer holding companies may also be at risk.

When share prices collapse or reinsurers default, some insurers may have to rely on the help of their holding companies – occasionally these same reinsurers – as they did at the beginning of this millennium. However, if – as was the case at the time with Mannheimer Holding – it were not in a position to do so (even in spite of its obligation to do so), it would no longer be able to meet its obligations to customers in full. In that case, no customer is visibly obligated to be “faithful to the Nibelung”, even if the insurer has excluded the ordinary right of termination.

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

by courtesy of

www.bi-fachzeitschriften.de (published in bi GaLaBau, issue 12/2008, page 18)

and

www.dietabakzeitung.de (published in the Tabak Zeitung, issue 44/2008)

and

www.landpost.de (published in Landpost, issue 43/2008 under the headline: Terminate without notice: Insurance contracts) )

and

www.www.hoerakustik.net (published in Hörakustik issue 05/2019, page 80 and 81)

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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.
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