It was not only the financial market crisis since 2008 that led to the realisation that insurance companies need higher equity capital in accordance with the so-called Solvency II rules so that they can better bear a fall in the value of, for example, government bonds?
30% insolvency risk with Solvency II:
If Solvency II were implemented as originally envisaged, this would mean an improvement in the probability of ruin to only 0.5% per year. This would at least have given a 25-year-old pensioner an improved chance of 7 to 3, compared with today’s equity rules, that his pension would actually be paid as agreed, at least until age 95. This in itself requires considerably more equity on the part of insurers, which they do not currently have.
50% insolvency risk in private pension insurance by the European Parliament?
However, a subsequent softening by the European Parliament (resolutions of the EU Economic and Monetary Affairs Committee on the reduction of capital requirements for the insurance industry of 21 March 2012) is intended to save a further EUR 100 billion in equity capital. Private old-age provision via private pension and life insurance policies will thus become even more insecure, the risk of policyholders will increase, as will the profits of the insurance companies‘ shareholders.
Profit maximization of insurers increases old-age poverty of insurance customers
The insurance lobby achieved this decision of the European Parliament by a legally in no way valid justification, namely that a cancellation of long-term annuity insurances is not possible in case of asset forfeiture of the insurer. The opposite is true, and is open to policyholders, as must be known since a ruling by the BGH in 1951. The EU therefore hopes, quite unjustifiably, that policyholders will have to leave their capital with the insurer after a fall in value until the values have increased again at some point or the losses have been offset in some other way, such as by reducing the surpluses.
Even guaranteed ducks are not safe
Numerous investors in private old-age provision had to find out that their insurance company actually pays 50% or less – compared to the sample calculation at the time of brokerage – per month at the start of the pension because the surpluses in particular have fallen. Often there are almost only the guarantee ducks. But even these are now additionally endangered by the planned softening of capital requirements. An increasing number of pension savers have to reckon with the fact that their insurer cannot even pay the guaranteed annuities in full until the end of their lives.
Reductions in benefits also for pension funds and pension chambers
Those affected by legal speculation have for years also been the compulsory members of professional pension funds. Candidates and pensioners of a dentists‘ pension scheme had to accept benefit cuts of about 50%. At least one lawyers‘ association published before the latest „Greece bailout“ that benefit cuts of 30& could already be expected. The rules according to which insurers have to manage the assets of their customers also apply to such pension funds – in some cases they are risky financial bets, objectively speaking. Because officially many of the papers may be classified as safe, just until they are shown to be unsafe.
Government securities are not safe either
Even government securities are not safe. In future, German government bonds will also contain a clause providing for the debt to be cut with the consent of the majority of creditors, who usually have no other choice. These include insurers and pension funds, the majority of which are invested in European government bonds and corporate bonds. It should be clear that 7% cannot be earned for a corporate bond without risk: there is an increased threat of insolvency here with the hope of a better rate than in the case of a total loss.
Termination of insurance contracts without notice
In such a situation, the EU assumes that annuities often cannot be cancelled, so that the insured cannot withdraw his funds – which are debts owed to him by the insurer. Although the insurer’s debts would now in themselves be greater than his assets, he thus gains time to ride out the situation until the securities might have recovered, or he could otherwise recoup the losses after a few years. This is the EU’s idea. However, even insurance contracts that cannot be terminated by contract can be terminated extraordinarily, as a fundamental ruling of the Federal Court of Justice established as early as 1951 (BGH ruling of 04.04.1951 Az. II ZR 32/50, in: NJW 1951, 714 ff.), if the performance of the contract has become uncertain. It is sufficient for this if the economic basis of the insurance company changes significantly to the detriment of the insurance customer. In this case, it is no longer reasonable for the customer to adhere to the contract. This has also long been recognised in the case of property insurance.
Termination without notice of insurance policies for old-age provision
Even if the ordinary right of termination is contractually excluded, regularly from the start of the pension, but for example in the case of Rüruprenten also before, the deteriorated financial situation of the insurer may entitle the policyholder to terminate the contract without notice – for exceptional reasons. The insurer cannot then merely „waive premiums“ because no one has to leave their good money with the bad insurer. This is because even „guaranteed“ benefits could be reduced under supervisory law by the financial supervisory authority BaFin – even if the insurer is affiliated to the „Protektor“ protection system, which would, however, hardly be able to cope with the consequences of a financial crisis generally affecting insurers.
Death benefit in life insurance as a business model
Only one of the 20 largest life insurers has claimed in the wake of the subprime crisis that „we have no hidden liabilities on our books“, which means that 19 out of 20 insurers are sitting on hidden losses not shown on their balance sheets in the hope that things will get better again. However, it is self-deception to believe that risky hybrid bank bonds or bonds from sovereign debt crisis countries will initially earn interest rates of over 5% – but in the end may not even get back the capital invested without a debt haircut.
Federal Government on 08/03/2012: „Risks to the financial stability of the euro area have continued to increase since the onset of the financial crisis in 2007.“ A new bill will introduce debt haircuts along the lines of Greece’s with regard to German government securities and bonds – so one consequence of the „stability pact“ will be a drop in the value of domestic government bonds.
Financial bets by banks and insurers: prospect of old-age poverty for all
If you get only 1.5% interest for a 30-year federal bond nowadays, then subtract the usual risk, distribution and administration costs from it, and maybe even individual or perceived inflation, the following becomes clear: the low-interest cartel is already leading to negative real interest rates for funded pensions and is encouraging financial houses to speculate on credit without any restraint. But insurers think they can promise guaranteed annuities for periods of more than 70 years without risk, which would require a net interest rate of 1.75% on a permanent and secure basis. In this situation, the actuarial reserves of life insurers, which are currently already around 1,000 billion, do not represent assets but a burden of debt, which is why they are on the liabilities side of the balance sheet. In reality, most of these debts of insurers today are even subject to interest rates well above 3 %.
If the financial bets don’t work out, the pension payments in the private pension scheme will melt away like snow in the sun. If in the end perhaps half of what is expected is paid out, the private pensioner can increasingly expect poverty in old age because of the tax on consumer goods. In addition, the state will demand a solidarity contribution via levies so that systemically important banks and insurance companies are rescued by the taxpayer. Such „promotion of global competition in the financial industry“ means, on the one hand, maximising profits for management and shareholders, and on the other hand, financial institutions taking on new risks, but again without the necessary equity capital for their own risk-bearing capacity.
It must therefore be demanded that the EU does not weaken the capital requirements for insurers as announced on the basis of false premises, thereby further endangering citizens‘ old-age provision.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.handwerke.de (published in Computern im Handwerk 04/2012, page 5-6)
www.experten.de (published in Expert Report 05/2012, page 26-27)
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Dr. Johannes Fiala ist seit mehr als 25 Jahren als Jurist und Rechtsanwalt mit eigener Kanzlei in München tätig. Er beschäftigt sich unter anderem intensiv mit den Themen Immobilienwirtschaft, Finanzrecht sowie Steuer- und Versicherungsrecht. Die zahlreichen Stationen seines beruflichen Werdegangs ermöglichen es ihm, für seine Mandanten ganzheitlich beratend und im Streitfall juristisch tätig zu werden.
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