Court tells insurers to pass on profits to clients
26 July 2005, KARLSRUHE, GERMANY - Life insurers must pass on more of their profits to customers, Germany's constitutional court in Karlsruhe said Tuesday in a ruling that may cost the industry billions of euros.
26 July 2005
KARLSRUHE, GERMANY - Life insurers must pass on more of their profits to customers, Germany's constitutional court in Karlsruhe said Tuesday in a ruling that may cost the industry billions of euros.
Federal judges said it was unfair to deny policy-holders a share of revenue generated by company reserves.
Customers pay monthly premiums to the life assurance company with an agreement to receive the whole sum back plus a profit factor when they reach a certain age, usually 65. The profit is calculated from the returns on the company's investments in stocks, bonds and land.
Under current German rules, that return reflects changes in the accounting value of the investments. Usually the market value of the investments is higher, which both creates a buffer to reduce the impact of unexpected events and creates value for shareholders.
Customers contended that they were losing out to an accounting trick: whenever a life insurer went out of business and transferred its contracts to a new company, a slice was taken off the assets.
Under Tuesday's ruling, insurers will have to reveal more about the value of assets, making it easier to sue for a share, and they will have to pay out some of the additional profits to customers.
While this would only increase final payouts by a few hundred euros per customer, the bill might run into the billions for the industry, with TV commentators saying there were estimates of nearly 100 million life policies in force in Germany.
The court, which only rules on cases with a constitutional impact, agreed with specimen complaints from three life customers.
Instead of laying down precise rules, the judges set the end of 2007 as a deadline for the government to pass new legislation.
In Germany's ageing society, state-backed pensions are set to decline, and there is growing pressure for Germans to fund their old age from private investments such as life insurance.
Subject: German news