Criticism from financial regulators
Expensive life insurers face trouble
By Nadine Oberhuber
31.08.2024, 14:58
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Many life insurance contracts are so expensive that they are not worthwhile for customers. The consequence: more than 70 percent of all savers cancel their contracts early. Now the financial regulator Bafin is getting involved.
Capital-forming life insurance policies are actually intended to increase customers' money. They are sold with this promise. In the official German language of the German financial regulator, they say that they want to offer customers “appropriate customer benefits”, i.e. not only security, but above all returns. “It sounds like a matter of course, but unfortunately it isn't,” says Bafin insurance supervisor Julia Wiens, criticizing the insurance industry quite explicitly.
In the course of a special audit, the financial regulator took a closer look at 13 life insurers “that had attracted particular attention.” BaFin says that this corresponds to around 20 percent of the market. It is concerned with their retirement provision products and two aspects in particular: the cost ratios of these policies and the question: how often do customers actually stick to such long-term savings contracts?
To do this, Bafin first looked at the cancellation rates. The industry average is not dramatic because it is only given on an annual basis, as it currently stands at 3.14 percent. However, this figure must be extrapolated to the usual total term of 30 or 40 years, because most customers take out this type of insurance at an early age and the policies are only paid out regularly when they retire.
“Based on a cancellation rate of 3.14 percent,” Bafin explains, “after a savings phase of 40 years, more than 70 percent of customers have already decided to terminate their contracts early.” In plain language: More than two-thirds of all customers do not stick to such contracts at all, but terminate them early.
Low interest rates
That alone would be a poor reflection on the industry, but it gets even worse when you look at what comes out of the contracts. The supervisory authority asked the insurance providers about their cost ratios and asked them to state the effective costs for their original products. The standard contract is a police policy with a monthly premium of 100 euros, i.e. 1200 euros paid annually and a term of 30 years.
“For products from several companies, the effective cost burden was four percent or even significantly higher at the relevant time,” Bafin now states: “In order for the customer to achieve a positive return, these costs must first be earned. In the current market environment, this seems very ambitious.” The effective costs of 4 percent mean that if an insurer achieves 5 percent with its capital investment (after deducting its own costs), then with 4 percent effective costs, only one percent interest remains for the customer.
Now the net return on capital investments, i.e. the net profit that the insurers themselves achieved through investing, was only around 2.2 percent on average for the industry. Of course, there are some insurers who achieve higher returns because they are good at investing money. But the industry has not achieved average values significantly above four percent for at least eight years. So you can calculate what return is left for customers when such poor investment results are burdened by a four percentage point cost ratio.
Expensive fund policies
In general, the costs are quite high, especially for fund policies, warns Bafin after presenting the first survey results. The high costs therefore quickly cancel out the alleged advantage of higher capital market returns. The cost burden is somewhat lower for traditional insurance contracts.
According to Bafin's survey, the average effective costs for an average classic policy are 1.28 percent. For fund policies, the average is 1.9 percent. But for one in four insurers, the average is around 3.3 percent. Bafin found that there are even many providers who charge gigantic effective costs of over 4 percent for all terms. With these cost ratios, even the income from good equity funds, which yield an average return of 6 to 7 percent, hardly leaves any significant income.
That makes a huge difference: let's assume that the entire 100 euros paid in each month went into a fund that yields a 6 percent return for 30 years. The customer would then receive just under 98,000 euros. Even with the average cost ratio of 1.9 percent for fund policies, the customer would be left with almost 30 percent less, around 69,950 euros.
However, if the cost ratio is 4 percent, only 49,200 euros of this remains for the insurance customer. With 36,000 euros of their own deposit. That is only about half of what they would have achieved by saving on their own without insurance. Many fund policy customers have already been confronted with such poor maturity performance. It is no wonder that, given these figures, so many customers prefer to cancel their contracts.
Bafin is therefore now threatening providers with hefty fines: “If there is no appropriate customer benefit, if a product does not meet the needs of the target market, then that is a problem,” says Wiens. And Bafin will also intervene in these problems: “For example, we can prohibit the sale of products or impose measures on individual board members if their professional decision is called into question in light of problems.” The question of whether such contracts need to be improved so that customers are also helped remains open for the time being.
This text first appeared on Capital.de. Like ntv, Capital belongs to RTL Deutschland.
