“The Bafin investigation is a real hammer,” says Professor Hermann Weinmann from the Institute for Finance at the Ludwigshafen University of Applied Sciences. It shows that there has been a wild growth in fund policies in the industry and “that the returns on equity funds are often eaten away by the high costs”.
This is a major setback for the industry. Because in the persistently low interest rate environment, in which classic life insurance with guaranteed interest can no longer be sold, many providers are now relying on fund policies. They promise their customers higher returns by using investment funds to capitalize on opportunities on the capital market.
However, insurers are also responsible for ensuring that their investment products offer reasonable value for money. According to Bafin, high costs indicate that this is often not the case at the moment. If the return is then too low, in the worst case the savings contributions of the policyholders would not be sufficient to avoid later supply gaps, write the Bafin Journal authors Guido Werner and Roland Paetzold.
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In addition, things are obviously not going smoothly in sales either. For example, high commission payments that fund companies pay to life insurers or intermediaries as so-called reimbursements can result in customers not receiving the best product for them.
Query of effective costs
The Bafin’s assessment, which has now led to the critical judgment, is based on a query of actual costs and other information on the cost burden. The data was collected from insurers last year.
What was striking was that the effective costs, which indicate how much the annual return on an insurance investment product is reduced by the costs, were sometimes very different. This is illustrated by an example: For a starting age of 37 and a contract term of 30 years, the weighted average effective costs of the best-selling unit-linked products are 1.90 percent. In a quarter of the contracts, however, the effective costs are over 2.35 percent.
In some of the combinations of entry age and term that were surveyed, the effective costs of the best-selling fund policies were even higher than four percent. The underlying equity funds must therefore at least achieve this return for the insured to achieve an investment profit.
The Bafin is not alone in its criticism. Consumer advocates have long criticized life insurance providers. One of them is Elke Weidenbach, an insurance expert at the consumer advice center in North Rhine-Westphalia. She considers the cost structure of fund policies to be confusing and non-transparent, since the insured would have to pay both the insurance cover and the fund costs. In her view, separating risk protection and wealth accumulation for consumers is the better solution.
“Basically a bit more expensive on average”
Peter Schwark, deputy general manager at the German Insurance Association (GDV), must at least concede that “unit-linked insurance is generally a little more expensive on average than classic life insurance”. However, this is not new and is not problematic due to the higher return opportunities.
The Bafin doubts that the interests of the customers of unit-linked life insurance are always protected by the providers.
(Photo: Getty Images/EyeEm)
The Bafin counters that the insurers with the highest effective costs in particular have serious doubts as to whether the interests and needs of the insured would be protected.
The Bafin also took a close look at reimbursements – according to a current survey, fund companies pay them to insurers for a third of new business. On average, that’s 0.3 percent of the fund assets, at the top even more than 1.2 percent.
In many cases, the insurers involve their customers in the reimbursements, for example through special surplus shares. But the insured only receive full reimbursement for a quarter of the products.
Positive examples include Allianz, the market leader in life insurance in Germany. According to its own statements, the customers share 100 percent of the reimbursed fund costs. The insurer Zurich Germany, which accounts for around 80 percent of new business with fund policies, uses fund share classes without reimbursements whenever possible. Otherwise, the reimbursements are also passed on in full to the customer, it is said.
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Since 2018, Axa Germany has only offered shares in investment funds without reimbursements in its old-age provision products. According to the company, the insurer credits “a large part of the reimbursements” to the customer contracts for policies from the time before.
The procedure is different in almost a fifth of the cases where the reimbursements go directly to the intermediary – a practice that Michael Hauer from the Institute for Pensions and Financial Planning (IVFP) considers “inappropriate”. In less than half of these cases, the life insurers know the specific amount of the payments, according to Bafin. This is surprising, since banks or asset managers, for example, have long had to disclose reimbursements they receive in sales.
Big conflict of interest
According to the Bafin, the temptation is great for intermediaries to recommend the fund with the highest reimbursements to their customers. There is a conflict of interest. Acquisition and sales costs are not sufficiently transparent for the insured.
What follows from all this criticism? Bafin wants life insurers to correct deficiencies. Weinmann from Ludwigshafen calls for “decent regulation that limits the insurers’ playing field and treats the cost mania at the expense of others” for fund policies.
The information sheets that the insured have received so far are not very suitable for the selection of funds in the policy. Insurance intermediaries should therefore base their offer on the key investor information that customers also receive when purchasing individual funds.
More: How insurers deal with their unwanted high-yielding old portfolios