Insurance coverage in Germany
( By Verbraucher - Zentrale Hamburg e.V.)

Sinister an covers of insurances

Present Situation in Germany

The term insurance is not legally defined and is not used uniformly. The term “insurance” can mean the insurance contract as such or the contractual relationship, but it can also mean risk assumption and liability in general (Römer/ Langheid § 1 Rn 1).
Predominately, the term insurance is used in the sense of a definition given by the Bundesverwaltungsgericht (Federal Court for Administrative Law) in a judgement in 1956 (22.03.1956, VerBAV 1956, 182): “ An insurance exists, if -within a risk bearing community of similar risks- a private contract entitles a policyholder to the insurer’s performance in case the risk insured occurs”.

The main legal sources are the Versicherungsvertragsgesetz (VVG, Insurance Contract Act), the Versicherungsaufsichtsgesetz (VAG, German Insurance Supervision Act), Bürgerliches Gesetzbuch (BGB, Civil Code), Pflichtversicherungsgesetz (PflVG, Obligatory -Insurance Law),
Allgemeine Versicherungsbedingungen (General Conditions of Insurance, GIC), special policy conditions and –if the policy is old- written declarations of the insurer.

The most important legal source is the Insurance Contract Act which came into force 30.05.1908. It applies to all kinds of insurances and regulates the contractual relationship between consumer and insurance company.
The Act has been amended several times, the most recent amendment entered into force 29.07.1994, implementing the Directives 90/618 EEC, 92/96 EEC and 87/344 EEC.

These directives mainly harmonise the conditions under which insurers are admitted and can take up business within the EU, while a harmonisation of contracts has not been dealt with. Before 1994, fears were expressed that the German insurance market would be rattled by foreign insurers with complex conditions and freely calculated premiums. However, these fears have not come true. Most contracts are still based on conditions formerly common and approved by the German Supervision Body. Foreign insurers have also achieved a positions on the German market by ways of mergers and investment (van Bühren, § 1 Rn 5).

The first sections of the Versicherungsvertragsgesetz (VVG, Insurance Contract Act) apply to all kinds of insurance and differentiate between indemnity and fixed- benefit insurance.

Indemnity insurance obliges the insurer to compensate any damage covered by the insurance contract (sec.1 VVG). The actual damage limits the amount of compensation. Typical examples of indemnity insurance are personal liability insurance, household insurance and partially, private health insurance.

Fixed- benefit insurance obliges the insurer to pay the sum guaranteed. Examples are term life, whole life, pension, accident, disability and per diem indemnity for sickness insurances.

An insurance contract can -like most other private contracts- be concluded either implicitly or explicitly, formally or formless. The insurer is obliged to hand over a policy after the conclusion of the contract (sec. 3 VVG).

Contracts entered into for an indefinite period of time can usually be terminated annually at the end of the running period (sec. 8 VVG), which is usually identical with the calendar year. Contracts running for more than five years can be terminated at the end of the fifth year and each consecutive year with a three month notice. However, this does not apply to life and health insurance.

Apart from that, contracts may be terminated without notice in case of hazard increase, premium increase, conditions pre- or subsequent to the policy, not paying premiums on time, selling the item insured and after a claim has been made.

All German insurers are supervised both legally and financially by the German Federal Financial Supervisory Agency (Bundesanstalt für Finanzdienstleistungsaufsicht, BAFin). The Versicherungsaufsichtsgesetz (VAG, the German Insurance Supervision Act), has now been amended considerately to encompass not only the conditions for German insurers but also for foreign insurers taking up business in Germany (Drittes Durchführungsgesetz/EWG zum VAG).

Insurers which have been admitted to business in Germany, can take up business elsewhere in the EU. The BAFin examines whether the conditions for a cross border business are met ( sec. 13 VAG) and, if this is the case, informs the supervising body of the country in which the insurer wants to take up business. For EU- insurers wanting to take up business in Germany, the same applies (sec. 110a, 111 VAG).

The former obligation to obtain a permit for tariffs and conditions of contract was abolished so that BAFin can make dispositions only in case of fraudulent misuse or malpractice (sec. 81 VAG).

Due to that abolition in 1994, every insurer in the EU is able to offer insurance products of any legal design in Germany without obtaining a permit first.
Many expensive insurers now refer to their conditions as being especially favourable for consumers. However, if one compares conditions of household insurance, the conditions of less expensive insures are often even more advantageous.
Especially in the field of motor vehicle third party insurance, the opening of the market and the subsequent competition has brought prices down. Premiums are now determined by various factors such as the driver’s age, the kilometres travelled per annum or ownership of a house. Additionally, insurers open up the scope of the insurance by automatically adding cover for special services, for example in case of a breakdown, at no extra cost.

Another example demonstrating the impact a different scope of cover in the clauses of a contract can have, is the disability insurance.
The policies common until 1995 often enabled the insurer to turn down claims.
The insurer was able to claim that the insured person would still be able to work in a different profession, regardless of whether the insured had a chance to find employment in that profession (so called “abstract referral”). By now, most insurers have GIC without such a clause, though the abstract referral is still not extinguished completely.

These examples show the importance of obtaining and comparing different offers and scrutinising the smallprint closely.

The German Civil Code (BGB) only contains a few sections regarding life and household insurance.
However, as far as the Insurance Contract Act does not contain deviating provisions, the Civil Code applies. For instance, the provisions of the Civil code determine contractual capability, conclusion of contracts and inclusion of general conditions of contract.

The Pflichtversicherungsgesetz (PflVG, Obligatory -Insurance Law) deals with the compulsory motor vehicle third party insurance.

The general conditions of insurance (GIC) are subject to scrutiny under the sections 305 et seqq. of the Civil Code. Individual clauses can be invalid, for example if they are unclear or inappropriately disadvantageous for consumers. In case the GIC are incomplete, the VVG applies.

The general conditions of insurance are the most important source for the policyholders to determine content and conditions of the contract. According to sec. 10 VAG, the insured has to be enlightened fully about his rights and duties under the contract. The GIC are only legally binding if they have been handed out to the insured prior to or at the conclusion of contract. However, the insurer is not obliged to hand them over when the consumer is actually signing the contract.
Contrary to the requirements of the EU, consumer information and GIC may also be handed out together with the policy and not prior or at the conclusion of contract.
This so called “policy model” is common practice. The insured is entitled to revoke the contract in writing within 14 days after receiving the contract (sec. 5a VVG). The 14 day period only commences once the insured has received the policy, GCI and has additionally been informed in writing about his right to revoke the contract.
In case the insured has neither been informed nor received the GCI, or these are incomplete, the right to revoke the contract nevertheless expires one year after paying the first premium.
By introducing the policy model, Germany has cunningly ruled out the protection envisaged by Directive 92/96 EEC. Under the Directive, the consumer is supposed to be provided with at least the most important information prior to conclusion of the contract, thus enabling him or her to make a balanced choice between products and insurers.

Special policy conditions are conditions specifying the risk insured and are usually additions to the GIC.

Declarations are legally binding written statements by which insurers establish their reaction towards policyholders should certain questions arise; addressee of these declarations was the former supervisory body (now BAFin).

Main Problems Consumers Face

Only very few contracts are entered into after the consumer has sought advice on which insurance is suitable and on prices from an independent body such as consumer protection centres.

An overwhelming number of contracts are entered into because an insurance agent or salesman working for an insurer, contacts and visits the consumer. Only very rarely, do the contracts sold in that situation meet the needs of consumers.
Apart from insurance agents and salesmen representing just one insurance, there are also agents and financial service providers selling policies of various insurance companies. Recently, banks have also started selling insurance over the counter.
All persons acting as a broker, be it as an agent, a salesman or an independent provider, receive commission, the highest ones are paid for traditional whole and pensions insurance and unit- linked life and pension insurance.

Each citizen spends an average of 1.700 € on insurance p.a.. However, the majority does not have a reasonable protection. Often contracts are unnecessary and even more often, an expensive insurer is chosen.
On average, each household has six policies lying about, not including insurance most persons are obliged to have by law such as compulsory health insurance, statutory pension insurance, unemployment and compulsory long term care insurance.

Insurance companies earn approximately 135 billions per year in premiums. Just one third of this is spend for compensation, which has resulted in insurance companies amassing a vast fortune. Millions of Euros are invested daily. Insurance companies lend money to the Federal Republic, the German Länder (States), communities, companies and private persons. Due to direct money- lending, personal connections and effective lobbying, the insurance companies take a vast influence both on the legislative process and the science.

Despite an high income from premiums and the financial power of the insurance branch, analysis demonstrate that only a small percentage of insurance contracts satisfies the needs of consumers. This is confirmed by international figures regarding to premium level and benefits.

Which insurance an individual needs, depends on the personal situation. One should keep in mind that insurance first of all should prevent or at least attenuate the financial ruin in case an inevitable event occurs. Thus, each individuals requires a health insurance, which most persons possess due to statutory requirements. Likewise, everyone needs a personal liability insurance which covers the financial consequences of negligence.

Everyone fit for work requires a disability insurance due to the fact that since 2001, all employees born after 1.1.1961 do not receive any state benefit in case they are unable to work, and for those born before 31.12.1960, benefits were dramatically reduced. However, older employees and those having health problems often have trouble taking out insurance since insurance companies can reject their offers or only accept them on unfavourable terms, excluding certain health problems.
If needed, a term life insurance can be appropriate. This also applies to motor vehicle third party insurance and household insurance.
Nonetheless, only a few percentage of employees actually has a disability insurance and by far not all citizens have a personal liability insurance.

The insurance products sold most in Germany are whole life, pension and unit- linked life and pension insurance. They build up cash value during the policy period and result in a payment at the end of the specified term. These insurance contracts are actually disguised savings agreements.

One can easily detect a gap between consumers actual needs and the contracts finally concluded.

Whole life, pension and unit- linked life and pension insurance are sold with the argument, state pensions would not suffice and one had to make individual provisions for ones retirement. Fears of old age poverty are stoked to sell contracts.
Additionally, contracts are praised as a means to finance real estate. Instead of repaying the bank loan directly, consumer pay premiums for a whole life insurance, hoping that the sum will suffice to repay the loan when it is due (mortgage repayment through life insurance). Whole life contracts are also sold as educational endowment insurance for children and as funeral expense insurance for old people. In these cases, tax benefits and high profits are used as sales arguments. In the contract itself, the bonus is not mentioned: whole life and pension contracts usually do not
provide much more then the guaranteed sum assured and unit- linked contracts usually do have any bonus. On the other hand, consumers are not informed about the high costs of their contracts which can easily amount to more than 25 per cent of their premiums.
Since the policy model is common, consumers can only find out about the costs after the conclusion of the contract. However, as consumers tend to take the sales arguments for granted and believe the promises of the sales persons, they often do not read the GCI carefully to verify the sales arguments once the contract is signed.
If consumers did so, they could easily see the gap between the promised and the guaranteed benefit. Likewise, if they were able to fully understand the complicated language of the GIC, they would see how many possibilities insurers have to manipulate and misuse premiums by drawing a veil over the calculation of bonuses. Smoothing out of bonuses is thus a secret practice and it remains totally unclear whether a bonus is satisfactory or fair.
At least the GIC of contracts concluded since the end of 2001 clearly show, why contracts are favoured by sales personnel: the “Zillmer” calculation method allows insurers to subtract all costs related to the contract (which predominately means commission) first – before starting to build up any cash value. These costs can equal up to three years of premiums paid. Consequently, consumers wanting to access cash value in the first years by surrendering the policy, get nothing back.

The clause on costs in the GIC in contracts concluded until 2001, was held to be totally intransparent and incomprehensible by the Federal Court of Justice in two judgements on 09.05.2001 (IV ZR 138/99 and IV ZR 121/00) . Nonetheless, the court pointed out that the “Zillmer” calculation method was in accordance with the law, provided insurer and insured agree upon it.

The current tax privileges for whole and pension insurance will cease at the end of 2004. No tax has to be paid on profits, provided the policy period has a minimum duration of 12 years and premiums have been paid for at least five years.
Though the tax privilege will not, as originally planned, vanish completely, it will be restricted to a large extent. Thus, the main sales argument ceases to apply, rendering these types of insurance evidently even more unattractive for consumers.

Suggestions
It is doubtful, that the introduction of the policy model is in compliance with Directive 92/96 EEC. The intention of sec. 10 a VAG is clearly undermined by sec. 5 a VVG. The envisaged standard of providing all relevant information beforehand has become the exception as nearly all German insurers make use of the policy model originally intended to be the exception.

The calculation of acquisition costs according to the Zillmer calculation method is unfavourable for consumers.

The problems arising from the situation in Germany should be accounted for in future amendments of the European legislation.

Literature:
van Bühren, Handbuch Versicherungsrecht, 2003
Meyer, Ratgeber Versicherung & Altersvorsorge, 2001
Prölls/Martin, Versicherungsvertragsgesetz, Kommentar, 27. Auflage 2004
Römer/Langheid, Versicherungsvertragsgesetz VVG, Kommentar, 1997