The capital is shrinking from year to year, the guaranteed interest rate is on a downward slide, the surplus participation has melted down to zero – after the first and second pillars of old-age provision, the third is now also crumbling. How insurance companies rip off customers on a grand scale.
Endowment life insurance has become a pretty bad deal for customers. Who thought to have provided sufficiently for the age, sees itself bitterly deceived. The payout shrinks from year to year like butter in the sun. For many, there is no longer any question of a carefree retirement. Der Spiegel" took up this topic and comes to the conclusion that the "life insurance companies are passing on their problems to the customers" . Their problems are mainly due to Draghi's low-interest policy . The head of the European Central Bank (ECB) has cut interest rates to zero – and below. How are insurers supposed to earn money for themselves, their customers and their shareholders??
And this is where the problem starts. Nothing remains of the insurance agent's former promises. Your supposed retirement cushion escapes the air. Der Spiegel" takes the federal government's answer to a small question from the "Greens" as a hook to analyze the problem of declining payouts to customers in more detail.
Insurance have two problems at once:
- "The companies invest the savings contributions of their customers mainly in safe bonds, but because of the low interest rates hardly yield anything ", writes the "Spiegel". Of course, it is the customers who suffer.
- And that's not all, because many old customers still have guaranteed interest rates of four percent, the insurers have to set aside money to meet their claims. Since 2011, insurance companies have had to build up additional interest reserves. This is of course bad for the return – and bad for the customers.
The "Greens" got in response that "the so-called gross surplus, from which the insured are served, has declined in recent years from almost 26.7 billion euros in 2000 to 10.4 billion euros in 2016," according to "Der Spiegel". The additional interest reserve is hitting the books hard. "Without the additional interest reserve, however, it (the gross surplus) would have been 22.7 billion euros in 2016," the magazine says.
Life insurance reform law is a mess
Here it comes – on 1. August 2014, the German government enacted the Life Insurance Reform Act (LVRG). This was primarily to safeguard existing customers and "protect consumers". Stupid only that thereby exactly the opposite came out. "It states, among other things, that insurance companies may no longer pay out profits to their owners if the benefits for the insured are at risk," according to "Der Spiegel". Sounds positive on the surface. Apparently, however, this "regulation has been widely circumvented". According to "Der Spiegel," many life insurers are using profit transfer agreements to divert increasingly large sums to their parent companies, for example. "Whereas in 2012 just over 350 million euros were channelled out of companies in this way, in 2016 the figure was around 1.1 billion euros," the magazine specifies. The bottom line is that the industry's total surplus in 2016 would have been just 335.5 million euros – but without profit transfer agreements it would have been around 1.45 billion euros.
Profits go to the parent company
Of course, if a large part of the profit is transferred to the parent company, this is bad for the customers. Apparently, more and more insurance groups are also catching on, because "the number of companies with profit transfer agreements has risen sharply since the Life Insurance Reform Act came into force – from 23 in 2013 to 31 in 2016," writes "Der Spiegel". This figure illustrates that there is currently no effective distribution block for the owners, because it is simply circumvented, criticizes the Green Party member of parliament Gerhard Schick, who asked the question.
Customers now only get the minimum
It looks quite like "that the life insurers tend to give the insured only the legally required absolute minimum of their income," according to "Spiegel". While 97.5 percent of these gross surpluses were distributed to policyholders in 1995, only 85.9 percent were distributed in 2016. "The share for the companies rose in the same period from 2.5 to 14.1 percent," summarizes the "Spiegel" magazine. For Schick accuses insurers of passing on the problems to their customers.
Profits flow into equity
The German Insurance Association (GDV) is fighting back. The reproach of "Spiegel Online" misses the facts. "More than 95 percent of the income generated benefits the customers," the GDV says . Also the criticism of the profit transfer agreements expressed by Gerhard Schick is unfounded. This is because a large part of the transferred profits flows back into the life insurance companies as equity capital and thus strengthens the risk-bearing capacity of the companies. The only problem is that customers whose policies are due to mature have nothing to gain from the strengthening of equity capital, because they are missing out on returns. If you don't want to believe it, the best thing to do is to look at your statement of financial position and compare it with previous ones – or compare the final statement with the statements of financial position from 2015 or 2010. Many insurance customers are likely to be quite shocked, if they are not already.
Gross surplus down to 10.4 billion
GDV calculates that "in 2016, for example, German life insurers earned 45 billion euros; of this sum, 22.4 billion euros went into customer credit as guaranteed interest and 12.2 billion euros as additional interest reserves. "So far, so good. "The remaining gross surplus of 10.4 billion euros also went largely to customers (9 billion euros)," GDV calculates. Okay, the percentage calculation shows: nine billion of 10.4 billion euros are 86.5 percent. In this respect, "Der Spiegel" is quite right, writing that the participation of the insured is 85.9 percent. The insured lack 1.4 billion euros. Also the "versicherungswirtschaft-heute" takes up the topic. "Now he (Schick) is following up with similar accusations that the industry is lamenting the low-interest environment, but pulling billions of euros out of life insurance, to the detriment of customers; and indeed, it is not a good sign to the outside world when the graphs of annual earnings (falling) and withdrawals (rising) meet".
Endowment life insurance policies yield less and less Source: Spiegel
Guaranteed interest rate is a deceptive package
But one more word on the "guaranteed interest rate". According to insurance critic Sven Enger, the guaranteed interest rate for endowment life insurance policies has always been a deceptive package, because it is "not calculated on their payments, as most policyholders assume, but on what remains of their premiums minus the costs (acquisition commission, sales expenses, administration, death cover)". Who really knows what amount the guaranteed interest rate on endowment policies refers to? Enger estimates the percentage on which guaranteed interest is really paid on endowment life insurance policies at 70 percent. Hermann-Josef Tenhagen, editor-in-chief of "Finanztip" blows the same horn in his column in "Spiegel": "When you signed the contract back then, you agreed that a large part of your actual savings sum would be diverted: First of all, there is the insurance sales company, which gets its money. Then the insurer covers its costs for administration. Then for the case that customers die and relatives have a right to money (life insurance) or for the risk that customers become very old (pension insurance). Only what is left over is saved and must be paid interest by the insurer in classic life and pension insurance policies."
How to provide for old age?
And "how can I still provide for old age at all?", Sven Engers was asked in "Stern" magazine. His answer: "In times of low interest rates, the main options are owner-occupied property and savings plans that invest in shares via low-cost index funds (ETF)". There is nothing to add to this. The former economist and current chief economist of the "Handelsblatt", Bert Rurup, says in the Comdirect customer magazine "compass" :
Germany is a rich country, but the wealth of its individual citizens is quite small compared to that of the inhabitants of other Western European countries". This is due in no small part to low real estate ownership, he said, but also to a preference for insurance and time deposits. "With low interest rates, this preference is costing Germans dearly," he concludes.
Rurup warns everyone: "It is a myth that the standard of living can be maintained by the statutory pension". Who does not want to limit itself in the age clearly, must provide thus additionally, it argues. Obviously that did not become generally accepted still for a long time with all. We are inevitably heading for increasing old-age poverty.