The German Parliament has enacted the new insurance contract law which will take effect on 1 January 2008. From 31 December 2008, the law will apply to policies written before this date, and insurers will have a period of one year to make the unilateral changes of terms and conditions which are needed to bring the existing policies in line with the new provisions.
In addition, the German Ministry of Finance has put forward the first draft of a regulation concerning information duties with respect to insurance contracts which also will take effect on 1 January 2008.
With the exception of a few hotly debated topics relating mainly to life insurance contracts, the provisions of the finalised law do not differ greatly from the draft put forward by the German government in October 2006 (see the summer 2006 edition of Insurance Focus).
With respect to the traditional German with-profits model of term life assurances, unrealised gains on the covering assets will need to be notionally allocated to the individual policyholder on a continuous basis. However, only 50 per cent of the amount available at the end of the relevant contract has to be paid out.
In order to clearly determine the surrender value in the event of a dispute, the surrender value of a traditional with-profits model of term life assurances will have to be calculated on the basis of the technical reserves (Deckungskapital) of the insurer (as opposed to the current value (Zeitwert) which will continue to apply for unit-linked life policies). In addition, surrender fees in life policies must be based on the costs actually incurred and need to be spread out evenly over the first five years of the contract. Insurers will have to restructure commission payments, or bear the costs which cannot be charged to the policyholder. The absolute amount of surrender values and any guarantees relating thereto will need to be notified to the policyholder at the point of sale.
Both initial and ongoing transparency requirements will be increased substantially and beyond the requirements set out in the Life Directives. The insurer will have to provide policyholders with all relevant information and provide them with all the necessary policy documentation (key features, terms and conditions, model calculation for benefits from life insurance products, surrender value etc.) at the point of sale. Most importantly, the amount in Euros (not percentages) of direct and indirect set-up and distribution costs (including commissions) need to be disclosed, irrespective of whether or not such amounts are included in the premium. Life insurers will also have to make additional disclosures in a particular order, including for example the part of the premium which is budgeted for administration costs.
Further, the insurer has an obligation to provide customers with advice and document such initial and ongoing advice in detail, except where the advice is provided to the policyholder by a broker or an IFA or where the policyholder has signed a written waiver of its right to be advised.
Other important changes relate to the following:
Except where the insurer is able to provide evidence of intentional misconduct, the policyholder’s failure to disclose risk factors at the point of sale will no longer entitle the insurer to cancel the policy retroactively. In case of negligence, the insurer has the option to continue the policy on adjusted terms and conditions, or to terminate the policy by giving one month's notice.
Similar rules apply in the event that the policyholder does not comply with contractual warranties as to future conduct. The legal consequences depend on the degree of the policyholders negligence. The current principle of "all or nothing" will no longer apply.
In case of compulsory insurance, the claimant will have a direct claim against the insurer under certain conditions (e.g. insolvency of the policyholder, unknown residence of the policyholder). This approach is much narrower than the approach of the white paper which would have provided for direct claims without further requirements. However, it will no longer be possible to exclude the policyholder’s right to assign the claim under a third party liability insurance to the party having suffered the loss. This means that insurers will be much more exposed to becoming a party in court cases.
The new contract law is the result of many years of debate, and most German insurers have started revising the terms and conditions of their products a long time ago. The same task will eventually have to be performed by insurers who are offering products in Germany on a branch or freedom of services basis.