In the current year, the financial supervisory authority Bafin is examining six life insurers that have attracted attention because of comparatively high costs, especially commissions. For the first time, the authority also defines criteria for when it can carry out such an examination. In the corresponding document, the Bafin states the general cost burden, commissions to intermediaries and income from the policies as a basis. Life insurers whose costs are in the upper quarter of the values of all companies examined will be taken on by the authority immediately.
“We are thus capturing the worst quarter of companies in terms of effective costs and expenses for insurance intermediaries,” said Frank Grund, head of insurance supervision at Bafin, in an interview with the specialist publication insurance monitor. “These companies deserve our special attention.”
The step is likely to provoke angry reactions from intermediary associations and large structured sales companies such as Deutsche Vermögensberatung AG (DVAG). For years, you have successfully resisted any kind of limitation on commissions in old-age provision. Many insurers also fear for their new business if payments to intermediaries are restricted.
Every year, German life insurers spend around eight billion euros on acquisition costs, most of which are commissions. According to the General Association of Insurers, it was 8.3 billion euros in 2022. In addition, there are 2.1 billion euros in administrative costs. The life insurers charge 100 percent of these sums to the customers – whose returns are correspondingly lower. In the case of unit-linked policies, this can mean that the annual return is significantly more than three percent lower.
The major distributor DVAG generates most of its income of 2.2 billion euros annually with commissions from life insurance. The company categorically rejects any form of limitation, and it is politically well networked: the Union politician Theo Waigel, former Federal Finance Minister, and the EU MP Markus Ferber, the Green MP and former head of the Verdi union, Frank Bsirske, sit on the advisory board. the FDP deputy Hermann Otto Solms and the longstanding SPD Minister of Justice Brigitte Zypries.
Other countries have long since banned commissions for old-age provision
In Great Britain, the Netherlands, Denmark, Finland, Norway as well as Australia and New Zealand, commissions on pension schemes are prohibited. In Germany, on the other hand, all attempts to even set an upper limit have failed. Most recently, the then SPD Finance Minister Olaf Scholz failed in the grand coalition in 2021 due to resistance from the Union.
But the problem doesn’t go away that easily. The EU Commission proposed an EU-wide ban earlier this year. However, she had to give up the plan for the time being because it met with strong resistance from the EU Parliament and some member states, including German Finance Minister Christian Lindner, FDP.
The Bafin is now attempting a moderate limit based on EU supervisory regulations. “An important factor for us is the effective cost of capital-forming products,” said Chief Supervisor Grund. “The effective costs describe the cost burden of the products as a reduction in the annual return in percent. From the customer’s point of view, this is of course very important.”
One thing is clear at the Bafin: Things cannot go on as before
Before joining Bafin, Grund was head of insurance for many years and is not a friend of a commission ban. But he knows that things can’t go on like this for long because the burden on customers is simply too high. “The expenses for the insurance brokers, which make up a significant part of the acquisition and sales costs, are also important to us,” he explained. This could result in false incentives in sales, “especially if high acquisition commissions are paid”. Reason apparently fears that intermediaries and distributors will primarily sell contracts with which they earn the highest commissions and not those that are in the best interests of the customers.
Together with several colleagues, Steffen Sebastian, Chair of Real Estate Financing and Director of the Center for Finance at the University of Regensburg, has calculated how expensive the EU waiver of a commission ban in life insurance will be. In April 2023, he said households in countries with a ban saw a 1.7 percent higher return on their wealth than those in countries without it.
The study was heavily attacked by the industry. According to the criticism, Sebastian did not take into account the fees for consultants that would be incurred if commissions were lost. “One wonders at what level science writes reports,” said Helge Lach, board member of DVAG, on Twitter. It has long been evident that fees should be taken into account when there is a loss of return due to commission. “Who commissioned the report?” asked Lach.
The damage in Europe amounts to 375 billion euros
Undeterred by this, the Regensburg researchers have now followed up and, for the first time, estimated the financial loss associated with the waiver of a commission ban. “Across Europe, there is damage of 375 billion euros,” explained Professor Sebastian. “For Germany alone, this is 98 billion euros, year after year.” That corresponds to a loss of around 2,400 euros per household per year.
In addition, the scientists investigated the criticism that due to a commission ban, people make fewer provisions for old age. “According to our calculations, there is no significant impact of a commission ban on the savings rate of households,” said Sebastian. “The statement that less will be saved through a ban on commissions is, according to the data, a completely unsubstantiated assertion.”