trade body claims proposal is against european law and spirit of open markets
The Association of International Life Offices (Ailo) is gearing up to take on the German government over draft legislation it claims will prevent its members entering the market.
Alan Morgan-Moodie, the chairman of Ailo, confirmed the body had formed an action group, involving UK and Irish-based insurance companies affected by the proposals.
He said one of the main concerns was the draft legislation suggested establishment charges for insurance contracts would have to be spread over five years but the policyholder could surrender the contract within those five years without penalty.
Ailo member companies are estimated to have a 6% share of the German marketplace, with more than one million policy-holders on their books.
Morgan-Moodie said: "This sort of thing really would prevent entry into the German market by other Irish and British companies.
"When a client surrenders his contract within the first five years, normal practice has been to seek a proportion of the costs that have been incurred, so their surrender value has been reduced somewhat.
"This is just fair practice because the expenses have been incurred on the basis of a long-term commitment."
Even more concerning, said Morgan-Moodie, was that the German government was proposing to implement the legislation retrospectively.
He added: "None of our member companies have priced for this, so it is a big issue. We are forming an action group to really try to persuade the German government that it does not really want to do this; that it is against European law and the freedom and spirit of open markets."
Craig Tunstall, business development director for Standard Life's German office, said of most concern was the requirement under the draft legislation for insurance companies to guarantee surrender values in the contract from year one, but spread initial costs over five years.
He said: "Both of those things have the potential to be quite painful for products that offer guarantees at maturity but at the same time invest a large part of the assets backing the contract in equities."
Tunstall said an example was products such as typical UK-style with-profits contracts, invested roughly 50% in bonds and 50% in equities. If the insurance company had to guarantee a relatively high surrender value from year one, the investment strategy would have to change.
He said: "The insurer cannot afford to run the risk that the 50% of the portfolio invested in equities falls in value, the customer exercises their right to walk away with the guaranteed surrender value and either the company or all of the other policyholders are left to pick up the gap."
Tunstall added while the proposals were good for those who surrendered their policies early on, it was not in the best interests of those who took out the policy for the longer term.
"One of the key problems with the draft law is it effectively removes choice," he said.
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