Recent case law relating to transparency of unit-linked insurance policies

In the Netherlands, unit-linked insurance policies (so-called beleggingsverzekeringen) remain a hot topic for litigation despite various compensation measures by Dutch insurers.

Consumers' complaints tend to focus on the lack of transparency of these products, in particular with regard to the cost structure. Case law is divided on key legal issues relating to these policies.

Public debate

Unit-linked insurance products were first offered in the Netherlands to customers around 1990. The products soon became popular as a tax-efficient alternative to saving. At that time, Dutch regulations based on the Third life assurance Directive¹ did not require insurers to provide detailed information about the underlying cost structure, as it was thought that this might be detrimental to a consumer's understanding of the insurance agreement.

Insurers started receiving complaints about the revenue of the products about 15 years ago. The sharp drops in the global stock exchange markets during the years 2001-2004 also led to disappointing revenues for unit-linked insurance products, which fell short of many consumer's expectations.

During 2006, consumer discontent resulted in inquiries by several government bodies and eventually the involvement of the Financial Services Ombudsman (Ombudsman) in the debate. This resulted in a recommendation to Dutch insurers to retrospectively minimise the costs of these products for contracts taken out in the past and, in those cases in which greater costs were charged, to compensate the consumer in the manner as recommended by the Ombudsman. These recommendations by the Ombudsman led to Dutch insurers reaching resolution agreements with various Dutch customer interest groups.

Despite the express support of the Ombudsman and several other parties, public debate and litigation on the lack of transparency of unit-linked insurance policies continues. Several consumer interest groups have brought claims before the Financial Services Disputes Committee² and threaten to initiate mass claims before the Dutch courts.

Recent case law

The complaints about unit linked insurance policies tend to focus on the lack of transparency relating to the life insurance premium, costs charged and specific risks attached to the policy. Recent case law has provided some guidance on these issues.

• Recent case law seems to imply that, in order to charge costs, these costs must be mentioned in the information material provided to a consumer.³ This information must be provided to the consumer at the time the consumer enters into the agreement or is (still) able to withdraw from the agreement. In the absence of such reference, the insurer is obliged to repay the costs charged. This approach has been heavily criticised in the market because, as mentioned above, in the past Dutch law did not require complete transparency on the cost structure on these types of insurance policies.
• Where a consumer has been provided with information containing a reference to certain costs, but the level of costs is not mentioned, there has been a divergence of approach. The Financial Services Disputes Committee's current position is that the costs may be charged if, at the time the agreement was entered into, the insurer was not obliged to inform consumers on the level of costs.⁴ The Dutch civil courts have in some cases taken the approach that these costs may be charged, provided they are reasonable.⁵ The same approach is taken on life insurance premiums.⁶ In some cases the costs and life insurance premiums have been found to be reasonable if they fall within certain limits set by the Ombudsman⁷ and/or the settlement agreements entered into with certain customer interest groups.⁸
• The life insurance premium of certain unit-linked insurance policies can vary during the term of the policy, depending on the value of the investments. This could create financial leverage, which could result in the life insurance premium effectively "eating" into the value of the investments. Recent case law indicates that insurers should have warned consumers of this possible outcome, however it is not yet clear what the consequences are of an insurer breaching this obligation.⁹
• With respect to traditional life insurances with a guaranteed minimum capital, the Financial Services Disputes Committee takes the approach that a consumer accepted the costs that are incorporated in the premium. The rationale behind this approach is that the consumer knew what premium it would pay in order to receive the minimum capital. It is argued that this should also apply to unit-linked insurance policies with a guaranteed minimum capital as well.

Comment

In the absence of decisive case law, there is still uncertainty in the Dutch insurance market about the consequences of the change in transparency requirements over the past decades on unit-linked insurance policies. As long as the revenues of the policies are less than hoped for by consumers, the unit-linked insurance policies portfolio remains a concern for Dutch insurers.