Residual debt insurance – sales scandal or perennial favorite?Debt
Residual debt insurance is criticized by BaFin due to its enormous costs and low benefits for consumers. Only the banks and savings banks selling this insurance, including insurance companies, are fighting to preserve them
While residual debt insurance has proven to be an expensive sales scandal in Great Britain, which made high provisions at banks necessary, it is still a long-running favorite in Germany. I was astonished to see the contribution to residual debt insurance from Mr. Kurtranger, chief authorized representative and CEO of Lifehand Bank in Germany, in particular the consequences of a commission cap and other measures for his industry and the banks and savings banks that sell residual debt insurance that he so frankly admitted,
As the author rightly fears, if the commissions in the residual debt insurance were capped, the banks and savings banks would be deprived of a significant source of commission income if, in view of commissions of up to 70 percent, the new addition of almost 1.2 million residual debt insurance in 2018 (included, negligible life insurance policies without profit sharing) with a premium volume of 1,412,057,000 dollars (in single premium business) and 8,357,000 dollars (ongoing premium for one year).
Further figures on residual debt insurance
In 2018, new customers paid residual premiums for single premium, which are the main business, premiums in the amount of (rounded) USD 75 per USD 1,000 insurance sum. In contrast, in life insurance, the premium for every 1,000 dollars insured was 45 dollars. The numbers speak for themselves. This also applies when considering possible risks of incapacity to work and / or unemployment, since the latter risks are only taken over for a limited period of time.
How do consumer credit, residual debt insurance and personal bankruptcy interact?
The connection between the decline in credit-financed consumption and the increase in the personal insolvency ratio with further regulation of the residual debt insurance should not be revealed to the reader.
It can be doubted that there is a connection between the regulation of residual debt insurance and a decline in credit-financed consumption. The opposite could also be the case, since the monthly loan installments would be much cheaper if the loan were not co-financed.
And to what extent a decline in credit-financed consumption provided with residual debt insurance should increase the personal insolvency ratio is also not clear. The net loan amount raised is increased due to the co-financed residual debt insurance. This also increases the effective interest rate and the monthly installments. An associated higher financial burden is more likely to fuel the risk of insolvency. The low level of protection against unemployment and / or incapacity to work is out of all proportion to the high costs of residual debt insurance due to the large number of exclusions and the short duration of benefits.
The fear of the author of an “attempt to destroy an entire industry” may not be meant very seriously, and if so, the statement made that an entire industry lives from the sale of residual debt insurance is actually worrying from the perspective of the consumer advice center in North Rhine-Westphalia.
Educating consumers about residual debt insurance is right and important because they spend a lot of money on an overpriced and bad product. In the future, it would be desirable to use the British Prudential Regulation Authority (PRA) a little more as a role model, which eventually halted the sale of the expensive residual debt insurance.