If an insurance company becomes insolvent, the question of insurance coverage arises. These protection mechanisms secure your claims.
Imagine you are standing in front of your damaged house after a flood disaster. The damage is extensive, but you have peace of mind – at least you are insured. But what if your insurer has to file for bankruptcy now of all times? Not an unimaginable situation: the current Element Insurance case raises exactly this question. What happens to your insurance coverage if your insurance company goes bankrupt? And how can you protect yourself from it? We clarify.
Insurance is essential: it protects you against financial risks that arise in everyday life or as a result of unforeseeable events – a sudden burst water pipe that floods your apartment or a car accident that results in high repair costs. Without insurance, such events can pose a significant financial burden.
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Whether liability, household contents or health insurance – the right protection provides security. But how likely is it that an insurance company will go bankrupt? In fact, this is extremely rare. Insurance companies calculate their premiums with the help of experts, so-called actuaries, who carefully assess risks. There is also reinsurance – essentially insurance for insurers – which steps in in the event of high amounts of damage.
But even with these security mechanisms, in rare cases it can happen that an insurance company goes bankrupt. Examples include the insolvency of Mannheimer Lebensversicherung in 2003 and the current bankruptcy of Element Versicherung with over 400,000 customers affected. The reason often lies in economic mismanagement, risky investments or a sudden, massive wave of damage.
If your insurance company becomes insolvent, you as the policyholder are well protected. Your rights take precedence over those of other creditors. This means that claims from ongoing claims or premium refunds are given priority. The insurance assets are used to service your claims. But be careful: cuts can still occur if the existing assets are not sufficient.
According to the Association of Insured Persons (BdV), settlement cannot be guaranteed for Element Insurance, especially for new damage. Since it is unclear whether the security assets are sufficient to ultimately satisfy all of the policyholders’ claims, there are currently no payouts to the insured, according to the BdV.
In certain insurance lines such as life or health insurance, a contract often ends automatically when insolvency proceedings are opened. For example, if a private health insurance company goes bankrupt, the contract is usually terminated, as this type of insurance is subject to particularly strict regulation.
However, according to statistics from the Federal Financial Supervisory Authority (Bafin), this scenario occurs extremely rarely, as less than 0.1 percent of all insurance companies have had to file for bankruptcy in the past few decades. In other areas, such as liability insurance, the contract usually ends one month after the start of the procedure.
What happens if there is an open claim? Example: You just reported a break-in in which your doors or windows were damaged and the interior was vandalized. Even before the settlement is completed, it becomes known that your insurance company has filed for bankruptcy. What now?
If your insurance company declares bankruptcy, you must register your claim in the so-called insolvency table. An insolvency administrator will then check whether and to what extent your claim will be recognized. However, the payout depends on how much money is available in the insolvency proceedings.
In certain cases, security funds step in. For example, when it comes to life insurance in Germany, Protektor Lebensversicherungs-AG takes over the policies of insolvent companies. Protektor continues the contracts and ensures that insured persons receive their benefits.
The insolvency proceedings of an insolvent insurance company begin with an application to the Federal Financial Supervisory Authority (Bafin). After the proceedings have been opened, an insolvency administrator is appointed to secure the insurance company’s assets and protect the interests of the policyholders.
In the current case of Element Versicherung, the provisional insolvency administrator is checking whether existing contracts can be transferred to solvent insurance companies. If this fails, the contracts will automatically end one month after the opening of insolvency proceedings. Until then, affected customers should urgently take out new insurance coverage, especially for essential policies such as liability or homeowners insurance.
Example: the insolvency of the Mannheim life insurance company. A look at the past shows how insolvency proceedings can work.
- Mannheimer Lebensversicherung had to file for bankruptcy in 2003 because it had suffered high losses from risky stock investments.
- In order to secure customers’ claims, the Protektor security fund was founded, which took over over 300,000 contracts.
- The remaining contracts were later passed on to other insurance companies, by so-called run-off companies that specialize in managing existing insurance policies particularly efficiently and cost-effectively.
- Not a single Mannheimer Leben customer lost their insurance coverage. The contracts will continue to this day unless the agreed term has already expired.
This example shows that even in an insolvency case, mechanisms exist to protect the interests of the insured. These proven processes and security instruments guarantee amazing stability, even in seemingly hopeless situations – evidence of the robustness of the German insurance system.