Life Insurance

Is This the Worst Policy Ever Issued?

OK, there have been some amazingly stupid contracts written over the years. But among people who really must understand what they’re doing, one from France probably does take the biscuit. It’s a hybrid life insurance/savings product that allows a policy holder to allocate capital among various funds. Nothing very strange or stupid there. However, here’s the catch:

It allows the policy holder to switch funds this Friday based on the prices from the funds last Friday. Which isn’t just stupid, that’s doolally. It might be the worst policy ever issued.

The basic background is the fact that this was a reasonably popular sort of contract among French insurance companies in the 1980s and ’90s. Take out a life insurance contract (usually, to get the tax privileges that go with such a contract) and use it as a savings vehicle. You can swap between bond, equity funds and so on as you go along. Given the speed of the post in those days, and the overall rarity with which people fiddled with their investments, prices of the funds would be published on the Friday, and also you had until the next one to switch around your investments based on those prices.

The world has changed since then: We are able to all lookup asset prices in seconds now. And a number of those insurance policy holders noticed. They started aggressively managing (as they have every to do) the savings within their funds. You can see what’s coming here. If I'm able to trade Thursday on last Friday’s prices, I’m prone to do pretty well, because I know what has happened to prices. And therefore it is with a few of those players.

Does a 70% compound profit per annum sound like a juicy investment return to you? It does to me.

Of course, there has been a variety of scrambling to test and get out of this. The organization managing the contracts, Aviva, has been refusing to move funds, for example. And it should be said that most from the people with these contracts were, umm, gently maneuvered out of them over the years both from the corporation and others. You realize the kind of thing: “Sirs, we wish to make a slight change to the T&Cs of your contract; here is EUR100 for the trouble in signing this and returning it to us.” That change being that you’re no longer allowed to shift based on 20/20 hindsight.

Max Herve-George was not tempted by such offers. So, he’s been making those alarmingly high profits, isn’t budging and has been up and down the courts system (winning pretty much all of the while) to hold Aviva to that contract.

It gets better: Herve-George is, under the terms from the contract, allowed to include more funds. He’s made arrangements with a hedge fund or two (who wouldn’t like 70%-per-annum returns?) to inject perhaps a further EUR20 million-..and you can see where this really is going, can’t you? At some point, he owns the company, then France and then the entire planet. FT Alphaville gleefully calculates for us when this really is going to happen. May not be within my lifetime. but it’s prone to be in Max’s.

Of course, this isn’t actually going to happen. As Herb Stein pointed out, if something cannot go on forever, then it won’t. But the interesting question is, well, what will stop it?

There are really only two possibilities. The first is that France, or the French courts, shred contract law. And, believe me, over things like savings and life insurance, the French are very serious indeed about that law. Or, Max ends up owning Aviva, the organization that sold him the contract.

As it happens, an old friend of mine is working as an adviser somewhere in this instance. And we’ve been chewing the fat over which way it’s going to turn out. Our best bet is that Max ends up owning Aviva France.

The thinking is along these lines: First, France really does take extremely serious ly the law surrounding these types of investment, life insurance and pension policies.

We’re both reminded from the case of Jeanne Calment. France has a system of reverse mortgages. You, a nice little bourgeois lawyer, say, look around you and find out some little old lady living in a nice apartment that she owns. Say, a 90-year-old little old la dy with no surviving descendants. So, she’d quite like to swap the apartment after her death for an income stream now. A reverse mortgage of sorts. So you need to do this, and she continues to become the longest-living human being ever (OK, for completists, leaving the Antediluvians). In 1965, at age 90 with no heirs, Calment signed a deal to sell her apartment to lawyer Andr√©-Francois Raffray, on a contingency contract. Raffray, then aged 47 years, decided to pay her a monthly sum of 2,500 francs until she died. Raffray ended up paying Calment the equivalent of more than $180,000, which was more than double the apartment’s value. After Raffray’s death from cancer at the age of 77, in 1995, his widow continued the payments until Calment’s death in 1997, at age 122.

French law is really very strict about such things. So, we just don’t think that the courts are going to shred the contract: Yo do so would be shredding that basic sanctity of contract law.

Yes, it’s true, you can’t write a contract making yourself a slave, and there are some other restrictions. But you are indeed allowed to write some amazingly stupid contracts, and you'll be held to them.

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