From Dan McCrum, writing at the FT Alphaville blog:
When he was seven years old, Max-Hervé George was given a magic ticket by his father. It lets him turn back the clock, to invest with perfect hindsight week after week, steadily accumulating a fortune.I have the feeling if this happened in the States, American courts and American regulators might have been able to find a way to help the insurer out of their contract. The French courts may yet do that.
There is no mystery to the financial magic, however. Instead it is a story of grand stupidity, of how a French insurer wrote the worst contract in the world and sold it to thousands of clients.
The company was L’Abeille Vie. In 1987 it began to offer a special deal to its richer clients, a Fixed Price Arbitrage Life Insurance Contract.
Life insurance is a popular savings product in France, and typically the customer allocates their money among different investment funds offered by the insurer. But this contract was not typical: prices for the funds were published each Friday, and clients were allowed to switch funds at those prices anytime before the next price was published, even if markets moved in the meantime.
L’Abeille Vie called this an arbitrage, but really it was a gift. Is the stock market up this week? Just call your broker to buy it at last week’s price and pocket the difference.
In a world where the price of everything is now a mouse click away, offering a hindsight investment service seems incredible, if not suicidal. Yet thirty years ago prices for funds were published infrequently. Trading involved calling your broker, visiting him person, or maybe sending a fax. It could take days for the trade to be processed, during which time the market could move again.
The important thing to realise about insurance is the sanctity of contract. You might finagle the meaning of a particular term, but the whole point is for the writer to stand behind what was agreed. Regulators do not let insurers unilaterally change their terms.
In 1997 L’Abeille Vie’s known price deal was still available and Mr George senior took out polices for the whole family, depositing Fr50,000 (almost E8,000) in the name of young Max-Hervé.
Shortly afterwards, Abeille Vie — which had by then been absorbed into Commercial Union — stopped selling magic tickets.
Mr George grew up with a fine appreciation for the power of paperwork and the French legal system. Each week the family would switch their money into the best fund. “At the beginning I could send the document by fax, so it was really easy. Soon after they told me no, only by letter”, he said. To make sure nothing goes awry in the post, Mr George pays for a court appointed bailiff to deliver each set of instructions. The paper has piled up almost as fast as the money: “I would need to take one Boeing to bring all of the documents with me”, he said.
The family George won their first court judgement in 2007, which affirmed the validity of their contracts. A subsequent appeal court ruling went their way, as did a September 2014 ruling from the Cour de Cassation, France’s highest legal authority. According to Mr Lecoq-Vallon, “established case law exists and my office alone has constituted no fewer than 64 decisions which are unfavourable to Aviva”.
An appeal court, and potentially the Cour de Cassation, will still have the chance to settle the matter.
But until then, Vive la France! :)