Expert opinion on "Swiss Select": High risk of loss without corresponding expectation of return of investment

In a proceeding conducted by Schwärzler Attorneys at law against a Liechtenstein insurance company a recent expert opinion ordered by the court had to answer the questions whether it was at all possible to make a profit with a specific “Swiss-Select”-product, at what level the break-even point was, what influence the credit financing had and how the formulation used in the insurance documents “potential for good earnings with calculated risk – dynamic” had to be understood.

The court certified expert in the banking and stock exchange sector already made out serious irregularities in the fact sheets which were given to the policy holders during contract negotiations. The fact sheets contained partially incorrect facts and figures.

According to the expert opinion "Swiss Select guarantee" even with equity financing – therefore without credit financing – contained a substantial probability that inflation-adjusted capital preservation would not be achieved, i.e. that the policy holder would de facto lose money.

Solely for the prevention of losses nominal rates of 11% -12 % per annum would have been required to bring the respective policy holders into the profit zone. The expert stated that such high return rates of the target funds made necessary by the various costs of the "Swiss Select" product would appear “indeed possible” but were “not very likely”. Because of the additional partial credit financing inherent to the "Swiss Select" product in question the break-even level, i.e. the profit that had to be made solely in order to be able to pay the costs of the product, was raised even higher. This is due to the costs of the credit which additionally had to be earned. Because of this negative leverage effect equity was reduced even more than this would have been the case with an investment financed only by equity capital, the expert explained in his report. 

With regard to the transparency of the costs, the expert furthermore stated that even by taking into account all existing product documentation, the allocated costs of the insurance and of the other participants involved could only partially be reconstructed even by an expert.

How the formulation “potential for good earnings with calculated risk – dynamic” specified in the insurance documents had to be understood could not at all be answered unambiguously and would leave wide room for interpretation. The expert concluded that it was not possible to determine how the average investor should understand this formulation.