This Insurance Contract Will Make You A Billionaire

The Financial Times called it “the worst contract in the world”. It allows the contract holder to invest with hindsight. Did you see a stock go up this week? Now you can buy it at last week’s price. Did your stock plummet? Sell it at last week’s price. It is the ultimate form of insider trading: time travel.
— Dark Bid

Having businesses in the financial advisory and life insurance industry, we found this article to be of great fascination. Insurance contracts are like any other, governed by the power of a binding agreement inked under the circumstances of law. When a contract is crafted, a lot of thought and due diligence goes into it, for all the obvious reasons.

The life insurance industry is like any other. Insurers write contracts to buy mortality and morbidity risks from clients. In return, clients pay insurers a premium or regular stream of premiums for this favor. This agreement fulfills the basic principal of a valid agreement, and when signed by both parities, forms a legally binding contract.

Insurers profit because most of their clients won't make significant claims, if at all, during the course of their insurance coverage; premiums that these clients have paid would essentially become sunk costs. Even with contracts that attribute so-called cash values to clients do so with an inbuilt minimum buffer which guarantees a profit margin to the insurer even before the first interest payment is rolled forth.

The heyday of the life insurance industry was back in the 1980s, where such contracts were popular amongst the middle-class. Back then, the science of actuarial mathematics was lacking in terms of specific risk modeling and pricing. They didn't have the complex algorithms and automated systems that make the pricing of risk as efficient as it is today.

Profiteering & Insurance?

One of the principals of life insurance is that the contract should not be created to allow monetary gain by the insured or the owner of the policy contract. The very definition of insurance is a polar opposite to profiteering. However, when major slip-ups occur, certain contracts inherently give the policy owner the right to profit, at the cost to the insurer.

Such is the case of Max-Hervé George, a Frenchman who so happened to be endowed with what many call the "worst contract in the world". When Max was at a tender age of 7, his father bought him what was called a Fixed Price Arbitrage Life Insurance Contract. In essence, this contract was designed to allow wealthier clients to purchase funds at last week's prices - hence the term "arbitrage".

The underwriter of the "worst contract in the world" or the "best contract in the world for clients" was none other than the French Life Insurer Aviva, known back then as L’Abeille Vie.

What this meant was that the client could never ever possibly loose money if he had done his homework right and churned the funds quickly enough. For instance, knowing which funds had done well this week by looking at their daily price histories for that week, a client could sell his existing holdings at the prevailing bid and use those proceeds to purchase funds that had done well - but the client had the right to purchase at last week's prices. Essentially a guaranteed profit, week after week, with absolutely no chance of loosing.

A numerical example would be as follows. A client has $10mn in his account with his insurer. Under the Fixed Price Arbitrage type of insurance contract, the client has the right to purchase funds sold by his insurer at last week's prices. The client has the golden advantage of hindsight. As each week passes, the client would purchase funds that had done well for that particular week; a judgement that will always be correct. Over the course of many years, the client would be able to compound his capital by an ungodly rate, as long as the insurance contract remains legally binging on the insurer. And in the case of Max-Hervé George, it was.
 Illustration of exponential extrapolation. Fairy dust anyone?  Chart courtesy of Business Insider

Illustration of exponential extrapolation. Fairy dust anyone?

Chart courtesy of Business Insider

During the period between 1997 and 2007, Max-Hervé George's contract realized a 68.6% exponential rate of return, annualized. Extrapolating this figure, the value of his contract would be €1.26bn by 2020, and a staggering €234.2bn by 2030. If all else holds, Max will be worth more than the world's largest life insures combined.  This puts even Bernie Madoff, possibly the modern world's most notorious Ponzi Artist to shame.

Meet The Man Who Could Own Aviva France

Via Dan McCrum:

  The life of Max-Hervé George now revolves around litigation, and tons of it. Paying millions for lawsuits to ensure Aviva France upholds its contract they agreed to in 1987.

The life of Max-Hervé George now revolves around litigation, and tons of it. Paying millions for lawsuits to ensure Aviva France upholds its contract they agreed to in 1987.

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.
The ticket is a life insurance contract and Mr George, now 25, has fought for years in the French courts to preserve its magic. He could be a billionaire by the end of this decade and, by the end of the next, his contract would be worth more than the insurance company which stands behind it, Aviva France.
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.
L’Abeille Vie was not alone in the madness. Other insurers, including Axa and a group now owned by Allianz, also offered “known price” contracts to rich customers.
It may be that the opportunity to talk to the wealthiest clients on a regular basis was the incentive, or executives thought the work involved meant few would take full advantage of the opportunity. Perhaps life insurance was a great business and they didn’t ponder the consequences.
As financial information became more accessible in the 1990s, insurance companies began to realise the danger of hindsight terms. They started to persuade customers to amend the contracts, paying them to give up the right to trade at week-old prices.
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. It could not tear up thousands of contracts, so it tried a more subtle tactic: policy holders were sent new papers, with the offer of 100 francs for the trouble (about £10). It is a measure of the bureaucrat’s art that almost all did sign, but the Georges declined.
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.
In 2002, Commercial Union took part in the merger of insurance companies which formed Aviva. Around that time legal cases began to appear as holdouts tried to assert their right to hindsight, represented by Nicolas Lecoq-Vallon, a lawyer who would later become celebrated in France for representing victims of the ponzi schemer Bernie Madoff. In 2005 Aviva told Les Echos around 30 holders of the magic contracts had taken legal action.
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”.
What remains a matter of continued litigation is the value of those contracts. An expert was appointed to assess the claims, and a Paris District court approved his findings, effectively that the families investments grew in value at 68.6 per cent a year for a decade from 1997. As of 2007 the family’s investments were worth €9.6m, out of a €21m total for all court awards so far, with €1.4m belonging to Max-Hervé.
Mr George continues to arbitrage time. For instance, he might have his money in an Aviva fund invested in the French stock market. Lets say the Nikkei 225 rises 5 per cent during the week. He’ll tell Aviva to move his investments into its Japanese fund, at the price before the market moved.
So he is now in a strange position. Each week he grows his fortune by trading the past with precision, but cannot say how rich he is. “This report is until 2007, so what about 2007 to 2014?”, said Mr George. “The amount of the arbitrage is 100 per cent exactly, because I don’t know the amount of my contract.”
Aviva France strongly contests this compensation claim and believes that the Court will rule against the speculative and excessive compensation levels being sought.
— Statement Issued By Aviva
Estimating the size of his windfall is an illustration of exponential growth. Assume the growth rate of 68.6 per cent a year continues, and €1.4m becomes €93m. There was quite a significant market crash in 2008, but imagine you were able to pick the best performer each week as markets rebounded in 2009.
An appeal court, and potentially the Cour de Cassation, will still have the chance to settle the matter. Aviva said in a statement,
Were Aviva not to prevail, the numbers become more significant every week the George’s bailiff arrives with instructions. Consider the effect of a liability growing at 68.6 per cent a year from here.
  Contract value assuming  68.6% annualized RoR . Growth is exponential.

Contract value assuming 68.6% annualized RoR. Growth is exponential.

Mr George has also started to add fresh capital to the account governed by the contract, €19.9m last year, helped by a loan from the Swiss arm of a French Bank. (He is a French citizen, but lives in Switzerland). He said the contract terms allow him to add more cash to the pot. “I can take all the money in the world and invest it, there is no limit”.
Some policy holders may have died, but a handful of such cases would start to become a material number, even for an insurer of Aviva’s size, were court decisions to go against it. The company said “Aviva France remains appropriately reserved”. The absence of some plaintiffs from subsequent litigation suggests settlements were reached in some cases. Mr George’s father is no longer a claimant, for instance. The family declined to comment on the status of his policy.
His son claimed to be resolute, however. “With 64 decisions in favour the jurisprudence is a reality” he said. “After everything I just want to go for the maximum of justice. I don’t want money, I just want my contract.”
Mr George has also started to add fresh capital to the account governed by the contract, €19.9m last year, helped by a loan from the Swiss arm of a French Bank. (He is a French citizen, but lives in Switzerland). He said the contract terms allow him to add more cash to the pot. “I can take all the money in the world and invest it, there is no limit”.
Some policy holders may have died, but a handful of such cases would start to become a material number, even for an insurer of Aviva’s size, were court decisions to go against it. The company said “Aviva France remains appropriately reserved”. The absence of some plaintiffs from subsequent litigation suggests settlements were reached in some cases. Mr George’s father is no longer a claimant, for instance. The family declined to comment on the status of his policy.
His son claimed to be resolute, however. “With 64 decisions in favour the jurisprudence is a reality” he said. “After everything I just want to go for the maximum of justice. I don’t want money, I just want my contract.”
Some policy holders may have died, but a handful of such cases would start to become a material number, even for an insurer of Aviva’s size, were court decisions to go against it. The company said “Aviva France remains appropriately reserved”. The absence of some plaintiffs from subsequent litigation suggests settlements were reached in some cases. Mr George’s father is no longer a claimant, for instance. The family declined to comment on the status of his policy.
His son claimed to be resolute, however. “With 64 decisions in favour the jurisprudence is a reality” he said. “After everything I just want to go for the maximum of justice. I don’t want money, I just want my contract.”
Mr George has also started to add fresh capital to the account governed by the contract, €19.9m last year, helped by a loan from the Swiss arm of a French Bank. (He is a French citizen, but lives in Switzerland). He said the contract terms allow him to add more cash to the pot. “I can take all the money in the world and invest it, there is no limit”.
Some policy holders may have died, but a handful of such cases would start to become a material number, even for an insurer of Aviva’s size, were court decisions to go against it. The company said “Aviva France remains appropriately reserved”. The absence of some plaintiffs from subsequent litigation suggests settlements were reached in some cases. Mr George’s father is no longer a claimant, for instance. The family declined to comment on the status of his policy.
His son claimed to be resolute, however. “With 64 decisions in favour the jurisprudence is a reality” he said. “After everything I just want to go for the maximum of justice. I don’t want money, I just want my contract.”