German insurers expect spike in fidelity claims as whistleblowing act arrives

German insurers expect higher losses in the short term but fewer white-collar crimes in the long term as a result of new whistleblowing rules in the country, said their insurance association (GDV) in a recent comment.

The German Whistleblower Protection Act has finally been passed after much debate and delay.

In a recent note, leading German and international law firm Taylor Wessing explains that the act is designed to protect whistleblowers from “disadvantages” in future.

Companies with more than 249 employees must set up and operate a whistleblower system after the act comes into force. This is expected to happen in June this year.

The rules will also apply to companies with at least 50 employees from 17 December this year.

The GDV says the act will give around 18 million employees the opportunity to report rule violations in their company anonymously.

“In view of the better protection of whistleblowers in companies, insurers expect more detections of white-collar crimes in the short term – and thus more compensation payments,” states the association.

“Previously unnoticed violations are now likely to be uncovered and lead to correspondingly higher losses in fidelity insurance,” says Jörg Asmussen, general manager of the GDV.

Such policies protect companies against financial losses caused by criminal acts by employees or third parties.

According to figures from the Federal Statistical Office, around 18 million people work in medium-sized and large companies in Germany.

These companies will have to name internal or external contacts for their employees to raise concerns and ensure information remains confidential.

“Whistleblowers should be able to report violations of the rules without fear of negative consequences for themselves,” says the GDV.

The association says that insurers expect the rules to reduce white-collar crime in the long term.

“On the one hand, whistleblowing systems increase the risk of being discovered and deter potential perpetrators. On the other hand, actions are recognised earlier and can therefore cause less damage. This will have long-term positive effects for the German economy and also for fidelity insurance,” says Asmussen.

The GDV explains that fidelity insurance pays out if employees embezzle money, sabotage the company, reveal trade secrets or are guilty of breach of trust.

Financial losses caused by criminal acts by temporary workers or external service providers are also insured. In 2022, German fidelity insurers paid compensation of more than €200m.

The GDV believes the new act will mostly impact medium-sized firms, which typically do not have a whistleblowing system in place.

“In medium-sized companies, whistleblower systems have hardly been in place to date. According to a representative Forsa survey commissioned by the GDV, in spring 2022 only every fourth medium-sized company had a whistleblower system, as is now required. Managing directors and board members who have not established a whistleblower system in their company by the deadline may face fines and high liability claims in the event of damage,” says the association.

Taylor Wessing advises German risk managers to incorporate whistleblowing measures in compliance management system (CMS).

“A functioning whistleblower system is a central component of an effective CMS and must therefore be linked to the other elements of a CMS. In addition to identifying compliance violations, the whistleblower system also serves to determine whether the preventive compliance measures taken are effective and whether any misconduct is avoided. To the same extent, a whistleblower system helps to identify necessary adjustments and improvements to the CMS and, at the same time, to preserve the authority to interpret the facts underlying the respective report in favour of the company concerned,” said the law firm’s recent note, authored by Hamburg-based Dr Martin Knaup.

Knaup and his team point out that German firms and multinationals that operate across Europe will need to be aware of differences between the new German act and the EU’s own Whistleblowing Directive.

The EU Directive requires member states to provide whistleblowers working in the public and private sectors with effective channels to report breaches of rules confidentially. They must also establish a “robust system” to protect against retaliation. Member states had to transpose the necessary measures to comply with the directive’s provisions by 17 December 2021.

Knaup points out that a group-wide central whistleblower system at the parent company does not constitute a permissible allocation of resources under the rules.

This means that subsidiaries falling under the EU’s rules must also set up their own decentralised whistleblowing system.

Risk and compliance managers with multinationals will have to take care over how centralised systems are applied, advises Taylor Wessing.

“If the data protection requirements for a cross-border data transfer have been met, the whistleblower system of the parent company can only be used as an additional tool. The subsidiaries and sub-subsidiaries must also maintain a local reporting channel,” says Knaup and his team.

“Companies should intensively support an internal whistleblowing system in order to create the greatest possible incentives for this to be used as a matter of priority and to therefore avoid external whistleblowing as far as possible. Companies shall provide clear and easily accessible information to employees on how to use the internal reporting procedure. This must not restrict or impede the possibility of making an external report,” concludes the law firm.

Germany was one of eight EU member states referred to the European Court of Justice in February for failing to transpose the European whistleblowing directive. The other seven nations were Czechia, Estonia, Spain, Italy, Luxembourg, Hungary and Poland.