New rules for the supervision of foreign insurers
Autor: Agata Kwaśniewska, Piotr Czublun
On 2nd of July 2020 the Act of 28 May 2020 amending the Act on compulsory insurance, the Insurance Guarantee Fund and the Polish Motor Insurers' Bureau as well as the Act on insurance and reinsurance activity was published, which introduces new rules for the supervision of foreign insurers, among others, a mechanism enabling the supervisory authority to impose specific penalties on foreign insurance companies in the event of failure to pay compensation under civil liability insurance within the statutory deadline or failure to comply with the information obligation towards those entitled to compensation. The Act enters into force 14 days after its announcement, i.e. on 17th July 2020.
The rules and the manner in which supervision over entities operating on a regulated market takes place is an argument frequently taken into account by entities or capital groups deciding to establish, for example, an insurance company within a given jurisdiction. There is no doubt that in the European Union there is a kind of "ranking" of supervisory authorities, which means that in some countries we have many newly established insurance companies, while in other countries insurers decide to operate on the basis of a single license, establishing branches or operating only on the basis of notification, without opening a branch. At the same time, the majority of entities operating in such a way count on the fact that the local supervisory authority will have little to say as to how the business will be conducted, and thus it will be possible to develop business based only on relations with the home supervisor.
There is no doubt that the principle of a single license is the right solution without which it would be much harder for the European single market to develop. It is true that this rule in individual countries is subject to far-reaching practical restrictions (in fact, it is not possible to simply translate the GTC from French by a French insurer and implement such a product on the Polish market without additional adaptation of both the content of the documents and the distribution process to specific Polish requirements), however, without a uniform license, both the costs of operations and the risks associated with them would be much higher.
However, the principle of a single license has also a different face. On the one hand, based on the capital base in the home country, the insurer operating locally, e.g. in the form of a branch, has much greater possibilities in the field of pricing policy, which can directly lead to a price war, which we have seen in Poland. On the other hand, the lack of real tools enabling the supervisory authority to immediately react to irregularities in the activities of foreign insurers poses a real threat to the protection of clients of such insurers (we also encounter such cases in Poland).
In my opinion, the single-license principle applied in this way can also be considered a type of unfair competition. Everyone today is well aware that the area of ensuring compliance with the law, but also with the requirements of the supervisory authority, is one of the major items in the budgets of national insurers. Also the risks associated with it (e.g. reputational risk or exposure to possible financial penalties) generate additional costs associated with mitigating such risks. Therefore, if some of the entities operating on a given market will be to some extent exempted from complying with local regulations, it can undoubtedly mean significantly lower costs of conducted activity, and this in turn may have an impact on maintaining fair competition on a given market.
The need to provide the Polish Financial Supervision Authority, as the Polish supervisory authority, with effective and quick mechanisms to supervise foreign insurance and foreign reinsurance undertakings from a Member State of the European Union other than the Republic of Poland that conducts activities on the territory of the Republic of Poland through a branch or otherwise than through a branch, under the freedom to provide services, was one of the postulates included in the explanatory memorandum to the Act of 28 May 2020 amending the Act on compulsory insurance, the Insurance Guarantee Fund and the Polish Motor Insurers' Bureau as well as the Act on insurance and reinsurance activity.
The Act introduces into our legal order a mechanism enabling the supervisory authority to impose specific penalties on foreign insurance companies in the event of failure to pay compensation under civil liability insurance within the statutory deadline or failure to comply with the information obligation towards those entitled to compensation. In such cases, the supervisory authority imposes a fine on a member of the management body of a foreign insurance company up to the amount corresponding to three times his average monthly salary over the last 12 months, and if the average monthly salary over the last 12 months cannot be determined - up to PLN 100,000, or imposes on a foreign insurance company a financial penalty of up to 0.5% of the gross written premium from insurance contracts referred to in section II group 10 of the Annex to the Act on insurance and reinsurance activity, with the exception of the liability of the carrier, concluded in the course of carrying out activities in the territory of the Republic of Poland, obtained by this foreign insurance undertaking in the previous calendar year, and in the event that the undertaking did not perform such activity or obtained a gross written premium of less than PLN 20 million - up to PLN 100,000. The described mechanism of imposing penalties will be used regardless of the date of conclusion of the insurance contract from which the claimant's claims are derived.
Moreover, to determine the amount of the premium, foreign insurance companies within 14 days from the day of entry into force of the Act shall provide to the Insurance Guarantee Fund data on the value of the gross premium written from the insurance contracts referred to in section II group 10 of the Annex to the Act on insurance and reinsurance activity, with the exception of the carrier's liability, concluded as part of carrying out business on the territory of the Republic of Poland, for the year 2019 and for the period from 1 January 2020 to the day preceding the date of entry into force of the Act.
In addition, in an urgent case, in order to immediately remove or prevent the occurrence of further irregularities, the Act allows the Polish Financial Supervision Authority (KNF) to properly apply to a foreign insurance or reinsurance undertaking all rights vested in the Polish Financial Supervision Authority in accordance with the Act on insurance and reinsurance activity in relation to domestic insurance undertakings or domestic reinsurance undertakings. In such a case, the KNF will not be required to exhaust the procedure of implementing recommendations and communicating with the supervisory authority of the European Union Member State in which the company is established. However, in such a case, the KNF is obliged to notify such a supervisory authority of measures taken under this procedure as a matter of urgency towards a foreign insurer. In addition, as indicated in the explanatory memorandum to the Act, such entitlement should be limited to an urgent case, when it has been established that certain irregularities imply a real and inevitable risk of serious irregularities to the detriment of insured persons or other entities, as a result of which their interest should be immediately secured.
The Act enters into force after 14 days from the date of publication, which date at the time of writing this text is not yet known, but there is no doubt that foreign insurers operating in Poland should already take appropriate measures to adapt their activities to the new regulations.