The Guidelines for insurance companies on the distribution of insurance
In the course of works on the adoption of the U Recommendation, addressed to the banking sector, the Polish Financial Supervision Authority (KNF) identified irregularities in particular areas of insurance companies’ activity within bancassurance. A significant part of these irregularities can be materialized also in the case of performing insurance activity without the engagement of banks, i.e. beyond the bancassurance channel. While seeking to introduce best practices in the field of bancassurance, KNF recognized the need to harmonize standards in the field of business insurance regardless of the channel of insurance distribution.
In consequence, in June 2014 KNF issued Guidelines addressed to all insurance companies operating in compliance with Polish law. In the area of bancassurance, the Guidelines do not affect the provisions of the U Recommendation as they are complementary to the Recommendations included therein, referring to specific obligations from the perspective of an insurance company.
It is worth mentioning that up to 1st January 2016, in relation to the insurance sector, KNF was issuing solely guidelines. Recommendations were issued only in relation to the banking sector, since up to that date only the Banking Law gave KNF the legal basis for issuing such recommendations for supervised entities. Guidelines for the insurance sector have so far been issued by KNF based on the objectives of financial market supervision, as defined in the Act on the supervision of financial market and are not a binding law. Moreover, the legality of the powers of KNF to issue guidelines and enforce their use, as well as the very legal nature of the guidelines are being challenged legally. Despite doubts, guidelines are applied by the insurance market entities, fearing any possible negative supervisory consequences. The Act on insurance activity, which entered into force on 1st January 2016, undoubtedly grants KNF the power to issue recommendations for insurance companies, as well as in the case of recommendations for banks. Probably for this reason it uses the term "recommendation" instead of guidelines. It shall be considered that the recommendations and guidelines issued so far describe the same type of documents issued by the KNF. Despite the disputable legal nature of KNF guidelines, it should be assumed that the guidelines issued before the entry into force of the Act on insurance activity remain in force and shall be applied by insurance companies. Transitional provisions are silent on the effect to the guidelines issued by KNF before the entry into force of this Act. Transitional provisions relate solely to decisions and other regulatory acts issued by KNF under the formerly effective act on insurance activity.
According to the definition adopted in the Guidelines, the distribution of insurance should be considered as offering by an insurance company the conclusion and the conclusion of the insurance contract, as well as offering the accession and the accession to the insurance contract concluded on another person's account. Having regard to this definition, with reference to the statutory independence of the profession of an insurance broker, it shall be assumed that the Guidelines do not embrace brokerage activities. Therefore, the Guidelines shall not apply to the intermediation services offered by insurance brokers, as brokerage activity involves actions taken in the name of or on behalf of the entity seeking insurance coverage (the client), i.e. not on behalf of the insurance company.
The liability for the implementation of the Guidelines shall be borne by the insurance company, in whose name or on behalf of which the insurance intermediary (i.e. in practice the insurance agent) shall act. The agent would solely be obliged to adjust its agency activity to the requirements of the Guidelines, which should be reflected in the obligations of the parties specified in the agency agreement.
Special attention shall be paid to the Guidelines 5 and 6, which relate to the models of insurance distribution.
According to Guideline 5, the insurance company shall conduct its business in a manner that does not result in the arising of a conflict interests, on the side of the entities responsible for the distribution of insurance, in particular the conflict of interests involving simultaneous, in point of fact, acting as the policyholder and the insurance intermediary. Guideline 5 reflects the requirements of Recommendation 7 of the U Recommendation. The prohibition to carry on activity in a manner that entails conflicts of interest on the side of generally defined entities distributing insurance products, in the KNF’s opinion, results in the need for transparency in the distribution of insurance in all, not only banking channels. It should be pointed out that the incompatibility of these two functions i.e. the policyholder and the insurance intermediary does not result from any generally applicable laws. What should be kept in mind is that as long as all parties to a contract (i.e. the policyholder and the insurance company) and the insured party agree on the actions of the policyholder in a dual role, there is no conflict of interest.
Pursuant to Guideline 5.2, the insurance company shall apply all available mechanisms to ensure that policyholders in the insurance contract will not play, at the same time in the same contract, the role of an insurance intermediary (objective approach). Simultaneously, even the actual occurrence of the same entity as the policyholder and the insurance intermediary, in terms of the present must be declared inadmissible. Guideline 5.2. expresses the same rule as Recommendation 7.1 of the U Recommendation. This means that the entity engaged in the distribution of insurance cannot only intermediate in concluding the insurance contract, but also perform other agency activities, not related at all with the conclusion of the insurance contract. For this reason, this prohibition should be considered as too broad. What should be kept in mind in this respect is the definition of agency activities, set forth in Art. 4 item 1 of the Act on insurance mediation, under which agency activities shall mean not only the activities aimed to conclude an insurance contract or the conclusion of the contract itself, but also the participation of the agent in the administration and performance of insurance contracts, also in terms of compensation.
Pursuant to Guideline 5.3, the simultaneous acting of the same entity as the policyholder and the insurance intermediary may be considered acceptable only if it concerns different insurance contracts (subjective approach). This guideline is also a reflection of Recommendation 7.2 of the U Recommendation, except with respect to non-banking distribution channels.
Guideline 6 states that the insurance company should not pay the policyholder remuneration. In addition, the insurance company should not pay remuneration to the entities responsible for the distribution of insurance other than insurance agents and otherwise than under the rules established in the laws governing the activity of insurance intermediation (Guideline 6.1).
What results from Guideline 6.1 is that an entity distributing insurance may be paid remuneration by the insurance company only when acting as an insurance intermediary. This means that the entity appearing in the insurance contract as the policyholder cannot be paid remuneration not only for the fact of conclusion of the insurance contract or for the performance of obligations of the policyholder arising from the contract, e.g. the obligation to pay contributions, or informing the insurance company about the persons entering into the insurance contract (i.e. activities, the performance of which belongs to the essence of a group insurance contract), but also cannot receive remuneration for other services provided to the insurance company. As the prohibition for the policyholder to be paid remuneration for the performance of activities that fall within the scope of its normal activities related to the performance of the insurance contract, or the activities that fall within the scope of insurance intermediation (if it is not an insurance agent) can be considered reasonable, however it is the extension on other activities performed by such entity for the insurance company or the insured cannot justified. Receiving by such an entity acting in the role of the policyholder remuneration for these "other activities" in no way threatens the interests of clients, provided the client is duly informed of the insurance product. Hence it shall be considered that such a generally formulated prohibition is unjustified.
In turn the Guideline 6.2 provides that the insurance company should not pay the policyholder equivalent, in particular pecuniary, for activities related with the administration of the insurance contract. The Guideline 6.2 is a consequence of the Guideline 6.1., which allows to pay remuneration only to an insurance agent, while not giving the possibility of reimbursing by the insurance company the costs incurred by the policyholder in connection with processing or administering an insurance contract. And it is worth to recall that these costs will not necessarily require solely the performance of "normal" activities, which are performed by the policyholder by concluding and implementing the insurance contract.