The U Recommendation on good practices within bancassurance
In June 2014 the Polish Financial Supervision Authority (KNF) issued the U Recommendation on good practices in bancassurance. The U Recommendation is a response to the position of KNF on bancassurance that was presented in 2012 in which KNF challenged the legality of the current model for offering insurance by banks, on the basis of an insurance contract concluded on another person’s account. The primary charges of KNF concerned the actual combination of a role of a policyholder and that of an insurance intermediary by the bank and the resultant conflict of interests. When concluding a contract for the account of its clients, the bank should seek to obtain the most favorable terms and conditions of insurance on the one hand, but the bank, as an intermediary, is interested in maximizing the amount of paid insurance premiums on the other, since it is the basis for calculating the bank's remuneration for services relating to offering insurance. The charges raised by KNF did not solely relate to situations of offering insurance for the account of a third party under a group insurance model, but actually to each case when a bank participates in providing insurance coverage for its clients, even if this is done under individual contracts.
Recommendations relating to the role of the bank in this distribution channel of insurance (Recommendation 7) and the bank's relations with clients, including those concerning remuneration of the bank for offering insurance in the bancassurance channel (Recommendations 9-20) shall be of special importance for the bank's operations regarding bancassurance.
Pursuant to Recommendation 7, “the bank shall conduct its business in a manner that does not result in arising of a conflict of interests, especially the bank shall ensure that the bank shall not simultaneously act, in point of fact, as the policyholder and the insurance intermediary”. This principle has been developed in Recommendation 7.1 that explicitly points out that “simultaneous, even actual acting by the bank as the policyholder and the insurance intermediary shall be recognized as inadmissible under a subjective approach”. As assessed by KNF, a combination of the role of the policyholder and the intermediary by the bank is possible only in a situation when it applies to different insurance contracts (Recommendation 7.2).
In the light of Recommendation 7.3 and 7.4, a bank acting as an insurance intermediary may receive remuneration from an insurance company, however, “in a situation when a bank acts as the policyholder, it may receive only an equivalent for actions relating to support for the insurance contract. Such equivalent shall correspond to the costs directly related to performance of a specific action for the client and may be paid solely by the client.”
In turn, pursuant to Recommendation 17.1 ”when the bank acts as the policyholder, the bank may be refunded the costs of the operations relating to handling the insurance contracts solely in amounts corresponding to the actual relevant costs. In such a situation, the bank shall make appropriate arrangements directly with its clients (the insured), e.g. by incorporating the relevant costs payable by the client in the loan margin or by way of a separate agreement providing the client with insurance coverage under an insurance contract for a third party account. Additionally, with respect to the receivables due for reimbursement of the costs, in particular in case of the reimbursement of the costs referred to in Recommendation 17.1., the receivables shall be specified directly and may not be subject to the amount of the premium or damages payable under the insurance contract.” (Recommendation 17.2)
Recommendations concerning the bank's relations with its clients impose numerous obligations on the bank involved in bancassurance business, including, but not limited to, a disclosure policy aimed at its clients, adjustment of insurance products to the clients' needs, allowing clients directly to seek claims under insurance contracts, freedom to choose an insurance company, information about offered products, and an explicit statement on its role in the bancassurance process.
Although the U Recommendation is not a source of commonly applicable law, it is nonetheless a set of rules applicable to good practices for supervised entities, in this case banks, that has been issued by KNF on the basis of statutory authorization (the Banking Law), compliance with which shall constitute a major element of the assessment of banking business performed by a supervisory authority.
In the light of the U Recommendation, bancassurance means offering insurance by the banks on the basis of agreements concluded between the bank and an insurance company that is directly and also indirectly related to a banking product, also including an insurance product that, in its nature, is an investment or saving. However, by offering insurance the U Recommendation understands both intermediation performed by the bank in conclusion of insurance contracts by individual clients, as well as providing clients with an offer to enter into an insurance contract concluded by the bank on another persons’ account (group insurance in particular). Pursuant to a definition included in the U Recommendation, bancassurance shall also be understood as conclusion of insurance contracts by banks related to a banking product under which the bank’s client – subject to a separate contract – shall be obliged to cover the costs of insurance coverage for the bank against specific types of risks covered by the insurance contract. A literal interpretation of the definition of bancassurance enables one to recognize that the U Recommendation applies only to the bank's activities involving concluding insurance contracts with clients, either as an insurance agent in the individual model or as a policyholder in the group model. The definition does not mention the later stages related to the operation of the previously concluded insurance contract, such as e.g. the administration of the concluded contract, the execution of the contract conducting of the compensation procedure. Such a narrow understanding of the concept of bancassurance seems to be confirmed also in the introduction to the U Recommendation, which has defined the scope of its application. KNF clearly indicates that the U Recommendation is addressed to the banks involved in the cooperation with insurance companies by intermediation in concluding insurance contracts, offering accession to the insurance contract on another person’s account or contract under which the client finances the cost of the bank's risk insurance protection.
The above means that offering insurance products by the bank to its clients under any business model, i.e. both under a model based on insurance intermediation, and also under a model based on a group insurance contract, denotes a necessity of adjusting banking activity in that respect to the requirements imposed by the provisions of the U Recommendation. In order not to be subjected to an obligation of implementing the U Recommendation, the bank may not participate in offering insurance products under any of the above-mentioned roles.
The U Recommendation is addressed to all banks operating in compliance with Polish law, involved in cooperation with insurance companies by offering insurance products in two manners, i.e. by offering insurance and conclusion of insurance contracts as an insurance intermediary and by offering conclusion of insurance contracts on a third party’s account or when clients finance the cost of insurance coverage relating to the risks to which banks are exposed. This means that the provisions of the U Recommendation apply solely to banks engaged in offering insurance products and it shall not be applicable to other participants of the market.