Organizational Requirements for Insurance Brokerage Companies Establishing Insurance Agency Companies

Circular Date: 13/2008 19.12.2008

Organizational Requirements for Insurance Brokerage Companies Establishing Insurance Agency Companies

Life Insurance Companies Property Insurance Companies Branches of foreign life insurance companies Branches of foreign property insurance companies Marine Insurance Associations Fire Insurance Funds Insurance Agency Companies Insurance Brokerage Companies Reinsurance Brokerage Companies Ancillary Insurance Agency Business

No. 5 No. 5 No. 3 No. 3 No. 2 No. 2 No. 2 No. 2 No. 2 No. 2

P.O. Box 100 Bryn N-0611 OSLO Tel. 22 93 98 00 Fax 22 63 02 26 post@kredittilsynet.no

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Organizational Requirements for Insurance Brokerage Companies Establishing Insurance Agency Companies

Based on the introduction of the commission ban, the Financial Supervisory Authority has assessed the organizational requirements for insurance brokerage companies that establish insurance agency companies.

1. Legal Basis Section 5-2 of the Insurance Intermediation Act (fml.) contains rules regarding good brokerage practice. The second sentence of the first paragraph states: "The insurance brokerage company must not act in a manner likely to cast doubt on its position as an independent intermediary." According to the third paragraph, the company cannot "through agreements with insurance companies or in any other way arrange itself such that it can influence the insurance brokerage company's independence as a broker."

The commission ban is set out in Section 5-2a of the Insurance Intermediation Act. The second paragraph states: "An insurance brokerage company is not permitted to receive commission or other remuneration for insurance intermediation from the insurer that has taken over the insurance contract that the intermediation assignment concerns."

2. The Financial Supervisory Authority's Interpretations 2.1. Organization of the Company When an insurance agency company and an insurance brokerage company are in a ownership relationship with each other, it may increase the risk that the insurance brokerage company acts contrary to good brokerage practice. The Financial Supervisory Authority finds, however, that the commission ban or the independence requirement does not provide sufficient legal basis to impose requirements on the group structure in a group that will operate both types of businesses. An insurance agency company can thus be established as a subsidiary, parent company, or sister company of an insurance brokerage company. However, the most important factor is not how the formal company structure is organized, but that there is a real degree of independence between the insurance agency company and the insurance brokerage company. See also point 3.

2.2. Separate Premises Separate office premises will both remind the broker of the requirement for independence, in addition to actually creating greater distance. To the extent that the customer visits the office premises, separate locations will make it easier to know whether the intermediary is acting as a broker or an agent. The Financial Supervisory Authority assumes that the law's independence requirement implies that the brokerage and agency companies have separate premises. The offices can be next to each other, possibly with a common external entrance if the doors are clearly marked with the companies' names. The Financial Supervisory Authority has no objections to the companies having common office support functions, such as reception, canteen, toilet, and similar.

Sales and distribution channels (for example, websites and telephone numbers) should be separate.

2.3. Dual Employment The Financial Supervisory Authority is of the opinion that dual employment will make it more difficult for the customer to perceive whether the intermediary is an agent or a broker, while also increasing the risk that the intermediary fails to act sufficiently independently in the broker role. On this basis, the Financial Supervisory Authority believes that dual employment will be contrary to the insurance brokerage company's

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obligation not to act in a manner likely to cast doubt on its position as an independent intermediary.

3. Risk Management and Internal Control It is stated in the Regulation on Risk Management and Internal Control of 22 September 2008 No. 1080 (effective 1 January 2009) Section 3 No. 2 that "The Board shall ensure that the company has appropriate systems for risk management and internal control, including that the company has a clear organizational structure."

To ensure compliance with the requirement for good brokerage practice and the commission ban, the company must, as part of its internal control, have assessed the risk of establishing an agency company. In addition, the company must have specified which control measures are necessary to ensure that the commission ban is complied with.

Emil Steffensen Erik Myhre

Contact persons: Cathrine Novsett Borgen, tel.: 22 93 98 89, e-mail: cathrine.novsett.borgen@kredittilsynet.no Geir David Johannessen, tel.: 22 93 97 51, e-mail: geir.david.johannessen@kredittilsynet.no

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