Guidelines for Insurance Undertakings Regarding the Distribution of Insurance

Financial Supervision Authority

Guidelines for insurance undertakings regarding the distribution of insurance Warsaw, June 24, 2014

Preamble
During the work on adopting Recommendation U, concerning issues in the field of bancassurance, addressed to entities in the banking sector, the supervisory authority identified irregularities in certain areas of activity of insurance undertakings in the aforementioned field. A significant part of the subject irregularities may also materialize in the case of carrying out insurance activities without the participation of banks, i.e., outside the bancassurance channel. On the other hand, striving to introduce good practices in the field of bancassurance, one must recognize the need to harmonize standards regarding the conduct of insurance activities regardless of the channel (method) of insurance distribution. Such a solution will ensure that the situation of insurance undertaking clients will not vary significantly depending on the channel (method) of insurance distribution. At the same time, harmonizing standards regarding the distribution of insurance and issues related to the distribution of insurance, including the scope of client rights in different insurance distribution channels, should minimize the risk of limiting the competitiveness of individual market participants due to requirements resulting from good practices indicated by the supervisory authority. It should be noted here that, in accordance with Article 18 of the Act of May 22, 2003 on insurance mediation (Journal of Laws No. 124, item 1154, as amended), one of the basic tasks of insurance undertakings in the field of insurance distribution remains supervision over the activity of insurance agents carrying out activities on behalf of these insurance undertakings. Proper implementation of the obligations of insurance undertakings in this area should contribute to increasing the level of trust of clients in insurance undertakings and the entire financial market. The provisions of the Guidelines are addressed to all insurance undertakings operating on the basis of Polish law. These provisions may result in a weaker competitive position of domestic insurance undertakings compared to entities operating in the Polish market subject to the jurisdiction of foreign states, which could inevitably lead to unequal treatment of entities and potentially an increase in systemic risk. Therefore, guided by the principle of the general good, in order to limit the risk of such phenomena occurring, the Financial Supervision Authority expects that insurance undertakings having their registered offices in Member States of the European Union within the meaning of the Act of May 22, 2003 on insurance activity (consolidated text: Journal of Laws of 2013, item 950, as amended) and carrying out activities on the territory of Poland will, to an appropriate extent, comply with the provisions of the Guidelines. In the field of bancassurance, the Guidelines do not infringe upon the provisions of Recommendation U concerning good practices in the field of bancassurance. At the same time, the Guidelines constitute
a supplement to the aforementioned Recommendation, referring to individual obligations from the perspective of insurance undertakings. The Financial Supervision Authority expects that the Guidelines regarding the distribution of insurance, constituting an annex to Resolution No. 184/2014 of the Financial Supervision Authority of June 24, 2014 (Journal of Orders of KNF item 13), will be implemented by March 31, 2015.

Glossary of Terms Used

1. Distribution of insurance – offering the conclusion and concluding an insurance contract by an insurance undertaking, as well as offering participation in and participating in a concluded insurance contract on behalf of another.
2. Client – an entity seeking insurance coverage and the policyholder or the insured, bearing the economic burden of the premium. However, for the purposes of these Guidelines, financial institutions within the meaning of the provisions of the Commercial Companies Code are not considered clients.

Table of Contents of Guidelines
I Board of Directors and Supervisory Board

1. The Board of Directors of an insurance undertaking is responsible for developing (approving) in written form and implementing rules regarding the distribution of insurance. These rules should result from the business strategy approved by the Supervisory Board.

2. The Board of Directors of an insurance undertaking should appoint persons responsible for implementing and carrying out rules regarding the distribution of insurance.

3. The Board of Directors of an insurance undertaking should conduct periodic assessments of the implementation of rules regarding the distribution of insurance. The Board of Directors of an insurance undertaking should inform the Supervisory Board of the results of the conducted assessment.

4. The Supervisory Board, within the framework of fulfilling its functions and responsibility for the risk management system in the insurance undertaking, should monitor the implementation of rules regarding the distribution of insurance. Monitoring risk in an insurance undertaking takes place with a frequency enabling the provision of information to the Supervisory Board about changes in the risk profile of the insurance undertaking.
   II Insurance Distribution Models

5. An insurance undertaking should conduct activities in a manner that does not cause a conflict of interest on the part of entities responsible for the distribution of insurance, in particular a conflict of interest consisting in simultaneously, including factually, acting as a policyholder and an insurance intermediary.

6. An insurance undertaking should not pay remuneration to the policyholder.
   III Relations with Clients

7. An insurance undertaking should conduct a reliable information policy.

8. The insured or their heirs should be ensured by the insurance undertaking the possibility of direct enforcement of claims in situations where the policyholder, who is also entitled to enforce benefits from the insurance contract, decides not to use the right to enforce benefits.

9. In the case of an insurance contract on behalf of another, the insurance undertaking should enable the client, upon their request, to familiarize themselves with contractual provisions regarding the rights and obligations of the client before the client expresses consent to financing the insurance premium. The insurance undertaking should present to the client, upon their request, adequate and complete information regarding the insurance contract, in particular regarding the types of risks covered by the insurance contract, conditions of insurance coverage and exclusions from its scope, rules regarding the financing of insurance coverage, and possible reasons for refusal to pay benefits.

10. Remuneration of an insurance agent for offering insurance products should be determined taking into account the costs incurred by them.

11. An insurance undertaking should exercise due diligence regarding the provisions of the insurance contract.
    IV Internal Control System

12. The internal control system in an insurance undertaking should include, within its scope, the insurance distribution models used by that insurance undertaking.

I Board of Directors and Supervisory Board

1. The Board of Directors of an insurance undertaking is responsible for developing (approving) in written form and implementing rules regarding the distribution of insurance. These rules should result from the business strategy approved by the Supervisory Board.
   1.1. The Board of Directors of an insurance undertaking should define key areas of rules regarding the distribution of insurance, which will be subject to its direct control.
   1.2. The Board of Directors of an insurance undertaking approves standards of conduct within key areas of rules for risk management in the field of insurance distribution.
   1.3. The division of duties and competencies among individual members of the Board of Directors of an insurance undertaking and delegating functions related to the implementation of non-key areas in the field of insurance distribution should not cause a conflict of interest.
   1.4. The Board of Directors of an insurance undertaking may delegate functions related to the implementation of other (non-key) areas of rules regarding the distribution of insurance to persons designated by itself.
   1.5. Rules regarding the distribution of insurance should include, in particular, a description of business models accepted by the insurance undertaking in the field of insurance distribution.
   1.6. Rules regarding the distribution of insurance concluded by insurance agents should include, in particular:

1. determination of criteria for dividing duties and competencies between the insurance undertaking and the insurance agent in the field of concluding and servicing the contract,
2. determination of rules for cooperation with insurance agents,
3. periodic assessment and possible renegotiation of cooperation terms,
4. determination of policy regarding expenses incurred by the insurance undertaking for the conclusion of an insurance contract, taking into account the principle that these expenses (in particular, agency commissions) should be evenly distributed over time, during the insurance period specified in the insurance contract, for insurance contracts concluded for a period not longer than 5 years. In the case of contracts concluded for a period longer than 5 years or for an indefinite period, the period over which these expenses should be distributed should not be shorter than 5 years.
   1.7. Rules regarding distribution consisting of offering participation in a concluded insurance contract on behalf of another should include, in particular, the determination of criteria for dividing duties and competencies between the insurance undertaking and the policyholder in the field of contract servicing and periodic assessment and possible renegotiation of contract terms.

2. The Board of Directors of an insurance undertaking should appoint persons responsible for implementing and carrying out rules regarding the distribution of insurance.
   2.1. Persons appointed by the Board of Directors of an insurance undertaking should be responsible for preparing, implementing, and correctly applying internal procedures related to risk management in the field of insurance distribution.
   2.2. The basic tasks of the persons listed in point 2.1 should include:
   a) ensuring the compliance of internal procedures with the risk management rules adopted by the Board of Directors in the field of insurance distribution, b) determining the scope of tasks, duties, and responsibilities of individual employees, and control, c) ensuring periodic, independent control of adopted internal procedures and the manner of their implementation, d) ensuring periodic verification of internal procedures and criteria for introducing changes and conducting verification or refraining from conducting it.
   2.3. Adopted procedures regarding risk management in the field of insurance distribution should be presented to appropriate employees of the insurance undertaking in a manner and within a timeframe specified by the insurance undertaking. Persons designated by the Board of Directors should ensure that employees familiarize themselves with and understand the applied procedures and ensure control over the correctness of their implementation.
3. The Board of Directors of an insurance undertaking should conduct periodic assessments of the implementation of rules regarding the distribution of insurance. The Board of Directors of an insurance undertaking should inform the Supervisory Board of the results of the conducted assessment.
   3.1. The assessment of adopted rules regarding the distribution of insurance should include, in particular, checking the correctness of the implementation of the risk management policy conducted and examining the reliability, timeliness, and quality of submitted reports and information.
   3.2. The assessment of adopted rules regarding the distribution of insurance should contain conclusions and possible proposals for introducing changes to the current policy.
   3.3. The Board of Directors of an insurance undertaking is responsible for taking actions ensuring the implementation of adopted rules regarding the distribution of insurance in a manner consistent with legal provisions.
4. The Supervisory Board, within the framework of fulfilling its functions and responsibility for the risk management system in the insurance undertaking, should monitor the implementation of rules regarding the distribution of insurance. Monitoring risk in an insurance undertaking takes place with a frequency enabling the provision of information to the Supervisory Board about changes in the risk profile of the insurance undertaking.
   4.1. The Supervisory Board should receive, at least once a year, information regarding the current rules referred to in Guideline 1 and monitoring their compliance. The information should include conclusions and indication of planned or introduced changes, along with their justification.
   4.2. The Supervisory Board should receive information enabling verification of rules regarding the distribution of insurance of an investment nature, with the frequency of reporting to the Supervisory Board depending on the scale and nature of the insurance undertaking's activity in this area.
   II Insurance Distribution Models
5. An insurance undertaking should conduct activities in a manner that does not cause a conflict of interest on the part of entities responsible for the distribution of insurance, in particular a conflict of interest consisting in simultaneously, including factually, acting as a policyholder and an insurance intermediary.
   5.1. Cooperation rules between an insurance undertaking and an entity participating in the insurance distribution process should be formulated in a clear and unambiguous manner and must not mislead the client regarding the role in which the entity offering the conclusion or participation in an insurance contract appears.
   5.2. An insurance undertaking should apply available mechanisms ensuring that the policyholder in a given insurance contract will not simultaneously – under the same contract – act as an insurance intermediary (subject matter perspective). Simultaneous, even factual, acting of the same entity as a policyholder and an insurance intermediary in a subject matter perspective should be considered inadmissible.
   5.3. Simultaneous acting of the same entity as a policyholder and an insurance intermediary may be considered permissible only if it concerns different insurance contracts (entity perspective).
6. An insurance undertaking should not pay remuneration to the policyholder.
   6.1. An insurance undertaking should not pay remuneration to entities responsible for the distribution of insurance other than insurance intermediaries, and not otherwise than on the basis of rules specified in legal provisions regulating the performance of activities in the field of insurance mediation.
   6.2. An insurance undertaking should not pay the policyholder an equivalent, in particular monetary, for activities related to the servicing of an insurance contract.
   III Relations with Clients
7. An insurance undertaking should conduct a reliable information policy.
   7.1. An insurance undertaking should have precisely defined procedures for informing clients about all factors that influence the decision to conclude or participate in an insurance contract. The client's declaration of having familiarized themselves with the contract terms should be recorded in the documentation regarding the conclusion of the insurance contract.
   7.2. Information materials provided to the client should be formulated in an unambiguous, reliable, and non-interpretatively doubtful manner and must not contain misleading information. The scope of provided information should, in particular, take into account the existence of possible contractual exclusions and limitations regarding the amount of benefits and the method of their determination, waiting periods, etc. In the case of insurance of an investment nature, regardless of the indication of possible profits, provided information should comprehensively cover issues of risk associated with investing and fees that the insured may be obliged to bear.
   7.3. An insurance undertaking should ensure the client's access to information materials in paper, electronic, or other agreed-upon form, including to the provisions of the concluded insurance contract regarding the rights and obligations of the client.
   7.4. An insurance undertaking should have procedures preventing the offering of insurance-investment products not adapted to the individual needs and capabilities of clients (misselling), covering both the sales process and marketing actions.
   7.5. An insurance undertaking should ensure that persons participating in the insurance distribution process and persons performing activities related to the servicing of an insurance contract possess sufficient knowledge in the field of financial market issues and the specificity of a given insurance, by:
   a) enabling participation in regular training for persons participating in the insurance distribution process, in particular regarding new products, b) verifying the level of knowledge of persons participating in the insurance distribution process based on the analysis of reported complaints and client requests.
   7.6. In the field of insurance of an investment nature, an insurance undertaking should develop an information material – so-called a product card. The product card does not constitute an integral part of the contract. An insurance undertaking may develop a product card jointly with an entity directly offering insurance to clients. The product card should contain at least the information referred to in Guideline 9.4, as well as the purpose the product is to serve, its characteristics, an explanation of the functioning mechanism of the offered product, its functions, and application. The product card should additionally contain information about investment risk and the possibility of loss. Information contained in the product card must not mislead the consumer, e.g., by advertising manipulating information about a given financial product or by placing an information leaflet omitting its essential features.
8. The insured or their heirs should be ensured by the insurance undertaking the possibility of direct enforcement of claims in situations where the policyholder, who is also entitled to enforce benefits from the insurance contract, decides not to use the right to enforce benefits.
   8.1. In insurance contracts concluded on behalf of another, in particular in insurance contracts concluded as security for the policyholder's claims against the insured, the designation of the person entitled to receive benefits from the insurance contract should be made in a separate declaration of will by the client. Automatic designation of the policyholder as the person entitled to receive benefits from the insurance contract in the content of general insurance conditions or the insurance contract should be considered inadmissible.
   8.2. An insurance undertaking in insurance contracts concluded on behalf of another should ensure that in the event of the policyholder's omission or cessation of enforcing benefits from the insurance undertaking, the right to direct enforcement of benefits shall belong to the insured or their heirs, provided their identity is known to the insurance undertaking or they notify the insurance undertaking of acquiring the inheritance from the insured. The insurance undertaking should ensure that the insured or their heirs are informed about the possibility of direct enforcement of benefits immediately after the occurrence of the insured event or, respectively, immediately after notifying the insurance undertaking of acquiring the inheritance from the insured.
   8.3. In the case of an insurance contract concluded as security for the policyholder's claims against the insured, the insurance undertaking, upon the client's request, should inform whether the sum insured specified in the insurance contract is limited to the amount of possible claims of the policyholder, or whether the insurer's benefit may exceed the amount owed to the policyholder from these claims, and whether any part of the benefit exceeding the amount of the policyholder's claims is owed to the policyholder, or to the insured or their heirs.
9. In the case of an insurance contract on behalf of another, the insurance undertaking should enable the client, upon their request, to familiarize themselves with contractual provisions regarding the rights and obligations of the client before the client expresses consent to financing the insurance premium. The insurance undertaking should present to the client, upon their request, adequate and complete information regarding the insurance contract, in particular regarding the types of risks covered by the insurance contract, conditions of insurance coverage and exclusions from its scope, rules regarding the financing of insurance coverage, and possible reasons for refusal to pay benefits.
   9.1. An insurance undertaking should inform the client that, in accordance with applicable legal provisions, the client has the right to request access to appropriate information indicated in these legal provisions.
   9.2. In the case of an insurance contract on behalf of another, in particular a group insurance contract, the insurance undertaking should inform the client, upon their request, about the method of calculating and paying the insurance premium and provide the client with contractual provisions regarding their rights and obligations before the client expresses consent to financing the insurance premium. The information should also include a description of the obligations of the policyholder and the insurer towards the client.
   9.3. An insurance undertaking should make efforts to ensure that information provided to the client is formulated in a clear and understandable manner.
   9.4. Information provided to the client should concern at least:
   a) the scope of insurance coverage, b) a description of benefits due to the client or other persons from the insurance contract, c) the amount, deadlines for payment, and method of calculating all costs borne by the client, in particular insurance premiums, including determining whether these costs will be borne one-time or periodically, as well as rules for reducing and increasing these costs, d) rules for determining the amount of benefits due from the insurance contract, including factors that may affect the change in the amount of benefits, e) the amount of the sum insured and the rules and grounds for its possible change, f) the period of insurance coverage and rules for continuing or renewing this coverage, g) conditions for excluding and limiting the liability of the insurer, h) the right and method of renouncing insurance coverage along with information about its consequences and the amount of costs associated with it, borne by the client, i) rules and procedures for reporting an insured event and complaints, j) the method and procedure for handling complaints, k) rules for covering persons other than the client and the scope of this coverage, l) designation of the entity entitled to receive benefits from the insurance contract, m) the right to withdraw from the insurance contract in cases where such a right belongs to the client, n) provisions regulating any taxation of the insurer's benefits.
   9.5. An insurance undertaking should provide information with highlighted provisions particularly important for the client (such as exclusions from insurance coverage, amount of fees, etc.).
   9.6. Upon receipt of the declaration of participation in insurance, the insurance undertaking should inform the client that in their case, the necessary conditions for insurance coverage are not met.
   9.7. An insurance undertaking should inform the client, upon their request, about contractual provisions.