Recommendations for Insurance Undertakings Regarding the Product Governance System

Recommendations for Insurance Undertakings regarding the Product Governance System Warsaw, March 22, 2016

• 2 - Introduction The supervisory authority, in order to ensure that the activities of insurance undertakings comply with legal provisions, prevent violations of the interests of policyholders, insured persons, or beneficiaries under insurance contracts, and limit risks occurring in the activities of insurance undertakings, issues, pursuant to Article 365(1)(2)(a-c) of the Act of September 11, 2015, on the business of insurance and reinsurance (Journal of Laws of 2015, item 1844, hereinafter: the Act), the Recommendations for Insurance Undertakings Regarding the Product Governance System (hereinafter: the Recommendations).

The aforementioned Recommendations also aim to realize the goals set for financial market supervision, as specified in Article 2 of the Act of July 21, 2006, on financial market supervision (consolidated text: Journal of Laws of 2015, item 614 as amended, hereinafter: the Supervision Act), such as ensuring the proper functioning of the market, its stability, safety, and trust in the market, as well as ensuring the protection of the interests of its participants.

An effective product governance system, covering the full product lifecycle, i.e., from the moment of its design to the moment of withdrawal from the market and the fulfillment of the insurance undertaking's contractual obligations, and constituting an integral and coherent part of the risk management and internal control system in the insurance undertaking, affects not only the financial results and solvency of the insurance undertaking, but also the quality of the relationship between the insurance undertaking and its clients. Consequently, product governance affects trust not only in the undertaking itself but in the entire financial market, and its proper organization should be one of the paramount goals of every insurance undertaking.

In the opinion of the supervisory authority, the quality of the product governance system affects many important areas of insurance undertakings' activities and may be associated with various types of risks. These risks include in particular: product risk, reputational risk, legal risk, or operational risk. Taking into account the above, as well as the requirements arising from the Solvency II regime specified in Directive 2009/138/EC of the European Parliament and of the Council of November 25, 2009, on the taking-up and pursuit of the business of Insurance and Reinsurance - Solvency II (OJ UE L 2009.335.1 as amended) and the requirements of Regulation (EU) No 1286/2014 of the European Parliament and of the Council of November 26, 2014, on key information documents for packaged retail and insurance-based investment products (PRIIPs) (OJ UE L 2014.352.1) as well as previous supervisory action results, the supervisory authority deemed it necessary to issue the Recommendations.

The Recommendations define the framework for the proper organization of the product governance system as well as the identification, measurement, monitoring, management, and reporting of risks associated with this process. They are a set of recommended actions regarding internal control systems, which should indirectly and directly ensure the implementation of appropriate standards into the product governance system.

These Recommendations are addressed to domestic insurance undertakings and foreign insurance undertakings conducting insurance business on the territory of the Republic of Poland. The supervisory authority expects that foreign insurance undertakings from European Union Member States operating on the territory of the Republic of Poland through a branch or within the framework of the freedom to provide services will implement Recommendations 8 to 26 and 30 and 31.

The document contains 31 Recommendations, which are divided into the following areas:

• General Principles;
• Duties of the Management Board and Supervisory Board;
• Internal principles and procedures adopted within the product governance system;
• Conflict of interest;
• Product design/creation;
• Client acquisition and product offering;
• Remuneration principles for employees and intermediaries;
• Product monitoring;
• Claims handling and loss adjustment;
• Complaint handling (including complaints);
• Resolution of potential disputes by the Undertaking with clients;
• Defect management;
• Customer satisfaction survey;
• Internal control system.

The Recommendations should be applied proportionally, which means differentiating the approach depending on the nature, scale, and complexity of risks specific to the products offered by the insurance undertaking. The Recommendations are applied on a "comply or explain" basis. Insurance undertakings that will not apply the Recommendations or do not intend to apply them, pursuant to Article 365(4) of the Act, are obliged to inform the supervisory authority of this. At the same time, in the above case, pursuant to Article 365(5) of the Act, insurance undertakings should explain to the supervisory authority how they intend to achieve the goals for the realization of which the supervisory authority issued the Recommendations. The supervisory authority expects that the standards indicated in the Recommendations will be implemented by supervised entities no later than July 1, 2016. By the same deadline, the supervisory authority expects any information from insurance undertakings under Article 365(4) and (5) of the Act.

• 3 - Glossary of Terms For the purposes of the Recommendations:

1. Product lifecycle – a process lasting from the moment of product design/creation to the moment of withdrawal of the product from the market and the fulfillment of the Undertaking's contractual obligations incurred towards clients in connection with offering the product.
2. Client – policyholder, insured person, beneficiary, and person entitled under the insurance contract. The term client also refers to an entity seeking insurance protection and/or intending to conclude an insurance contract.
3. Conflict of interest – circumstances known to the Undertaking that may lead to a conflict between the interest of the Undertaking or a related entity (within the meaning of Article 3(1)(31) of the Act of September 11, 2015, on the business of insurance and reinsurance, Journal of Laws of 2015, item 1844) and the Undertaking's obligation to act honestly, taking into account the best interests of the client of that Undertaking. A conflict of interest does not include discrepancies regarding the client's and the Undertaking's expectations concerning the subject and scope of coverage, the amount of premium, and preventive actions and actions limiting the consequences of an insured event during the negotiation of insurance contract terms, provided that these actions are conducted by the Undertaking or a related entity in accordance with best knowledge and taking into account the client's insurance needs and interests.
4. Loss adjustment – the process from the notification of a claim to the payment of benefits or refusal of payment of benefits, consisting of the Undertaking taking actions aimed at determining the Undertaking's liability and the amount of the due benefit.
5. Product – a product designed/created or offered by the Undertaking, understood as a type of insurance contracts or insurance guarantees, identified by separate insurance terms or an internal designation used in the Undertaking, concluded based on the same contractual templates dedicated to this product (if the specificity of a given product assumes the existence of a contractual template).
6. Strategic product – a product that, due to the high amount of total expected or collected premium or a significant number of clients to whom it has been or, according to the Undertaking's expectations, will be sold, has significant importance for the Undertaking's activity, the scale of potential liabilities, or its business results or reputation.
7. Defect – an irregularity identified by the Undertaking occurring in a product at any stage of the product lifecycle.
8. Systemic defect – a defect causing a significant violation of clients' interests, including by defining the scope of coverage in a manner inadequate to the needs of the target group of clients.
9. Internal control system – a system including in particular administrative and accounting procedures, the organization of internal control, appropriate rules regarding reporting at all levels of the Undertaking's organizational structure, and the compliance function.
10. Management system – a system including at least an appropriate, transparent organizational structure, in which areas of responsibility are clearly assigned and appropriately divided, ensuring the effectiveness of information transfer and decision-making. The management system includes risk management, compliance, internal audit, and actuarial functions. Within the management system, the product governance system operates.
11. Product governance system – a part of the Undertaking's management system comprising procedures and elements constituting the product lifecycle.
12. Insurance investment product – a product providing a value at maturity or surrender value, in the case where this value at maturity or surrender value is exposed, directly or indirectly, to market fluctuations.
13. Undertaking – an insurance undertaking conducting insurance business in the scope of Section I or Section II of the Annex to the Act.

• 4 - General Principles Recommendation 1 The Undertaking should establish and implement an effective product governance system. Recommendation 2 The product governance system should take into account the expectations, interests, and characteristics of clients and serve to minimize the consequences of potential client losses resulting from defects, as well as ensure proper management of conflicts of interest. Recommendation 3 The Undertaking should conduct regular reviews of the product governance system, at least once a year, to ensure that it is up-to-date and adequate to the activity conducted by the Undertaking, and make necessary changes if required.

Duties of the Management Board and Supervisory Board Recommendation 4 The Management Board is responsible for creating, implementing, and regularly reviewing and ensuring compliance with legal provisions, guidelines, and recommendations of the supervisory authority, as well as internal regulations adopted by the Undertaking, regarding the product governance system. Recommendation 5 The Management Board in its entirety should possess knowledge and experience enabling the management of processes for creating, implementing, and operating an effective product governance system. Recommendation 6 Within the fulfillment of its functions and responsibilities, the Supervisory Board should monitor the effectiveness of the product governance system.

Internal principles and procedures adopted within the product governance system Recommendation 7 The Undertaking should develop and implement principles and procedures adopted within the product governance system.

Conflict of interest Recommendation 8 The Undertaking, in the process of product design/creation, distribution, and servicing, should apply effective organizational and administrative measures aimed at taking all justified actions to prevent, identify, and manage conflicts of interest, so that this conflict does not have a negative impact on clients' interests. Recommendation 9 In the event that organizational or administrative measures introduced for proper management of conflicts of interest are insufficient to avoid a conflict of interest, the Undertaking should ensure that the conflict of interest does not cause the Undertaking to act to the detriment of the client.

Product design/creation Recommendation 10 The Undertaking should design/create and place on the market only those products whose features, risks covered by insurance, fees, and distribution channels meet the expectations and interests of a specific target group of clients to whom the product is directed. Recommendation 11 The Undertaking should conduct detailed product analyses before placing them on the market and each time in the event of a change in the target group of clients or significant changes in the products. Recommendation 12 The Undertaking should ensure that the pricing of the designed/created product is consistent with applicable legal provisions, guidelines, and recommendations of the supervisory authority, as well as internal regulations adopted by the Undertaking. Recommendation 13 The Undertaking should ensure proper supervision over outsourcing in the area of product design/creation.

Client acquisition and product offering Recommendation 14 The Undertaking should select appropriate product distribution channels and ensure their proper functioning. Recommendation 15 The Management Board should establish rules specifying the method of accepting significant terms of the insurance contract (including: sum insured, premium amount, granting of discounts/rebates/allowances) and indicate circumstances when, in order to accept the risk for insurance, the consent of the Management Board or a person authorized by the Management Board is required. Recommendation 16 The Undertaking should provide intermediaries and clients with appropriate informational and advertising materials containing detailed information about the offered products. This information should be clear, honest, precise, and up-to-date. Recommendation 17 The Undertaking should take appropriate actions to ensure that distribution channels function properly and guarantee the effectiveness of the product governance system. Recommendation 18 The Undertaking should ensure appropriate advertising messaging suitable for the given product.

Remuneration principles for employees and intermediaries Recommendation 19 The Undertaking should establish a method of remunerating employees and intermediaries consistent with legal provisions, guidelines, and recommendations of the supervisory authority, which will prevent the emergence of conflicts of interest.

Product monitoring Recommendation 20 After placing the product on the market, the Undertaking should conduct continuous monitoring of the offered products. Recommendation 21 In order to improve the quality of offered products and identify potential defects, considering the type of product offered, the Undertaking should conduct qualitative analyses and, in justified cases, quantitative analyses. Recommendation 22 The Undertaking should offer only products that do not violate clients' interests, nor pose a threat to the proper functioning and integrity of financial markets, as well as the stability of the whole or part of the financial system.

Claims handling and loss adjustment Recommendation 23 In the event of an insured event, the realization of the loss adjustment process by the Undertaking should proceed in accordance with legal provisions, guidelines, and recommendations of the supervisory authority, as well as internal regulations adopted by the Undertaking.

Complaint handling (including complaints) Recommendation 24 The Undertaking should ensure a prompt and effective complaint handling process (including complaints).

Resolution of potential disputes by the Undertaking with clients Recommendation 25 In the event of disputes with a client, the Undertaking should strive to reach a compromise and conclude a settlement, unless the Undertaking's findings indicate an attempt to commit insurance fraud.

Defect management Recommendation 26 The Undertaking should introduce appropriate procedures aimed at identifying the causes of defects occurring in the process of product design/creation, distribution, or servicing, as well as determining whether they are one-time or systemic, including determining the scale and consequences of defects and the number of clients affected by the defects. Recommendation 27 The Undertaking should document identified defects. To this end, the Undertaking should maintain a defect register. Recommendation 28 If defects are identified after the product has been placed on the market, the Undertaking should immediately take appropriate corrective or preventive actions, including immediately making appropriate changes to the structure of the offered product or its distribution or servicing process, and if necessary, withdraw such product from the market. Recommendation 29 In the event of identifying systemic defects, the Undertaking should immediately transmit appropriate information to the supervisory authority, providing data on the scale and impact of the identified defects on the Undertaking's activity.

Customer satisfaction survey Recommendation 30 The Undertaking should develop and implement customer satisfaction survey principles covering the product lifecycle.

Internal control system Recommendation 31 An effective internal control system should be implemented within the Undertaking as part of the management system.

• 5 - General Principles Recommendation 1 The Undertaking should establish and implement an effective product governance system. 1.1. The product governance system should include all essential elements ensuring the proper organization of the product lifecycle, including in particular:

1. product design/creation,
2. client acquisition and product offering,
3. product servicing, including: a. product monitoring, b. loss adjustment, c. complaint handling (including complaints within the meaning of regulations on the handling of complaints by financial market entities), d. resolution of disputes by the Undertaking with clients. 1.2. The Undertaking should conduct activity in the area of product management in accordance with principles adopted within the product governance system. Key decisions regarding product management, which are manifestations of the Undertaking's action, should be documented. Recommendation 2 The product governance system should take into account the expectations, interests, and characteristics of clients and serve to minimize the consequences of potential client losses resulting from defects, as well as ensure proper management of conflicts of interest. 2.1. The product governance system should minimize the risk of defects occurring during product design/creation, distribution, and servicing, as well as the occurrence of client or Undertaking losses resulting from possible defects. 2.2. Within the current activity, the Undertaking should determine, measure, monitor, and report all significant risks to which it is or may be exposed in connection with product management, and manage them appropriately. Recommendation 3 The Undertaking should conduct regular reviews of the product governance system, at least once a year, to ensure that it is up-to-date and adequate to the activity conducted by the Undertaking, and make necessary changes if required. 3.1. The Undertaking should determine the minimum frequency of regular review of the product governance system. Furthermore, the Undertaking should determine additional circumstances whose occurrence necessitates an ad-hoc review of the product governance system, e.g., changes in sales strategy, changes in the legal or macroeconomic environment, changes in product construction complexity, changes in distribution channels. 3.2. Reviews of the product governance system should be appropriately documented, in a scope including at least: the organizational unit conducting the review, any proposed recommendations, and actions taken to fulfill these recommendations.

Duties of the Management Board and Supervisory Board Recommendation 4 The Management Board is responsible for creating, implementing, and regularly reviewing and ensuring compliance with legal provisions, guidelines, and recommendations of the supervisory authority, as well as internal regulations adopted by the Undertaking, regarding the product governance system. 4.1. The Management Board should ensure that the product governance system is appropriately designed and properly implemented into the Undertaking's organizational structures. 4.2. The Management Board should involve appropriate organizational units established in the Undertaking or persons supervising key functions in the creation and review of the product governance system. 4.3. The product governance system should be systematically monitored by the Management Board (no less than once a year). In the event of significant changes in the subject and scope of concluded insurance contracts, as well as changes concerning the functioning of the entire insurance market, the product governance system should be appropriately modified. 4.4. The organization of the product governance system and its changes are subject to prior approval by the Management Board. 4.5. The Management Board is responsible for developing and approving principles adopted within the product governance system and updating these regulations accordingly. 4.6. The Management Board should ensure that employees performing activities related to product management possess the knowledge and experience necessary and appropriate for performing their tasks within the product governance system, including in particular enabling the understanding of the features and properties of the product and the expectations and interests of the target group of clients to whom the product is directed. 4.7. The Management Board should indicate in written principles the organizational units responsible for individual elements of the product governance system. The Undertaking should have rules regarding the replacement of persons employed in the aforementioned units to limit risks associated with their departure or absence. 4.8. Organizational units involved in the product management process in the Undertaking should have clearly defined scopes of tasks, and persons engaged in product management in the Undertaking should have clearly defined scopes of responsibility and scopes of authorization to perform activities within the product governance system. 4.9. The Management Board should introduce appropriate internal control mechanisms aimed at minimizing risks identified in the product governance system. Recommendation 5 The Management Board in its entirety should possess knowledge and experience enabling the management of processes for creating, implementing, and operating an effective product governance system. 5.1. The Undertaking's internal regulations should indicate members of the Management Board who supervise individual elements of the product governance system. Recommendation 6 Within the fulfillment of its functions and responsibilities, the Supervisory Board should monitor the effectiveness of the product governance system. 6.1. The Supervisory Board should possess competencies enabling an understanding of the product governance system and comprehension of the significance of this system for the Undertaking's activity. 6.2. The Supervisory Board is responsible for monitoring the effectiveness of the product governance system. 6.3. The Supervisory Board should periodically, no less than once a year, receive a report from the Management Board regarding the assessment of the effectiveness of the product governance system.

Internal principles and procedures adopted within the product governance system Recommendation 7 The Undertaking should develop and implement principles and procedures adopted within the product governance system. 7.1. Principles and procedures adopted within the product governance system should be prepared in written form in the Polish language, although they may constitute separate documents or be part of larger documents. 7.2. Principles and procedures adopted within the product governance system should be:

1. adapted to the Undertaking's activity, especially in the case of principles and procedures developed at the group level,
2. reviewed regularly and each time in the event of significant changes in the Undertaking's activity, with the results of verification being documented, and the implementation of changes should occur in such a way that persons and organizational units dealing with individual elements of the product governance system are familiar with them. 7.3. In order to properly imp