Circular 10/2014 (VA) – Guidelines on Cooperation with Insurance Intermediaries and Risk Management in Product Distribution

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VA
35_I 4105-2014/0049

Circular 10/2014 (
VA
) – Guidelines on cooperation with insurance intermediaries, distribution-related activities and risk management in insurance product distribution

24.04.2015

Objectives of the Circular

This Circular addresses all insurance undertakings and Pensionsfonds that cooperate with insurance intermediaries and are subject to sections 80, 80a of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG ). This Circular details the legal provisions that insurance undertakings must observe when cooperating with intermediaries. Sections 80 and 80a of the VAG are of particular importance in this connection. Furthermore, the Circular sets out the expectations of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin ) regarding distribution-related activities that contain specific risks and thus require special attention in the risk management context pursuant to section 64a of the VAG .

A. Risk management in the intermediaries sector

For many insurance undertakings, the distribution of insurance products via intermediaries is of prime importance in terms of financial success. However, it should be remembered that cooperation with intermediaries is also associated with considerable risks for the undertakings. Hence, control and management of these risks are of great importance in the risk management context and require particular attention on the part of the undertakings. In BaFin’s opinion, the undertakings specifically require suitable control instruments that facilitate early detection. Otherwise they will not be in a position to protect either themselves or the insured against damage. There are no general rules as to which control instruments are required in individual cases. This depends on the individual circumstances of the undertakings and the type of insurance business conducted. The activities described in part B below are activities that may result in financial loss for the undertaking or the insured due to

inadequate or failed internal processes, staff or system-related shortfalls or external events.

Aside from these operational risks, legal and reputational risks must also be considered in the context of section 64a of the VAG .

This Circular is without prejudice to the general rules relating to risk management and organisational and operational structures that apply on the basis of other circulars. This also applies if these circulars are amended or replaced by successive circulars, especially in the case of Circular 3/2009 ( VA ) – “Minimum Requirements for Risk Management in Insurance Undertakings ( MaRisk

VA
)” of 22 January 2009.
In the context of section 64a of the
VAG
, adequate consideration, monitoring and documentation of distribution risks must also be guaranteed. It is not sufficient to carry out inspections on an event-driven basis only, e.g. in the context of checking irregularities. The undertakings must endeavour to ensure that the requirements regarding due compliance (section 64a (1) sentence 1 of the VAG ) are comprehensively met in the distribution field. back to top

B.I Cooperation with tied agents within the meaning of section 34d (4) of the German Industrial Code (Gewerbeordnung –GewO).

1. Commencement of the cooperation

Pursuant to section 80 (2) of the
VAG
, insurance undertakings may only cooperate with professional insurance intermediaries who are not subject to the authorisation requirement pursuant to section 34d (4) of the GewO ("tied agents") if these intermediaries

are reliable (section 34d (2) (1) of the
GewO
), are financially sound (section 34d (2) (2) of the GewO ) and if the insurance undertakings ensure that the intermediaries are sufficiently qualified to mediate the specific insurance product.

According to the grounds of the Law, the insurers must obtain "suitable information" ( cf.
Bundestag printed paper no.
16/1935 of 23 June 2006, page 27, available only in German) to verify that the intermediaries are reliable and are financially sound. This information must be obtained before the commencement of the cooperation. BaFin considers the following to be "suitable information":

a. Reliability check

Before commencing a cooperation with a tied agent, a current certificate of good conduct (section 30 (1) of the German Federal Central Register Act (Bundeszentralregistergesetz – BZRG)), which has been issued within the last 3 months, must be submitted. An intermediary's reliability is generally not ensured if the intermediary was convicted by final judgement of an offence or crime as specified in section 34d (2) (1) of the GewO in the last five years. In the case whereby the intermediary has operated a previous business, a current extract from the Central Trade and Industry Register (section 150 of the GewO ) issued within the last 3 months must also be obtained in order to verify the intermediary's reliability. It is not sufficient to obtain information via private enquiry agencies instead. In the case of legal entities, reliability must be verified for all managers/directors. If a German authority – for instance BaFin itself – has already verified the reliability of the specific person in terms of commercial law, this circumstance can be taken into account accordingly. The result of the verification and respective evidence must be documented. This also applies to the following part B.I.1.b.

b
. Financial soundness

BaFin considers the submission of a current extract from the List of Debtors (sections 882b, 882h of the German Code of Civil Procedure (Zivilprozessordnung – ZPO ) – central and national query), which has been issued within the last 3 months, to be a suitable means of verifying an intermediary's financial soundness. Finances are generally not sound if insolvency proceedings have been initiated against the applicant's assets or the applicant has been entered in the List of Debtors in accordance with section 26 (2) of the German Insolvency Code (Insolvenzordnung – InsO ). If current information is obtained via private enquiry agencies instead, such information must at least comply with the legal provisions under section 34d (2) no. 2 of the GewO (information from the List of Debtors and the insolvency announcements). In the case of legal entities, financial soundness must be verified for all managers/directors.

c. Legal presumptions under commercial law

Section 34d (2) of the
GewO defines legal presumptions under commercial law. Should an insurance undertaking continue to cooperate with an intermediary despite a case of non-compliance with commercial law, grounds for continued cooperation must be reviewed and documented according to commercial law standards. This also applies to first-time cooperation with such intermediary.

d.
Qualification

Pursuant to section 80 (2) of the
VAG
, insurance undertakings must furthermore ensure that the intermediaries are sufficiently qualified to mediate the specific insurance contracts. The extent of the required training depends on the product range offered by the respective intermediary. Should this range be extended at a later date, further training is required.

The above rule also applies when the intermediary sells products distributed by other insurance undertakings.
, Section 34d (2) no.
4 of the
GewO provides that in the case of legal entities, evidence of the intermediary's expertise may generally be supplied by a suitable number of natural persons employed by the intermediary who are responsible for supervising the individuals entrusted with the mediation of insurance policies and who are authorised to represent the intermediary.

The insurance undertaking must document relevant evidence of suitable qualification (or, where appropriate, reference to the application of the "Alte-Hasen-Regelung" rule set out in section 156 of the GewO , a rule whereby insurance intermediaries with several years of professional experience are not subjected to further checks) and the authority to represent the company (insurance intermediary’s file).

Evidence of appropriate qualifications required for the intermediary's professional suitability within the meaning of section 80 (2) of the VAG may also be submitted in the form of a professional qualification within the meaning of sections 4, 4a of the German Regulation on Insurance Mediation (Versicherungsvermittlungsverordnung – VersVermV ). A record of this type of evidence must be made.

e. Valve solution/liability cap

The sale of insurance products from various/several insurance undertakings by tied agents within the meaning of section 34d (4) of the GewO (so-called "valve solution" or "distribution with liability cap") is, at present, generally permissible under commercial law. However, if the tied agent is authorised to offer customers products from other insurance undertakings, the insurance undertaking that assumes the liability takes on a specific liability risk in respect of the intermediary's customers. The insurance undertaking that assumes the liability pursuant to section 34d (7) sentence 3 of the GewO must therefore ensure that its liability is limited internally. This can be effected via a declaration by the other insurance undertaking which releases the insurance undertaking that assumes the liability from this liability.

2. Entry in the register of intermediaries

Pursuant to section 80 (3) sentence 1 of the
VAG
, the insurance undertaking/s on whose behalf the insurance intermediary acts on an exclusive basis within the meaning of section 34d (4) of the GewO must, upon the intermediary's request, communicate to the registration authority the data required to be recorded under section 11a (1) of the GewO . In this context, pursuant to section 80 (3) sentence 2 of the VAG , the insurance undertaking must ensure that the requirements set forth in section 34d (4) of the GewO have been met.

3. Continuous supervision of intermediaries

In BaFin's opinion, the conditions mentioned under B. I 1 must also be met in respect of cooperation with all tied agents. However, it is not necessary to obtain the relevant information ( e.g. certificate of good conduct) again unless the need arises, for instance if irregularities occur or BaFin submits a respective request. If information is obtained beyond the required extent, any restrictions under the data protection laws must be observed. Respective evidence of continuous supervision must be entered in the intermediary records. These records must include information on the intermediary's basic and advanced training carried out to ensure the required level of qualification, especially in respect of new products. Furthermore, the undertaking must have sufficient control mechanisms to ensure that irregularities on the part of intermediaries are recognised at an early stage. The results of any event-driven checks of intermediaries must be documented.

4. Termination of cooperation

Pursuant to section 80 (4) of the
VAG
, insurance undertakings must inform the registration authority without delay of the termination of their cooperation with a tied agent and request that the intermediary concerned be deleted from the register.

B.II Special guidelines for cooperation with product-related intermediaries

Where insurance undertakings cooperate with product-related intermediaries within the meaning of section 34d (3) of the GewO , section 80 (2) no.
2 of the
VAG specifies that the same requirements apply as for cooperation with "tied" agents within the meaning of section 80 (2) no.
1 of the
VAG and section 34d (4) of the
GewO
. In this respect, the requirements set out in part B. I. apply mutatis mutandis. Before commencing a cooperation, the insurance undertaking must inspect the register of insurance intermediaries to verify that the intermediary is exempted from the authorisation requirement. When working with product-related intermediaries within the meaning of section 34d (9) of the GewO , the insurance undertaking must, in particular, ensure that the insurer does not offer the intermediary any products for mediation other than those meeting the requirements specified therein.

B III Special guidelines for cooperation with authorised insurance brokers and agents

1. Authorisation requirement

Insurers may not cooperate with intermediaries within the meaning of section 34d (1) of the GewO unless these have been authorised by the competent authority pursuant to the laws of the respective federal state. Insurers must verify the presence of such authorisation by inspecting the register of intermediaries before commencing the cooperation. If the register does not include a respective authorisation, cooperation with the intermediaries in question is not possible.

2. Notification of the supervisory authorities

Where serious doubts have arisen as to the intermediary's fulfilment of the requirements under commercial law, for instance with respect to reliability, the insurance undertaking must notify the supervisory authority responsible for the intermediary accordingly (see also section 80a sentence 2 of the VAG ). This is without prejudice to the duty to notify BaFin of complaints ( cf.

Collective administrative act:
Complaints management function and complaints-handling by insurance undertakings of 20 September 2013 and Circular 3/2013 ( VA ) – Minimum requirements for complaints-handling by insurance undertakings).

3. Regular reviews

BaFin considers it necessary that to meet the statutory obligations arising from section 80 (1) of the VAG , insurers must regularly check whether the prerequisites for cooperation with the respective brokers or insurance agents are still being met. In particular, they must check whether the intermediaries are still entered in the register of intermediaries. In this context, the insurance undertakings must check the "cancellation list" provided by the Chamber of Industry and Commerce (Industrie- und Handelskammer – IHK ) (section 11a (3) of the GewO ). back to top

B IV Rules applying to cooperation with all types of intermediaries

1. Handling of complaints

Pursuant to section 80a of the
VAG
, insurance undertakings must "respond" to complaints about insurance intermediaries who mediate their insurance products. Since appropriate responses to complaints require comprehensive clarification of the facts, BaFin considers it necessary that the insurers conduct the investigations required to provide the complainant with a conclusive response. BaFin also considers it necessary that the insurers take appropriate measures to recognise key staff-related or material areas of complaint, i.e. in particular whether certain intermediaries attract frequent complaints or whether the complaints are based on similar circumstances. Such investigations are necessary not least since insurance undertakings are obliged under section 80a sentence 2 of the VAG to notify the responsible authority if the complaints may affect the assessment of the intermediaries' reliability.

This shall not affect any supervisory requirements regarding the handling of complaints by the supervisory authorities (see also Collective administrative act:
Complaints management function and complaints-handling by insurance undertakings of 20 September 2013 and Circular 3/2013 ( VA ) Minimum requirements for complaints-handling by insurance undertakings).

2. Document storage

In BaFin’s opinion, insurers must store all documents that may be relevant to the assessment of their cooperation with individual intermediaries such that they are accessible at all times. This includes, in particular, the information obtained before the commencement of the cooperation ( e.g. from enquiry agencies), the registration entries that were inspected, whether a declaration of assumption of liability was issued and, where applicable, documentation of training courses the intermediary has taken as well as any authorisations that were issued to the intermediary. Furthermore, the insurers must record the dates and results of their checks. The same applies to contractual agreements. The data protection rules of the Federal Data Protection Act (Bundesdatenschutzgesetz – BDSG ) must be observed. This applies, in particular, to the collection, use and storage of data.

AVAD
(Information Office on the Insurance and Buildings Societies‘ Field Service)

BaFin also considers it necessary that insurers obtain AVAD information regarding respective intermediaries – irrespective of the status under commercial law. This also applies to managers/directors of legal entities as well as to all individuals that work as intermediaries for the legal entity. The information should be obtained before the commencement of the cooperation. Upon termination of the cooperation, the necessary information relating to the intermediary should be forwarded to AVAD .

4. Work instructions and authorisations

Insurers are required to issue written work instructions covering all of the above points to ensure that the requirements specified in this Circular are met. To the extent that the Circular provides for "regular" checks, the instructions must contain a specific period or date when such checks shall take place. Decision-making responsibilities must also be specified in the instructions. Furthermore, the instructions must specify which office-holder in a given organisational unit shall be responsible for derogation decisions. This also applies to authorisations. Authorisations must specify responsibility for the constitution of receivables or liabilities vis-a-vis intermediaries, for instance decisions regarding allowances, as well as naming the person/s responsible for writing off bad debts (so-called "closing out" or "lapse"). Normally, such authorisations should be based on disbursement authorisations. Furthermore, provisions should be included as to the write-off threshold above which a decision by the board of management is required. In order to avoid conflicts of interest, the organisational unit that decides upon the constitution of receivables from intermediaries should not be identical to the organisational unit that decides upon the write-off of the same receivable.

5. Involvement of staff in the mediation of insurance products

Pursuant to section 34d (6) of the
GewO
, authorised intermediaries, product-related intermediaries pursuant to section 34d (3) of the GewO and tied agents may only employ persons directly involved in the mediation if they ensure that such individuals are sufficiently qualified to mediate the respective insurance products and confirm that they are reliable. The aspects mentioned under B. I. 1. and B. IV. 1.-4 above apply correspondingly as standards.

BaFin considers it necessary that the insurance undertakings include respective clauses in their intermediary agreements and carry out spot checks to ensure that the above rules are complied with. In the case of existing agreements, the insurance undertakings should advise their intermediaries of the statutory provision under section 34d (6) of the GewO .

6. Safeguarding customer monies

Pursuant to section 80 (1) (2) of the
VAG
, insurance undertakings may exclusively cooperate with those intermediaries that are either authorised to receive certain assets from, or on behalf of, policyholders, provide evidence of collateral security within the meaning of section 12 of the VersVermV or are not authorised to receive any assets.

Details regarding the respective collateral security are specified in section 12 of the VersVermV .

BaFin is of the opinion that both the documents maintained by the insurer and the current contractual agreement must indicate whether and to what extent authorisations have been issued in respect of an intermediary. The type of collateral security and/or insurance taken out (section 12 of the VersVermV ) must be recorded.

B. V Rules applying to cooperation with referrers

A distinction is made between insurance intermediaries and referrers. Hence, the statutory requirements relating to insurance intermediaries do not apply to the activities carried out by referrers. However, since some referrers play a key role in the insurance undertakings' distribution process, the following requirements in compliance with section 64a of the VAG must be met. This is without prejudice to any further requirements relating to risk management and distribution compliance.

1. The term "referrer"

Although there is no statutory definition of the term "referrer", it relates to any person according to the definition below even if other terms are used to describe them, e.g. "Vertrauensleute” (trusted intermediaries), or if it refers to members of the mutual insurance society ( VVaG ). "The activities of a "referrer", which are limited to the identification of possible insurance contracts or the establishment of contact between a potential policyholder and an insurance intermediary or insurance undertaking, do, however, not constitute mediation within the meaning of section 34d [...] since they represent a preparatory act [...] that does not aim to generate a declaration of intent by the prospective policyholder regarding the conclusion of a contract that is subject to mediation. [...]." Bundestag printed paper no. 16/1935, page 17).

2. Referrer agreement

If the cooperation between the insurer or insurance intermediary and the referrer is of a regular nature, a written referrer agreement should be concluded between the referrer and the insurer or the insurance intermediary.

3. Remuneration scale and payments

The referrer agreement should also include a remuneration scale. Payments to the referrer should be made by a central office at the insurance undertaking. In principle, the approval of the payment and the actual disbursement should be separate from each other, both in terms of staff and organisational structure.

4. Authorisation/notification of a sideline activity

The referrer agreement should specify the referrer's obligation to obtain, for instance, an authorisation for a sideline activity pursuant to the statutory requirements before the commencement of the cooperation and to submit this to the insurance undertaking or insurance intermediary.

5. Data protection

Referrer agreements should contain data protection clauses or fact sheets informing the referrer of important data protection aspects.
The referrer should obtain a declaration of consent from the customers regarding the communication of personal data unless statutory provisions provide for an exemption. This documentation of consent regarding the communication and use of personal data also guarantees that the lawfulness of the data handling is documented and that any potential acquisitions of personal data ("purchasing of addresses") can be traced.

6. No cooperation with referrers

If the insurance undertaking has not concluded any agreements with referrers, the insurer's distribution partners should be obliged to observe the minimum requirements (re. nos. 2 to 5) specified in this part with regard to their cooperation with referrers. A contractual agreement referring to the Circular is sufficient. Ongoing business relationships should be gradually, i.e. at the latest upon amendment of the contractual agreement, adjusted to the guidelines provided in this part.

C. Withdrawn circular

Parts A to C of Circular 9/2007 (
VA
) are hereby withdrawn.

Additional information

Collective decree: complaints management function and complaints-handling of insurance undertakings

Circular 3/2013 (VA) - Minimum requirements for complaints-handling by insurance undertakings

Circular 3/2009 - Minimum Requirements for Risk Management in Insurance Undertakings ( MaRisk

VA
)

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