Circular

Insurance Agents' Information Duty Regarding Commission

CIRCULAR: 10/2013 DATE: 04.11.2013 THE CIRCULAR APPLIES TO: Life insurance companies Property and casualty insurance companies Insurance intermediaries

FINANSSTILSYNET Postboks 1187 Sentrum 0107 Oslo

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Insurance Agents' Information Duty Regarding Commission

2 | Finanstilsynet

This circular concerns the Financial Supervisory Authority's interpretation of insurance agents' information duty regarding commission and other remuneration that the agent receives from the insurance company.

1 Legal Basis

According to the Insurance Intermediaries Regulation of 9 December 2005 No. 1421 § 3-1 first paragraph no. 4 a), the insurance intermediary shall provide information on:

• the size of the commission and/or other remuneration that the insurance intermediary business receives from the insurer in connection with the conclusion of a contract for the relevant insurance.

2 Information Requirement

In cases where the agent's business receives a part of the premium or a specific amount linked to each individual insurance contract, the business must inform the client about either the actual amount the agent receives as commission or a percentage rate. In cases where the commission is stated as a percentage rate, it is important that it is clearly evident to the policyholder what amount serves as the basis for calculating the commission. The agent's business must inform about the specific commission that the agent receives from the company. It is not sufficient to mention the commission as an interval.

The information duty applies to all types of remuneration and benefits that an agent's business receives from the insurance company for insurance intermediation. It will not matter what the remuneration/benefit is called. In this circular, the term "commission" is used for all types of remuneration/benefits.

The Financial Supervisory Authority assumes a principle of materiality (see below) such that there will be lower requirements for specific information regarding modest remuneration/benefits.

3 Indirect Commissions

The information duty applies to all commissions that the agent receives from the insurance company for insurance intermediation, including commissions that are not directly linked to a specific insurance contract, but rather to the portfolio, the insurance intermediation business itself, etc. Examples of this type of commission are presented in points 3.1, 3.2, and 3.3 below.

3.1 Volume Bonuses and Profitability Commission

Volume bonus is an agreement that the agent receives a higher commission if sales in a period exceed a specified level. Profitability commission is a bonus that an agent receives if the loss ratio in a portfolio comes below a specified level. These are commissions that may be uncertain at the time of information whether the agent will receive them, and what the amount might be. For this type of commission, the agent must explain how the commission is calculated.

3.2 Coverage of Expenses and Benefits in Kind

In cases where an insurance company covers all or part of the agent's rent, this must be disclosed. It must also be stated whether the agent benefits from the rent being lower than market rent and about other benefits/expense coverages that the agent receives from the company. This may concern the use of the company's computer system, switchboard, and canteen, and coverage of the agent's business's wage expenses.

The agent's business must inform about which expenses or benefits the company covers. It is normally not necessary to state the amount since this normally constitutes a small part of the agent's business's income. If this type of commission constitutes a significant part of the agent's business's income, the requirement for detailing will increase as a result of the materiality principle, cf. discussion below.

3.3 Smaller Bonuses (Rewards)

It happens that agents receive smaller bonuses/rewards, such as trips or items for achieving specific goals. This can be, for example, when a sales target has been reached. This type of commission will in principle be covered by the information duty. The Financial Supervisory Authority assumes that this concerns marginal amounts and refers to the materiality principle discussed below.

4 The Materiality Principle

The higher the share of what the agent receives from the insurance company that comes from current commission types, the greater the requirement for precise information will be. For example, there will be fewer requirements for precise information about a small sales bonus than about information regarding commission on new sales.

5 Time for When the Business Must Give Information

According to the Regulation § 3-1 first paragraph first sentence, the business must provide information about commission in the same way before an insurance contract is concluded, upon subsequent changes, and upon renewals of contracts. Therefore, the business must provide the information already in the offer phase. If the commission has changed from the time of the offer to the time of signing, the business must also provide information in connection with the signing. The Financial Supervisory Authority believes it will be best practice to always inform about commission at the time of signing, even if the commission has not changed from the offer.

6 Communicable Commission Agreements

The main purpose of the information duty is that the policyholder can easily and clearly see what type of commission/remuneration and what other benefits an agent receives from the insurance company. It is therefore important that the information is clear. If the agent and the insurance company have agreed on a commission structure that cannot be communicated to policyholders in an understandable way, the agreement must be changed.

7 The Agent's Affiliation with the Insurance Company

Different types of agent businesses have varying degrees of affiliation with the insurance company they have an agreement with. Multi-agents have agreements with several companies, often foreign, and the affiliation with the company may be weak. Other agents have agreements with only one company and function in practice as a branch office for the insurance company. The rules on information duty apply to all types of agent businesses regardless of affiliation with the insurance company.

Emil R. Steffensen Director, Banking and Insurance Supervision

Runa K. Sæther Section Chief

Contact Persons: Senior Advisor Geir David Johannessen, tel. 22 93 97 51, email: geir.david.johannessen@finanstilsynet.no

Senior Advisor Hege M. Bogstrand, tel. 22 93 99 72, email: hege.m.bogstrand@finanstilsynet.no

First Consultant Ingerid Boge, tel. 22 93 99 48, email: ingerid.boge@finanstilsynet.no

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FINANSTILSYNET Postboks 1187 Sentrum 0107 Oslo

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