Official Information of 27 August 2010 regarding certain obligations of insurance intermediaries

Official Information of the Czech National Bank of 27 August 2010 regarding certain obligations of insurance intermediaries

In the course of supervising the activities of insurance intermediaries pursuant to Act No. 38/2004 Coll., on Insurance Intermediaries and Independent Claims Adjusters and on Amending the Trade Licensing Act, as amended subsequently (hereinafter referred to as "ZoPZ"), the Czech National Bank encounters cases where insurance intermediaries fail to meet established obligations when conducting intermediary activities in insurance, partly due to incorrect interpretation of relevant statutory provisions. In light of findings made during supervision and in the interest of increasing the level of legal certainty for persons conducting intermediary activities in insurance, the Czech National Bank issues this opinion:

Article 1. Intermediary Activity in Insurance – Preparatory Work

1. Intermediary activity in insurance includes, among other things, professional activity consisting of carrying out preparatory work aimed at concluding insurance or reinsurance contracts [§ 3 letter a) point 2 ZoPZ].

2. By preparatory work, the Czech National Bank understands any activities of a preparatory nature that simultaneously aim directly or indirectly towards the conclusion of an insurance or reinsurance contract and that require expertise, qualified knowledge in the field of insurance, and are carried out in a business manner (activities having a direct link to the subsequent conclusion of a contract). The Czech National Bank adds that in the course of supervision, it assesses not only the wording of the relevant contracts but, in particular, the manner in which the activity in question is actually performed, its purpose, the manner in which persons in a contractual relationship are remunerated, and other related facts. Preparatory work will not, however, be considered to include, for example, activities directed towards an undefined group of persons such as advertising and marketing activities, administrative activities, informational activities, etc. Preparatory work will also generally not include activities carried out by persons acting on behalf and for the account of the insurance intermediary, in which there is no such interaction with the insurance applicant that binds the insurance intermediary or the insurance company on whose behalf the insurance intermediary acts towards the insurance applicant.

3. In the course of supervising the activities of insurance intermediaries, the Czech National Bank has encountered situations where insurance intermediaries used persons who were not registered as insurance intermediaries for certain of their activities. These persons, who were in various contractual relationships with the insurance intermediary, were designated, for example, as tipsters, collaborators, sales representatives, commission agents, etc., and in many cases carried out the aforementioned preparatory work. The Czech National Bank considers the use of persons without the appropriate registration to conduct intermediary activity in insurance as a violation of the obligation to conduct such activity with professional care (§ 21 para. 1 ZoPZ). It is therefore in the interest of insurance intermediaries to consider whether the activity entrusted to a person without the appropriate registration fulfills the characteristics of preparatory work within the meaning of § 3 letter a) ZoPZ.

4. It follows from the provisions of § 3 and § 4 ZoPZ that if the subject matter of a contract, even if not concluded in writing, is intermediary activity in insurance, this activity must be conducted only by a person entered in the relevant register.

Article 2 Professional Care of the Insurance Intermediary

1. The basic obligations of an insurance intermediary under § 21 para. 1 ZoPZ are (i) to conduct intermediary activity with professional care, (ii) to protect the interests of the consumer, and (iii) not to provide the client with unjustified financial, material, or non-material benefits.

2. Given that the term "professional care" is an indefinite legal concept and cannot be effectively defined in a taxative manner by statutory and implementing legal regulations, its content and scope are often derived from established practice in the regulated area.1 Its application thus gives the administrative authority room to interpret and specify this concept in its application practice in accordance with the sense and purpose of the legal regulation.

3. The requirement to act with professional care does not stand alone as a separate obligation but is always linked to the specific activity performed by the obligated subject. ZoPZ regulates the performance of intermediary activity by experts who must meet a number of qualification requirements to be entered in the relevant register. The Czech National Bank therefore proceeds from the assumption that professional care requirements are placed on insurance intermediaries as professionals in connection with their business.2 Professional care is thus always a standard and a corrective by which the specific actions of an insurance intermediary, as a professional in the field, will be assessed.

4. The content of the concept of professional care is (i) expertise, i.e., professionalism in the sense of knowing and being able to correctly use knowledge, and (ii) diligence, i.e., active action and conscientiousness. Professional care is always assessed based on objective criteria, i.e., in relation to the professional knowledge and abilities that can reasonably be expected from an insurance intermediary given the situation in which they find themselves. The exertion of professional care must also be assessed individually in each case, because the manner of acting with professional care always depends on the specific activity and its unique conditions. In assessing actions with professional care, one cannot rely on how certain actions appear retrospectively from the current perspective, but must always assess them in relation to the conditions existing at the time of the action in question.

3 See also Methodology - Assessment of Professional Care (ODBP) available at: https://www.cnb.cz/export/CZ/Kapitalovy_trh_podle_temat/get_dms_file.do?FileId=1717 and the decision of the Securities Commission KCP/13/2001 available at: https://www.cnb.cz/export/CZ/Kapitalovy_trh_podle_temat/Kolektivni_investovani/Povinnosti_a_odborna_pece.page?FileId=1924 2 This can be illustrated, for example, by the difference between a mandate contract under § 724 et seq. of the Civil Code, which states that the mandatory is obliged to act according to their abilities and knowledge (subjective approach) and a mandate contract under § 566 et seq. of the Commercial Code, which requires the mandatary to act with professional care, as it is assumed that this activity is performed professionally when handling a commercial matter (objective approach).

5. In accordance with laws relating to other areas of the financial market, e.g., Act No. 256/2004 Coll., on Business on the Capital Market, as amended subsequently3, or Act No. 189/2004 Coll., on Collective Investment, as amended subsequently4, the Czech National Bank considers the exertion of professional care to include, in particular, qualified, honest, responsible, and fair action in the best interests of clients. This definition of professional care is also in line with the broader concept of professional care established by Act No. 634/1992 Coll., on Consumer Protection, as amended subsequently (hereinafter referred to as "ZOS")6.

6. On the insurance market, insurance companies represented by contractual insurance intermediaries meet clients who are in different positions regarding their professional knowledge and professional equipment. Thus, on this market, there is information asymmetry both in relation to the offered products and in relation to the subjects present on this market, and one of the tasks of regulating the operation of intermediary activity in insurance is to balance this asymmetry. A tied insurance intermediary, an exclusive insurance agent, and an insurance agent represent one or more insurance companies and are also remunerated by the insurance companies. The fulfillment of the obligation to conduct their activity with professional care can thus be influenced by the interest in maximizing profit, i.e., concluding as many insurance contracts as possible, usually for the insurance company where the remuneration for intermediation is highest. The same applies to the professional care of a subordinate insurance intermediary, on whom the economic interests of the insurance intermediaries with whom they cooperate may be further transferred. According to § 8 para. 4 ZoPZ, an insurance broker is also remunerated by the insurance company, unless otherwise agreed. For these types of intermediaries, the exertion of professional care in the performance of intermediary activity and the closely related assessment of whether the interests of the consumer have been sufficiently considered and protected are of crucial importance.

Article 3 "Know Your Client"

1. According to § 21 para. 8 ZoPZ, an insurance intermediary is obliged to record the client's requirements and needs related to the insurance being concluded and the reasons on which the insurance intermediary bases its recommendations for the selection of the given insurance product before concluding the insurance contract. The data that an insurance intermediary should obtain from the client depends on the complexity of the specific product7. The recommendation for the selection of an insurance product is then the obligation of the insurance intermediary to make primarily based on information provided by the client and depending on the nature of the insurance being concluded.

2. The information from the client concerning their requirements and needs in connection with insurance should be obtained by the insurance intermediary in sufficient scope to allow an assessment of what risks the client is undertaking, what their requirements and needs related to insurance are, and what their risk profile is. The insurance intermediary should also always consider the client's knowledge and experience regarding insurance products that are suitable for the client given their needs. Based on the acquisition and evaluation of the client's requirements and needs and considering their knowledge, experience, and financial situation, the insurance intermediary should recommend the most suitable product and state the reasons that led to this selection.

3. In fulfilling obligations within the meaning of the previous paragraph, the insurance intermediary proceeds proportionally to the nature and complexity of the given product (see also paragraph 1). This means that in the case of simple insurance products (e.g., travel insurance, so-called compulsory third-party liability insurance, etc.), the requirement to obtain information about the client's needs, evaluate them, record the reasons for recommending a suitable product, and consider the client's knowledge, experience, and financial situation is milder than in the case of more complex insurance products, which, due to their lower structural transparency, require greater knowledge and experience from the client, or place greater demands on the provision of information and explanations by the insurance intermediary. The exertion of a high degree of professional care by the insurance intermediary and the consideration of the client's interests are crucial especially for structured insurance products that contain any investment component (e.g., investment life insurance or capital life insurance). For this type of insurance product, obtaining sufficient information about the client's requirements and needs, evaluating them, and considering the client's knowledge, experience, and especially financial situation, including its expected future development, is of fundamental importance given the complexity of such insurance products, their varying degrees of transparency, and their focus on a longer time horizon. Increased requirements are also placed on conducting analysis within the meaning of § 21 para. 7 ZoPZ (see Article 5) for the aforementioned products. For the reasons just mentioned, the degree of exertion of professional care by the insurance intermediary and the consideration of the client's interests within the meaning of § 21 para. 1 ZoPZ is directly proportional to the complexity of the structure of the given insurance product and the risks associated or potentially associated with such a product.

4. It is the obligation of the insurance intermediary, in accordance with § 21 para. 8 ZoPZ, to record the aforementioned process and data, i.e., to keep them in permanent form. This record is one of the basic tools of the Czech National Bank's supervision over the activities of insurance intermediaries and also an important document by which the intermediary can prove in the event of a dispute that they acted with professional care towards the client. It is therefore essential that it be prepared precisely and with quality by the insurance intermediary. The record must show the decision-making process of the insurance intermediary from obtaining information from the client, through the evaluation of this information, recommending a suitable insurance product, to recording the reasons that led to such a recommendation. This applies to every advice given to the client in this context regarding the given insurance product.8 If the client refuses to disclose their requirements and needs, this fact must be clearly stated in the record, and the client must be warned that the missing information necessarily influenced the insurance intermediary's recommendation for the selection of the insurance product. If the insurance intermediary conducts an analysis within the meaning of § 21 para. 7 ZoPZ (see below), this analysis will be part of the record.

5. § 21 para. 9 ZoPZ specifies the form of the record, namely either in writing or on a data carrier accessible to the client. The insurance intermediary must provide information to the client clearly and precisely, in a form understandable to the client, and in the official language of the member state in which the insurance is being concluded, or in another agreed language. The record within the meaning of § 21 para. 8 ZoPZ, if prepared in writing, should be signed by the client and the insurance intermediary with the date of signature indicated. The client should receive a copy of the record, or a copy thereof. If the record is contained on a data carrier, it should be appropriately authorized by the client.

6. From the above perspective of clarity, precision, and understandability, frequently used form records of meetings with clients, on which various variants of answers (client's requirements and needs) are pre-printed and the client selects one of these variants, will be assessed in practice during supervision in insurance. The information provided should correspond to the individual conditions of each client and business case, and the form record should allow the client to express their own requirements and needs. Without prejudice to the general possibility of using pre-printed forms, in the case of reasons on which the insurance intermediary bases its recommendations for the selection of the given insurance product, it is not suitable from the perspective of the requirement to conduct intermediary activity with professional care to use only pre-printed variants in the form. Equally unsuitable is the use of indefinite formulations (e.g., "flexibility," "appropriate yield," "provision for future needs," etc.), which, due to their general character, cannot be a reason for the selection of a specific product.

Article 4 Information Provided to Clients

1. According to § 21 para. 6 ZoPZ, the insurance intermediary is obliged to inform the client, considering the nature of the intermediated insurance contract, that a) they provide insurance intermediation in a manner in which they are obliged to provide a proper analysis according to paragraph 7, b) they have a contractual obligation to conduct the intermediation of the given insurance exclusively for one insurance company or multiple insurance companies and, upon the client's request, inform them of such insurance companies, or c) they do not conduct intermediary activity either according to letter a) or letter b) and, upon the client's request, inform them of the insurance companies with which they are authorized to conclude insurance.

2. The purpose of the statutory regulation of the information obligation under § 21 para. 6 ZoPZ is to inform the client to such an extent that is sufficient for the client to make a qualified decision regarding the conclusion of an insurance contract. The client should therefore be informed that it is one or more insurance companies that the insurance intermediary represents and whether they provide the client with an analysis according to § 21 para. 7 ZoPZ or not. The client must not get the impression that the analysis presented to the client covers all insurance products suitable from the perspective of the risks the client wishes to insure. According to § 21 para. 1 ZoPZ, the insurance intermediary is also obliged to inform the client of their method of remuneration upon request. Furthermore, it follows from the provision of § 21 para. 1 ZoPZ that the insurance intermediary must not provide incomplete, inaccurate, and unclear data and must not conceal data regarding the nature and characteristics of the services provided. The absence of even one of these elements of professional care is action contrary to this obligation and in the area of consumer protection constitutes an unfair commercial practice or misleading action.9

3. Regarding the certificate of entry in the register and the method of remuneration, it is stated that this information is provided only upon the client's request, even though it concerns very significant information. The Czech National Bank considers it desirable that in cases where information is provided exclusively upon the client's request, the client be informed that they have the right to request such information and what information it concerns.10 Given that this information is also significant for the implementation of the business decision to conclude an insurance contract through the insurance intermediary, it is an essential part of the requirement to conduct intermediary activity with professional care from the perspective of consumer protection.

Article 5 Conducting Analysis According to § 21 para. 7 ZoPZ

1. The primary obligation under § 21 para. 6 ZoPZ is to inform the client of the manner in which the insurance intermediary proceeds in intermediation and whether they are an exclusive or non-exclusive intermediary (see Article 4.). Given that such information is crucial for the client, due attention should be paid to the manner and form of its provision and the recording of this provision.

2. If the insurance intermediary informs the customer that they advise based on an impartial analysis, they are obliged to provide this advice based on an analysis of a sufficiently large number of insurance contracts offered on the market, allowing them to make recommendations in accordance with professional criteria regarding which insurance contract corresponds to the customer's needs.11 Similarly, § 21 para. 7 ZoPZ establishes such an obligation, although it does not explicitly state that the insurance intermediary first informs the client and then proceeds in the manner mentioned above. The client should therefore always have access to information on whether they are provided with an analysis of the relevant market or if the product is intermediated in another manner. In light of the requirement of professional care, the Czech National Bank expects that information about the analysis conducted according to § 21 para. 7 ZoPZ will be formulated such that the insurance intermediary properly informs the client, in particular, about the scope and manner in which the analysis was conducted and what results were reached. The mere comparison of insurance products should then, in light of the requirement to act with professional care, be conducted on all essential parameters of the products, including any fees.

3. The fact that the insurance intermediary conducted an analysis and to what extent will also be part of the record according to § 21 para. 8 ZoPZ.

Article 6 Multi-tier Networks of Insurance Intermediaries

1. Unlike the previous regulation, ZoPZ12 assumes that intermediary activity of insurance agents, exclusive insurance agents, and insurance brokers is conducted only by employees of the insurance intermediary, their subordinate insurance intermediaries, and their employees, and that there is no transfer of full powers, and thus no uncontrollable conclusion of insurance contracts, and that the last possible link in the intermediary structure are employees of the subordinate insurance intermediary.

2. In this multi-tier structure, in accordance with the statutory requirement to conduct intermediary activity with professional care, the insurance intermediary should ensure adequate internal control. This control cannot, however, be limited only to the control of concluded insurance contracts regarding the correctness of formal requirements, but it must include control over the exertion of professional care in the intermediary activity by subordinate insurance intermediaries, respectively employees, control over the intermediary network as such (e.g., reliability and professional competence of persons), and its proper functioning. Insurance intermediaries, when concluding contracts with subordinate insurance intermediaries (or with their employees) and setting up their management and control systems, should take the aforementioned into account, especially given the fact that they are objectively liable for damage caused by their subordinate insurance intermediaries.

Vice Governor Prof. PhDr. Ing. Vladimír Tomšík, Ph.D. s. p. Section for Supervision of the Financial Market Responsible Employee: Mgr. Čížek, tel. 224 412 526