REGULATION No. 66 of 16.05.2019 on Additional Requirements in Connection with the Classification of Investment Insurance Products as Non-Complex within the Meaning of Article 342(5) of the Insurance Code

Pub. - State Gazette, No. 42 of 28.05.2019 Adopted by Decision No. 689-N of 16.05.2019 of the Commission for Financial Supervision

Chapter One

GENERAL PROVISIONS

Art. 1. (1) This Regulation establishes the additional requirements in connection with the classification of investment insurance products as non-complex within the meaning of Article 342(5) of the Insurance Code.

(2) This Regulation ensures compliance with the Guidelines on the distribution of insurance products including investment-linked insurance products with a structure that makes it difficult for the client to understand the existing risks (EIOPA-17/651/2017), issued by the European Insurance and Occupational Pensions Authority.

Chapter Two

REQUIREMENTS APPLICABLE TO CONTRACTS WITHIN THE MEANING OF ARTICLE 342(5), POINT 1, LETTER 'A' OF THE INSURANCE CODE

Section I

Requirements for Contracts for Non-Complex Investment Insurance Products within the Meaning of Article 342(5), Point 1, Letter 'a' of the Insurance Code

Art. 2. (1) An investment insurance product may be classified within the meaning of Article 342(5), Point 1, Letter 'a' of the Insurance Code as non-complex if it meets the following requirements:

1. The investment insurance product contract provides exposure solely to financial instruments considered non-complex under Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ, L 173/349 of 12 June 2014), hereinafter referred to as "Directive 2014/65/EU", as follows: a) financial instruments under Article 25(4)(a) of Directive 2014/65/EU; b) financial instruments meeting the criteria under Article 57 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of the said Directive (OJ, L 87/1 of 31 March 2017); c) instruments that have not been identified as complex under the Guidelines of the European Securities and Markets Authority on complex debt instruments and structured deposits (ESMA/2015/1787);

2. The contract does not include a structure that makes it difficult for the insurance service user to understand the existing risks.

(2) The insurer, or respectively the insurance intermediary, shall assess whether the contracts include a structure under paragraph 1, point 2, by taking into account the presence of the characteristics under Articles 3 - 6.

Section II

Contractual Characteristics Related to Changes in the Nature of the Contract and the Right to Surrender the Investment Insurance Product

Art. 3. The insurer, or respectively the insurance intermediary, shall define as a contract including a structure that makes it difficult for the insurance service user to understand the existing risks, a contract that contains any of the following characteristics:

1. It includes a clause, condition, or prerequisite that allows the insurer to substantially change the nature, risk profile, or payout profile of the investment insurance product;
2. There are no options for surrender or realization in another manner of the investment insurance product at a value that is available to the insurance service user or can be determined by them upon request based on rules that are clearly defined in the contract and disclosed to them;
3. There are direct or indirect costs and fees, as a result of which, although there are technically options for surrendering the investment insurance product, this could lead to unjustified harm to the insurance service user, as the costs are disproportionate to the insurer's costs in connection with the surrender.

Section III

Contractual Characteristics Related to the Determination of the Maturity Value, Surrender Value, or Death Benefit Amount

Art. 4. (1) The insurer, or respectively the insurance intermediary, shall assess the impact of the mechanisms that determine the maturity value, surrender value, or death benefit amount, and whether they make it difficult for the insurance service user to understand the existing risks, unless these mechanisms arise directly from national legislation specifically aimed at protecting consumer interests.

(2) As part of the assessment, the insurer, or respectively the insurance intermediary, shall define as a contract including a structure that makes it difficult for the insurance service user to understand the existing risks, a contract that contains any of the following characteristics:

1. The maturity value, surrender value, or death benefit amount depends on variables determined by the insurer, the impact of which would be difficult for the insurance service user to understand;

2. The maturity value, surrender value, or death benefit amount is based on different types of investment exposure or strategies, the combined impact of which would be difficult for the insurance service user to understand;

3. The maturity value, surrender value, or death benefit amount may vary frequently and/or significantly at different points in time during the contract term, either because certain pre-defined threshold conditions are met, or because certain time points are reached, except in cases of changes in the maturity value, surrender value, or death benefit amount due to the payment of voluntary bonuses;

4. There is a guaranteed maturity value, surrender value, or death benefit amount subject to conditions or time restrictions, the impact of which would be difficult for the insurance service user to understand, except in cases of changes in the maturity value, surrender value, or death benefit amount due to the payment of voluntary bonuses.

Section IV

Contractual Characteristics Related to Costs

Art. 5. (1) As part of the assessment of whether the contract includes a structure that makes it difficult for the insurance service user to understand the existing risks, the insurer, or respectively the insurance intermediary, shall assess whether the insurance service user would be hindered in understanding the costs, in particular the conditions under which the costs may change significantly during the contract term, including depending on the investment performance.

(2) When costs arise directly from national legislation specifically aimed at protecting consumer interests, they are not considered to include a structure that makes it difficult for the insurance service user to understand the existing risks.

Section V

Contractual Characteristics Related to the Beneficiary (Benefited Person) under the Life Insurance Contract

Art. 6. When the insurance contract allows the insurance service user to use a non-standard formulation to determine the person entitled to receive the benefits under the respective contract (beneficiary clause), which may lead to difficulties in determining the beneficiary and could create difficulties for the beneficiary in receiving death benefits upon the policyholder's death, the insurer, or respectively the insurance intermediary, shall define the contract as a contract including a structure that makes it difficult for the insurance service user to understand the existing risks.

Chapter Three

REQUIREMENTS APPLICABLE TO OTHER NON-COMPLEX INVESTMENTS THROUGH INSURANCE PRODUCTS UNDER ARTICLE 342(5), POINT 1, LETTER 'B' OF THE INSURANCE CODE

Art. 7. (1) An investment insurance product may be classified within the meaning of Article 342(5), Point 1, Letter 'b' of the Insurance Code as non-complex when the contract does not include a structure that makes it difficult for the insurance service user to understand the existing risks.

(2) Insurers, or respectively insurance intermediaries, shall perform an assessment of whether the contracts include a structure under paragraph 1, by applying the following to contractual characteristics related to:

1. the determination of the maturity value, surrender value, or death benefit amount, Article 4 shall apply;
2. costs, Article 5 shall apply;
3. the beneficiary under the insurance contract, Article 6 shall apply.

Chapter Four

ADMINISTRATIVE PENALTIES PROVISION

Art. 8. Persons who have committed a violation of this Regulation, as well as persons who have allowed such violations to be committed, shall be penalized under the conditions and in the manner set forth in Part Eight of the Insurance Code.

ADDITIONAL PROVISIONS

§ 1. For the purposes of this Regulation:

1. "Voluntary Bonuses" are bonuses under the insurance contract, the provision or non-provision and amount of which, according to the conditions of the insurance contract, depend on the insurer's discretion.

2. "Standard formulation of the beneficiary clause" is a formulation that determines the beneficiary unambiguously and in a manner that reveals a low risk of difficulty in determining them over time, such as the legal heirs of the insured person.

3. "Non-standard formulation of the beneficiary clause" exists: a) when the beneficiary is determined simultaneously by generic and individual criteria, which at the date of the insurance event (maturity) may not coincide (e.g., determining the beneficiary as spouse and simultaneously with their personal name) or may not encompass the same set of persons (e.g., determining the children of the insured and listing their names, without considering the possibility of their increase by the date of maturity); b) when the beneficiary is individualized but no substitute person is specified in case of their death at the date of the insurance event (maturity); c) in other cases, where the determination of beneficiaries could hinder their individualization at the date of the insurance event (maturity) and the absence of advice from the insurance service distributor prior to the conclusion of the contract could lead to undesirable consequences for the policyholder.

FINAL PROVISIONS

§ 2. This Regulation is issued on the basis of Article 342(13) of the Insurance Code and was adopted by Decision No. 689-N of 16 May 2019 of the Commission for Financial Supervision.

For the Chairman: Diana Yordanova