Guidelines on the Conduct of Insurance Business

October 2020.

Guidelines on the Conduct of Insurance Business (eng. Conduct of business)

CONTENTS
INTRODUCTION...........................................................................................................................................................3
LEGISLATION ......................................................................................................................................................4
DEFINITIONS ....................................................................................................................................................6
OBJECTIVE OF THESE GUIDELINES AND SCOPE.............................................................................7
PRODUCT DESIGN, OVERSIGHT AND MANAGEMENT SYSTEM................9
I. INSURANCE PRODUCT DESIGN.......................................................................................14

1. strategically important product development issues .............................................................................17
2. product complexity .............................................................................................................18
3. pricing of insurance products .........................................................................................19
4. target market .................................................................................................................................20
5. consumer interest and behaviour – product testing ..............................................................21
   II. INSURANCE PRODUCT APPROVAL...........................................................................22
   III. DISTRIBUTION...........................................................................................................................23
   III. a) DISTRIBUTION CHANNELS ....................................................................................................27
   III. b) OVERSIGHT OF DISTRIBUTION.........................................................................................29
6. Advice on purchasing insurance products ....................................................................................31
7. Insurance distributor remuneration..................................................................................................32
   IV. POST-SALE INSURANCE PRODUCT MANAGEMENT AND OVERSIGHT
   PRODUCT.........................................................................................................................................33
   Management and oversight of insurance investment products...................................................34
   V. CONSUMER AND THIRD-PARTY REQUESTS .........................................................................35
   VI. COMPLAINTS AND OBJECTIONS.........................................................................................................37
   VII. PERSONAL DATA PROTECTION...........................................................................................38

Guidelines on the Conduct of Insurance Business (eng. Conduct of business) INTRODUCTION The Croatian Financial Services Supervisory Agency (hereinafter: HANFA), pursuant to Article 15(4) of the Act on the Croatian Financial Services Supervisory Agency (Official Gazette, No. 140/05 and 12/12) and Article 204(10) of the Insurance Act (Official Gazette, No. 30/15, 112/18 and 63/20), adopted these guidelines at a meeting of the Board of Directors held on 21 October 2020. These guidelines elaborate in detail on the rules concerning the design and distribution of insurance products, including oversight of these processes, with a view to reducing the risk of inadequate approaches in these processes and inconsistencies in regulatory application. The guidelines further elaborate the framework for identifying drivers of conduct risk in insurance business throughout the product lifecycle, covering the product oversight and management system (business model and governance), design of insurance products (manufacturing), distribution of insurance products (delivery) and post-sale product management until all obligations under the insurance contract cease. The guidelines also support reducing risks from inadequate approaches and regulatory inconsistencies, with the aim of protecting and establishing a fair and honest relationship with consumers. These guidelines do not apply to ancillary insurance intermediaries under Article 400(3) of the Insurance Act, nor to large risk insurance, as prescribed by the Insurance Act.

LEGISLATION
The Insurance Act (Official Gazette, No. 30/15, 112/18, 63/20, hereinafter: the Act) contains implemented provisions of Directive (EU) 2016/97 on insurance distribution dated 20 January 2016, which governs the provision of distribution or sales services for insurance products and the rights and obligations of participants in that relationship.
Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council as regards product oversight and governance requirements for insurance undertakings and insurance distributors (hereinafter: POG Regulation), which establishes rules on the maintenance, application and review of measures for overseeing insurance products and managing them, as well as for major modifications to existing insurance products before they are placed on the market or distributed to consumers (the “product approval process”), and rules on measures for distributing those insurance products. It applies to insurance undertakings and insurance intermediaries that are manufacturers of insurance products sold to consumers, as well as to insurance distributors providing advice on insurance products they do not manufacture or recommending them. Regulation (EU) No 1286/2014 of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs), which supplements distribution measures, establishes uniform rules on the form and content of the key information document prepared by PRIIP issuers and on delivering the key information document to retail investors, thereby enabling retail investors to understand and compare the key features and risks of PRIIPs. Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 supplementing Regulation (EU) No 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products (PRIIPs) establishes regulatory technical standards concerning the presentation, content, review and audit of key information documents, as well as conditions for fulfilling delivery requirements, providing the content and presentation of the key information document. Commission Delegated Regulation (EU) 2016/1904 of 14 July 2016 supplementing Regulation (EU) No 1286/2014 of the European Parliament and of the Council as regards product intervention powers takes into account Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs), particularly Articles 16(8) and 17(7), which establish certain aspects of the intervention powers of competent authorities and, in exceptional cases, the European Insurance and Occupational Pensions Authority (EIOPA), regarding criteria and factors considered when determining significant investor detriment or threats to the orderly functioning and integrity of financial markets, stability of part or all of the financial system in at least one Member State or in the Union, and criteria and factors taken into account by competent authorities for product intervention powers (Article 17(2) of Regulation (EU) No 1286/2014). Commission Implementing Regulation (EU) 2017/1469 of 11 August 2017 establishing a
standardised format for the insurance product information document, taking into account Article 20(9) of Directive (EU) 2016/97 on insurance distribution, prescribes implementing technical standards regarding the standardised form of the insurance product information document, and the European Insurance and Occupational Pensions Authority (EIOPA) published on 11 December 2017 a template for the insurance product information document (IPID) that can be edited. Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council as regards information obligations and rules of conduct applicable to the distribution of insurance-based investment products. Regulation on the competence and appropriateness of insurance and reinsurance distributors and registration in the register (Official Gazette, No. 16/2019) which prescribes: the method of acquisition, verification and assessment or proof of knowledge and competence or continuous education of insurance intermediaries and ancillary insurance intermediaries, the level of competence and continuous education of employees of insurance undertakings and reinsurance undertakings directly involved in the distribution of insurance or reinsurance, and for all other persons directly involved in the distribution of insurance or reinsurance, (the function for monitoring and controlling insurance distribution and members of the management boards of these undertakings who within the board are responsible for the distribution of insurance and reinsurance products), conditions for appropriateness or good reputation and integrity of distributors, and data registration in the register maintained by HANFA in accordance with Articles 410, 411 and 412 of the Act, containing data on insurance intermediaries and ancillary insurance intermediaries authorised to carry out insurance distribution or reinsurance distribution within the Republic of Croatia.

DEFINITIONS
Undertaking means an insurance undertaking within the meaning of the provisions of the Act Consumer has the meaning of party under the Act Distribution channel is the method of offering, selling or recommending insurance products and/or services Distribution model is determined by the Undertaking for each insurance product, which may be distribution with advice, distribution without advice, direct distribution or through intermediaries and/or ancillary intermediaries Insurance product is an insurance contract Manufacturer means an insurance undertaking and an insurance intermediary that manufacture insurance products for sale to consumers Target market denotes consumers or a group of consumers to whom the insurance product is intended Distribution strategy means a strategy governing the distribution process of insurance products and relationships between participants in that process

OBJECTIVE OF THESE GUIDELINES AND SCOPE
Given that within the management system, the product oversight and management system plays a key role in consumer protection, to ensure that insurance products meet target market needs and prevent abuse in the distribution of insurance products, it is of exceptional importance to ensure a consistent and convergent approach to the design, approval and management of insurance products and their distribution for the prevention, control and elimination of risks present in these processes. These guidelines support the process of design and approval, distribution and management of insurance products for the Undertaking and intermediaries or distributors in order to:

• manage business with the care of a skilled professional,
• create best practice,
• ensure uniform and transparent treatment,
• eliminate and reduce conduct risk in insurance business, and
• maintain a fair and honest relationship with consumers.
  With the aim of promoting fair and honest treatment of consumers, these guidelines apply to all distributors to ensure the application of an equal level of protection regardless of the distribution channel through which consumers purchase insurance products.

The Undertaking is responsible for fair treatment of consumers throughout the entire lifecycle of the insurance product, regardless of the distribution model and channel used.
The Undertaking is obliged to monitor, oversee and assess the insurance product throughout the entire “insurance product lifecycle”, which begins with design and approval, continues through promotion, oversight, distribution, conclusion of the insurance contract, collection of insurance premiums, communication and consumer information, resolution of requests, complaints and objections, until all obligations under the concluded insurance contract are fulfilled. Distributors play an important role in insurance distribution, and their interaction with consumers and the Undertaking gives them a key role, so their behaviour in performing services in which they are involved is of decisive importance for building and justifying public trust in the insurance sector. When these guidelines apply to the Undertaking as a manufacturer of insurance products, they are correspondingly applied to an intermediary considered a manufacturer of insurance products. An insurance intermediary is considered an insurance product manufacturer if, based on a comprehensive analysis of its business on an individual basis, it is clear that it independently decides on the key characteristics and main elements of the insurance product, including coverage, price, costs, risks, target market or rights in the area of compensation and guarantees. Services involving exclusively the adaptation of existing insurance products, including cases where an intermediary may choose different product variants, different contractual provisions or options, or may negotiate a discount on premiums or fees with the consumer, should not be considered manufacturing because in such cases the main decisions on product form and development are made by the Undertaking, not the intermediary (POG Regulation).

PRODUCT DESIGN, OVERSIGHT AND MANAGEMENT SYSTEM HANFA expects the Undertaking to establish a product oversight and management system covering appropriate measures and procedures directed at design, development and design, monitoring, oversight and distribution of insurance products, which should be proportional to the level of complexity and risks relating to insurance products and the type, scope and complexity of the Undertaking's business with a view to ensuring that the Undertaking manages its business with the care of a skilled professional. HANFA expects professional treatment of consumers by the Undertaking and distributors, both towards each other, which includes, in addition to compliance with statutory and subordinate regulations, ethical behaviour and good faith conduct. HANFA expects that any potential or actual conflict of interest is avoided or properly managed so as not to affect fair treatment of consumers. The Undertaking establishes its product oversight and management system in a written document (product oversight and management policy), which is available to relevant employees of the Undertaking. It is not sufficient for the Undertaking to transfer principles and rules from the POG Regulation into policies; they must contain detailed descriptions of processes and activities adapted to the Undertaking's internal product oversight and management processes, with clear allocation of duties, defined deadlines and an internal control system. All relevant activities undertaken by the Undertaking regarding the product oversight and management system should be appropriately documented, recorded for internal control purposes and made available for supervisory needs. The product oversight and management system should appropriately take into account the objectives, interests and characteristics of consumers or target markets and ensure preconditions for proper management of conflicts of interest with a view to the sound business conduct of the Undertaking. Conflict of Interest Conflict of interest is any situation in which the Undertaking, intermediary or distributor has an actual or potential interest (which may be material or not), which may affect the professional and fair fulfilment of obligations towards consumers, or may lead to a conflict between its duties to another party due to its own interest or obligations towards third parties. For example, when selling products, the best interests of consumers should be considered, and this interest must not be subordinated to the interest in selling products that carry the highest commission. Namely, it is unacceptable for insurance products to be sold in a way that does not suit the consumer (so-called “mis-selling”) or for distributors to be primarily driven by reward motives or commission achievement, rather than the best interests of consumers, given that insurance products should align with the requirements and needs of consumers belonging to the target market. The Undertaking and
distributors are obliged to ensure that sales practices do not mislead consumers regarding the suitability of insurance products in relation to consumer requirements and capabilities, or regarding the content of insurance products. Furthermore, the Undertaking and distributors must ensure that consumers receive all prescribed pre-contractual information, that there is no deliberate omission of key data disclosure, misleading advice, or the emergence of any form of conduct risk and unethical behaviour, such as conflict of interest.

Conflicts of interest may arise between the Undertaking/distributor and consumers, as well as between the Undertaking and distributors.
Conflicts of interest may arise due to:

• set performance targets or performance management criteria1
• inadequate advice provided by the Undertaking or distributor2
• benefits offered to the Undertaking or distributor or any person acting on its behalf, for certain conduct or concession
• inconsistent implementation of a fair remuneration strategy.
  The above may encourage behaviour resulting