Official Position of HANFA on Insurance Distribution and Remuneration in Connection with Insurance Distribution

1 The Croatian Financial Services Supervisory Agency (hereinafter: HANFA) received on April 29, 2022, a query regarding the interpretation of provisions of the Insurance Act (Official Gazette nos. 30/15, 112/18, 63/20, 133/20, hereinafter: ZOS), specifically Article 402(1)(7) and Article 432(1)(4) and (5).
Given that the aforementioned query refers to the necessity of encouraging, organizing, and supervising measures for the effective functioning of financial markets in terms of harmonizing the actions of supervisory authorities under Article 2(2) of the Act on the Croatian Financial Services Supervisory Agency (Official Gazette nos. 140/05 and 12/12), the following is provided.
Based on Article 15(4) of the Act on the Croatian Financial Services Supervisory Agency, HANFA adopted at its Management Board meeting held on June 2, 2022 the OFFICIAL POSITION
I. Point (7) of Article 402(1) of the ZOS defines as a category of insurance intermediaries, credit institutions that, in the name and on behalf of one or more insurance undertakings or on the instruction of a client, carry out insurance distribution activities and are established in accordance with the law governing the establishment of credit institutions. This confirms that a credit institution may contract to carry out insurance distribution activities with one or more insurance undertakings for the distribution of several types of insurance.
The general information provided by the insurance intermediary promptly before concluding an insurance contract includes, among other things, whether the intermediary acts on the instruction of a client or in the name and on behalf of one or more insurance undertakings (point 6, Article 431(1) of the ZOS). Furthermore, the insurance intermediary is obliged promptly before concluding an insurance contract to provide clients with information on whether it is under a contractual obligation to carry out insurance distribution activities exclusively with one or more insurance undertakings, in which case it must provide the names of those insurance undertakings (point 3b, Article 432(1) of the ZOS). This indicates that the intermediary must promptly before concluding an insurance contract inform the client whether it acts on the instruction of a client or in the name and on behalf of one or more insurance undertakings, as well as information on which specific insurance undertaking or insurance undertakings are involved.
II. Points (4) and (5) of Article 432(1) of the ZOS stipulate that the insurance intermediary is obliged promptly before concluding an insurance contract to provide clients with information on the nature of received remuneration in connection with the insurance contract, and whether it operates in relation to the insurance contract on a fee basis (i.e., remuneration paid directly by the client), on a commission of any kind (meaning remuneration is included in the insurance premium), on any other types of remuneration, including economic benefits of any kind offered or provided in respect of the insurance contract, or on a combination of any of the aforementioned types of remuneration. This indicates that a combination of remuneration consisting of both commission and other economic benefits is permitted, regarding which the client must be informed before concluding an insurance contract. In such cases, it is necessary to avoid formulations that could lead the client to incorrect conclusions or imply lower (total) costs for the client than actual ones; specifically, if such remuneration is included in the insurance premium paid by the client, this circumstance must be clearly and unambiguously stated in the general information provided by the insurance intermediary.
Regarding remuneration, attention is drawn to the fact that insurance distribution commissions or any other remuneration must be determined in writing, and their calculation and amount may not be subsequently changed for concluded contracts (paragraph 14, Article 435 of the ZOS).
In accordance with Article 430 of the ZOS, in insurance distribution, distributors must always act honestly, fairly, and professionally in accordance with the best interests of their clients, and they must not receive or pay remuneration nor assess the performance of their employees in a manner contrary to the best interests of clients. Insurance distributors, in particular, must not conclude agreements regarding remuneration, sales targets, or other matters that could encourage them or their employees to recommend a specific insurance product to a client that does not meet the client's needs, taking into account Article 433(2) of the ZOS, according to which every offered insurance contract must align with the client's requirements and needs.
III. In the case of insurance investment product distribution, in addition to the principles of Article 430 of the ZOS, an insurance intermediary conducting such distribution is obliged to implement and maintain effective organizational and administrative measures to prevent conflicts of interest within the meaning of Article 436.e of the ZOS, so as not to harm client interests, which must be proportional to the activities performed, insurance products sold, and type of distributor (Article 436.d of the ZOS).
In accordance with paragraphs 1 and 2 of Article 436.e of the ZOS, insurance intermediaries are obliged during all insurance distribution activities to take all appropriate measures to identify and eliminate conflicts of interest between themselves, including their responsible persons and employees or any person directly or indirectly connected with them through control, and their clients, or between two clients. Only if the organizational or administrative measures taken by insurance intermediaries to resolve conflicts of interest in accordance with Article 436.d of the ZOS are insufficient to reasonably ensure the prevention of risks to client interests, insurance intermediaries or insurance undertakings are obliged to clearly and promptly inform the client about the nature or sources of conflicts of interest before concluding an insurance contract. In addition to obligations under Articles 380 and 381, Article 432(1)(4) and (5), Article 432(4), and Article 435(3) of the ZOS, it is considered that insurance intermediaries fulfill their obligations under Article 430(1), Article 436.d, or Article 436.e of the ZOS if they pay or receive fees or commissions, or provide or receive any non-monetary benefit in connection with the distribution of insurance investment products or additional services, provided that such payment or benefit is received from any party other than the client or a person acting on behalf of the client, exclusively when the payment or benefit does not impair the quality of the service provided to the client and does not hinder the insurance intermediary or insurance undertaking in fulfilling their duty to act honestly, fairly, and professionally in accordance with the best interests of their clients (paragraph 4, Article 436.f of the ZOS). Commission Delegated Regulation (EU) 2017/2359 of September 21, 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council regarding the information obligation and rules of conduct applicable to insurance investment product distribution (hereinafter: Delegated Regulation 2017/2359) stipulates that an incentive is considered a fee, commission, or non-monetary benefit provided by the intermediary or undertaking in connection with insurance investment product distribution to any party other than the consumer or a person acting on their behalf, and an incentive system is defined as a set of rules governing incentive payments, including payment conditions. Article 8 of Delegated Regulation 2017/2359 stipulates that an incentive or incentive system is considered to negatively affect the quality of service provided to a consumer if its nature and extent constitute a motivation for carrying out insurance distribution activities in a manner inconsistent with the obligation to act honestly, fairly, and professionally in accordance with the best interests of consumers. For the purpose of assessing whether an incentive or incentive system negatively affects service quality,
insurance intermediaries are required to conduct a comprehensive analysis taking into account all relevant factors that may increase or decrease the risk of negative impact on service quality, and all organizational measures taken by insurance intermediaries conducting insurance distribution activities to prevent negative impact risks. In doing so, the criteria specified in paragraph 2 of Article 8 of Delegated Regulation 2017/2359 are specifically considered. In accordance with Article 4 of Delegated Regulation 2017/2359, the insurance intermediary establishes, implements, and maintains effective conflict of interest management policies established in writing, appropriate to the size, organization, type, scope, and complexity of operations. In accordance with paragraph 1 of Article 3 of Delegated Regulation 2017/2359, for the purpose of identifying types of conflicts of interest occurring during insurance investment product distribution activities, which include risks to consumer interests, insurance intermediaries assess whether they, relevant persons, or any person directly or indirectly connected with them through control have an interest in the outcome of insurance distribution activities that meets the criterion of misalignment with consumer or potential consumer interests, and the criterion of ability to influence the outcome of insurance distribution activities to the detriment of consumers.
IV. In the parallel distribution of different types of insurance products, the insurance intermediary is obliged to consider all conflicts of interest that may arise for it from remuneration structures, for example, in relation to the suitability of individual products for clients and the amount and structure of remuneration (or potential remuneration, in the case of a right to an annual fee equal to a share of positive technical results) that the intermediary earns or may earn. Additional potential conflicts of interest may also arise here, such as the distribution of insurance investment products offering investment options related to investment funds from a group to which the insurance intermediary belongs, regarding which the insurance intermediary is specifically obliged to pay attention. As previously stated, insurance distributors must not conclude agreements regarding remuneration, sales targets, or other matters that could encourage them or their employees to recommend a specific insurance product to a client that does not meet the client's needs. In such cases, insurance intermediaries are obliged to establish internal mechanisms through which they will:

• continuously manage such conflicts of interest and ensure they are regularly monitored, as well that remuneration and incentive structures are transparently presented to consumers;
• conduct a comprehensive analysis to assess whether an incentive or incentive system negatively affects service quality provided to consumers, and implement organizational measures to prevent negative impact risks;
• ensure that all necessary information for understanding the characteristics, advantages, and disadvantages of insurance products is clearly and simply presented to consumers before concluding an insurance contract, so that they may make informed decisions.
  V. This official position is published on the HANFA website.
  CLASS: 008-02/21-03/01
  REFERENCE NO.: 326-01-70-72-22-7
  Zagreb, June 2, 2022.
  CHAIRMAN OF THE MANAGEMENT BOARD dr. sc. Ante Žigman