The German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft – GDV) responded by developing a code of conduct for selling insurance products which insurance companies can adopt.

Effective consumer protection also involves avoiding unnecessary costs, as the costs an insurance company incurs if its reputation is damaged are also passed on to policyholders. In order to protect consumers, it is therefore essential that insurance companies establish clear rules for sales incentives and also comply with them.

However, the question remains whether all insurance companies have in fact seriously addressed the issue of sales incentives and whether companies could be underestimating the problem under their own roof. This article is therefore intended to increase awareness of this issue.

The role of insurance supervision

Why has BaFin not yet imposed any binding requirements for intermediaries or insurance companies although consumer protection is at stake?

For intermediaries, the answer is simple: BaFin does not supervise any insurance agents or brokers. Pursuant to the German Industrial Code (Gewerbeordnung – GewO) and to German state law, supervision of intermediaries falls to the chambers of commerce and industry. It is only in the case of tied intermediaries (those employed exclusively by one company) that BaFin is able to exert an indirect influence through supervision of the intermediaries' insurance companies. However, this is not comparable with supervision in the traditional sense.

As there are no express legal provisions governing how incentives are structured, BaFin does not stipulate any requirements for insurance companies either. The only practices which are forbidden are those which have criminal law implications e.g., bribery. Each insurance company is therefore responsible for defining its own framework.

Public perception plays a decisive role in determining appropriate practices for granting incentives. This perception can shift, however. Travel incentives, which the press portrayed in a decidedly negative light some two years ago, may not have caused such a stir 30 years ago. By the same token, it cannot be predicted how the public will view incentives several years down the road which are common practice today. Those demanding binding supervisory regulations must remember that moral issues of this nature cannot be considered in any public law regulations.

Recommendations by BaFin

In order to ensure the protection of policyholder interests, BaFin has developed a set of recommendations which insurance companies should follow when managing sales operations (see info box). Depending on an insurance company's business model – in particular regarding its sales channel – and the company's size, these recommendations can be implemented in different ways, and further measures can also be taken. BaFin does not intend this to be an exhaustive list of recommendations. What is important is that the management board takes material decisions on sales-related measures and oversees compliance with them.

Overview:

• Clarify the responsibilities of the management board
• Perform a risk inventory
• Establish internal guidelines
• Prepare positive or negative lists of incentives
• Define responsibilities
• Describe events
• Separate event organisation from accounting
• Introduce prior checks
• Review agreements with external providers
• Provide for sanctions
• Involve sales
• Monitor measures
• Consider alternatives

Management board and risk inventory

Each management board member must be aware that sales operations carry reputational risks which can cause significant damage should they materialise. The management board should be aware that it can be the cause of negative developments. When it comes to changes to the conditions at a company or the corporate culture, the management board plays a central role.

When an insurance company is addressing the topic of incentives, it should begin by establishing which (reputational) risks relate to the company's sales operations. The company should perform an inventory to capture all types of sales, i.e., not only intermediaries in the industrial sense of the term, but also employees in insurance field service. The company's management-level employees and board members must also be taken into account. Special attention should be paid to external service providers and external sales companies. Particular care should be taken to ensure that external companies comply with the insurance company's internal guidelines.

Once the sales-related risks have been identified, the company should draw up guidelines to define which incentives are permitted, which are prohibited and where potential risks lie. The company should also determine whether it intends to use lists which may specify or exclude certain types of incentives and event locations (positive and negative lists).

Events and agreements with external providers

When an event is planned, its organiser and the manager authorising it should be defined in advance. The topics, participants, start and conclusion of the event should be specified in writing. Moreover, it makes sense to separate event organisation from accounting. No separation will be deemed to have occurred where a superior instructs his or her secretariat or subordinate organisational unit to effect payment. If necessary, events which have a budget exceeding a certain amount or which involve a certain number of people should be approved by a third and independent party within the company.

If an insurance company engages external sales companies or service providers to organise events (competitions, for instance), it should enter into separate contractual agreements to prevent funds from being misappropriated. This should be subsequently reviewed by Internal Audit, for instance. The contractual agreements should provide for sanctions (including internal sanctions) in case the contractual partner fails to comply with them.

Insurance companies should also review whether it is necessary or legally possible to amend existing contractual agreements to align them with new guidelines and model agreements. The review should also cover the employment agreements of the management board members and any management-level employees. If applicable, the relevant employees may be rewarded for compliance in the form of variable remuneration components.

Involvement of sales

Risk inventories, guidelines and agreements are not effective unless sales "plays along". This is why it is important to communicate the new corporate culture to sales. The new guidelines should be explained to field service employees in regular training sessions to highlight this issue and its importance for the corporate culture. Employees need to understand that if the insurance company's reputation suffers, this also negatively impacts the intermediary's business, and therefore any risk must be avoided.

The company should appoint internal contact persons for sales who can be easily reached in-house should any issues arise. Sales employees who have direct customer contact must be able to address any problems internally – all the way up to the management board. If this is not the case, certain issues may not be discussed, thus rendering them impossible to address.

Monitoring and alternatives

In order for the aforementioned measures to be effective, compliance with them must be monitored. Such monitoring activities may be carried out by various units of the company, depending on its size and organisational structure. Risk management, Internal Audit and compliance officers may be considered, for instance.

Insurance companies should also assess whether there are alternatives to incentives. In certain lines of business, it may be preferable to measure success in sales by how long-term the policyholders will be tied to the contract. Although high acquisition commissions and incentives may guarantee success in the short term, they are also very costly. The objective should be to allow insurance intermediaries to participate in the success or failure of the insurance contracts they have brokered.