As part of the implementation process, the legislature also intends to regulate two new subject areas that are not covered by the European Directive: a ban on special remuneration and on the sharing of commissions and regulations for insurance consultants.

What consequences will the new regulations have for BaFin's supervision of insurance undertakings? The present article answers this question with reference to specific examples.

Product development processes

In future, insurers will have to describe the product development process, or "product approval process" (Produktfreigabeverfahren) as it is referred to in section 23 of the new VAG, to BaFin in a transparent manner. The regulations for the product approval process will apply to all new products that undertakings design and distribute after the law comes into force. Retroactive application is not provided for.

What is meant by product approval process? This is based on Article 25 of the Insurance Distribution Directive which specifies "oversight and governance requirements". The product approval process obliges the insurer to have a structured procedure which allows, for example, for the identification and assessment of risks to particular target markets, i.e. to customers as well. This means there must company-specific requirements for the system of governance which can be assessed by BaFin. These requirements are accompanied by additional civil law obligations on the insurance undertakings towards their customers. This includes, for example, disclosure and information obligations from the VVG and the German Regulation on Information Obligations for Insurance Contracts (VVG-Informationspflichtenverordnung – VVG-InfoV).

Delegated acts

It is not yet clear how exactly the product approval process will be fleshed out. This due to the simple reason that the oversight and governance requirements are amongst the provisions of the Directive for which the European Commission will issue delegated acts later this year. These will provide details on the provisions and supplement them. Unfortunately, any predictions about the content of the regulations would not be reliable at this point in time. This is evident from a cursory glance through the 837-page-long report by the European Insurance and Occupational Pensions Authority (EIOPA) to the Commission regarding the delegated acts.

Despite areas of unpredictability in the awaited regulations, it is possible to say that German insurers will at least in part be able to build upon existing internal processes when implementing the statutory requirements of the product approval process. They already have structured product development processes that they will "merely" have to document in a certain way in future in order to demonstrate them to BaFin. This will certainly not be the only task at hand but part of the work has already been done.

Direct distribution

Another new development is that BaFin will also assess direct distribution by insurers. In this context, the fitness and propriety of the employees working in distribution are of particular importance. Here BaFin will draw on processes that have already proved effective in assessing the fitness and propriety of tied insurance intermediaries – something which is currently still regulated by section 34d (4) of the GeWO. This means that initially insurers will – as is already the case for tied insurance intermediaries – have to assess for themselves whether the requirements under commercial law for working with employees have been met. BaFin will not conduct any checks in advance. Instead, BaFin can and will assess the relevant processes and also prohibit working with particular intermediaries in individual cases.

As regards BaFin's supervisory practices, the question of who exactly is to be considered an employee in distribution has not yet been conclusively answered. Article 2(1)(1) of the IDD provides a very broad definition of insurance distribution. It is therefore conceivable that the new regulations will also apply to employees in service centres if, for example, they can expand customers' insurance coverage upon request by phone.

Ban on special remuneration and the sharing of commissions

A regulation to ban the sharing of commissions has been a widely discussed topic in recent years. The legislative package contains such a provision in the planned section 48b of the VAG regarding the ban on special remuneration and the sharing of commissions, i.e. a ban on direct or indirect benefits in addition to the payment agreed on in the insurance contract. The ban targets insurers but – provided that the new section 34d (1) of the GewO is applied – it will also be applicable to insurance intermediaries. In cases where the ban is violated by insurance intermediaries, the chambers of industry and commerce and the trade offices (Gewerbeämter) of Germany's federal states will be responsible for the prosecution of administrative offences (new section 144 of the GewO).

A challenge faced by BaFin and the authorities of the federal states here is ensuring that the ban on special remuneration and the sharing of commissions is interpreted consistently. They will be consulting with each other on this matter in the coming months.

Substantive changes

The ban on special remuneration and the sharing of commissions also means there will be substantive changes to the law. The ban on the sharing of commissions is a particular type of ban on providing special remuneration. Only benefits which are deemed to be of little value are permitted, specifically those of €15 or less per insurance relationship and calendar year. It will also be possible to use intermediary commissions, for example, for continuously improving performance or reducing the premiums of mediated contracts.

A new aspect here, albeit one that has not received much public attention to date, is that that the ban explicitly constitutes a market conduct rule. This is referred to in the explanatory memorandum for the government’s draft legislation (page 44). What does that mean? In recent years, there have been disputes of competition law regarding the question of whether such a ban on sharing commissions can even constitute a market conduct rule – i.e. a regulation that protects market participants from unfair business practices. To phrase this differently: can, for example, one intermediary take legal action against another intermediary on the grounds of the latter violating such a ban on the sharing of commissions? In future it will be possible to answer this question in the affirmative.

In practice this means that, regardless of the sanctions available to BaFin and the chambers of industry and commerce, there will probably be a greater number of disputes between undertakings under competition law dealing with violations of the ban on the sharing of commissions. It can then be expected that the resulting civil law judgements will ensure that the ban soon gains acceptance and is complied with.

Both insurers and intermediaries would be well advised to familiarise themselves with the new regulations on special remuneration and the ban on the sharing of commissions in good time since the new section 48b of the VAG will come directly into force on the day after the law is promulgated. This can be expected to occur before the 2017 parliamentary summer recess. A transitional period is not provided for.

Insurance consultants

The regulation on insurance consultants¹ referred to above is found in the new version of section 34d of the GewO. The objective of this amendment is to strengthen independent fee-based consultancy in the field of insurance. Alongside insurance intermediaries who work on the basis of commission, there is also to be a commission-free alternative for consumers which in part will also be available to insurance brokers. Insurance consultants will require an authorisation from a chamber of industry and commerce and will not be supervised by BaFin.

BaFin will nonetheless assess whether insurance undertakings adhere to the "pass-through requirement" (section 48c of the new VAG). According to the laws currently applicable, a customer who uses the services of an insurance consultant must pay for the advice provided because the consultant cannot receive any remuneration from the insurer. Despite this, if the customer concludes an insurance contract after the consultation, they generally also pay for the insurance mediation costs which are calculated into their insurance premium.

The pass-through requirement is intended to counteract this disadvantage. The customer, i.e. the policyholder, will receive credit from the insurer as compensation for paying the insurance consultant – the amount of which is determined based on the insurer's costs for insurance mediation. This will result in a lower premium for the policyholder. The customer will thus receive a “net” product. It is even possible that the credit received by the policyholder will be greater than the costs paid for the consultant. This means that using a consultant might even result in a cost benefit for the customer.

The legislature intends for BaFin to monitor whether these pass-through processes are carried out in accordance with the law. At the moment, however, it is not possible to predict whether and to what extent fee-based consultancy will be able to gain traction in the market. According to the statistics of the Association of German Chambers of Industry and Commerce (Deutscher Industrie- und Handelskammertag – DIHK - only available in German), there were 227,978 insurance intermediaries in Germany in January but only 311 insurance consultants. Somewhat similarly to the envisaged future insurance consultants, these consultants already work on the basis of fees, albeit without any pass-through regulation.

Outlook

As described above, the delegated acts of the Commission will supplement and provide details on the existing European requirements for insurance distribution. Apart from the oversight and governance requirements (product development processes), this also affects the additional requirements relating to insurance-based investment products. The Commission has not yet decided whether its delegated acts will take the legal form of an EU Regulation or Directive. The latter option would still have to be transposed into German law.

BaFin will also be expressing its views on numerous amendments. It is planned to expand on the circular “Cooperation with Insurance Intermediaries, Risk Management in Distribution” of 2014 with the appropriate guidance notes and recommendations regarding supervisory practices. BaFin is also planning a public consultation process. This, however, can only be carried out once the new law, the delegated acts, and the planned new Regulation on Insurance Mediation (Versicherungsvermittlungs-Verordnung – VersVermV) have been adopted.

footnote