On 27 September 2019, the Czech National Bank (the “CNB”) published responses to the most frequent questions (“FAQ”)regarding Act No. 170/2018 Coll. on the Distribution of Insurance and Reinsurance, as amended (the “Act”), on its website. Responses are not a binding interpretation of a legal regulation; however, they provide practical guidance for the application of certain problematic provisions of the act. The published document summarises for example the conditions under which the Act will apply to operators of web insurance comparison programmes, obligation to obtain information from customers and provide recommendations and advice or the issue of the conflict of interest in insurance claims handling.
Insurance comparison programmes
The Act stipulates exemptions from its scope by directly listing which activities are not treated as mediation of insurance and therefore are not subject to the Act. These exemptions include the comparison of insurance, provided it does not include the possibility to procure insurance or arrange its change. The activities of web comparison programmes operators are therefore not included in the activities regulated by the Act, if the customer does not have the possibility to arrange insurance at the end of the comparison.
Internet comparison programme operators asked themselves whether their activities are regulated by the Act or not as numerous web portals include links to websites where customers may arrange insurance. In this context, the CNB specified that in a situation when a web portal provides, in addition to general comparison of product, a recommendation of a particular product arising from the needs of a customer, as he/she completed it on the portal, and concurrently provided with a direct or indirect possibility to arrange the specific insurance, such activity is treated as mediation of insurance.
According to the CNB, operators of web comparison programmes who, at the end of the comparison process, provide a link to a portal where it is possible to procure a particular product or operators who provide gathered information to insurers or insurance mediators to be able to contact a particular customer will have to newly adhere to the conditions of the Act. A helping distinguishing criterion is the fact whether the customer sees the arrangement of the insurance as one process.
Recommendation vs. advice
A frequently discussed topic in insurance practice are also new obligations of insurers and insurance intermediaries stipulated in Sections 77 and 78 of the Act. These include the obligation to obtain information from customers on their requirements, objectives and needs based on which customers are provided with recommendations thanks to which they may make a qualified decision whether they arrange or substantially change already arranged insurance, or an advice, if a reserve making insurance is to be procured or substantially changed. Unclarities in practice arose primarily from the distinguishing of recommendation and advice or a situation when a client does not provide sufficient information to the insurer or insurance intermediary.
As part of the FAQ, the CNB commented on numerous questions regarding this topic. The difference itself between the provision of an advice or recommendation consists in the level of detail. The obligation to find out the information on requirements, objectives and needs of a customer must be always fulfilled and cannot be replaced only by a general analysis of the target market and subsequent issuance of a general recommendation applicable to the target group of a specific product – the recommendation must be inherently personalised, even though it may mean a statement, in respect of rather simple insurance products, that the customer is compliant with the target market given the identified requirements, objectives and needs. In addition, the possibility to verify what information was stated by the customer in conclusion of a contract or substantial change is important. If the insurer or the insurance intermediary do not manage to get information in such scope so that they may recommend a particular insurance, they must not arrange insurance with a customer. The breach of this obligation may result in the liability for an offence or liability for caused damage.
In addition, the issue of provision of advice in change of the insurance procured before the Act took effect and upon procurement or change in the reserve making insurance with the minimum or zero reserve making component was discussed. In both these cases, there is the obligation to provide an advice. In respect of the insurance procured before the Act took effect, it is necessary to provide advice to a customer in respect of potential changes in the product and setting of current contractual relationships. In respect of the reserve making insurance, it is necessary to provide advice exactly in respect of its amount and its possible change. If the insurance allows a change in the allocation ratio, advice is provided only upon its arrangement.
Last but not least, the CNB commented on the question how to respond when customers select another alternative of insurance than the one that was recommended. In such case, the insurer or insurance intermediary must ensure for customers to have sufficient information, notify the customer that it is not the recommended option and assess whether the customer is able to sufficiently understand the features of the product. If, at the same time, the conditions of procurement of such insurance are not in conflict with internal risk management policies, it may be procured.
The CNB additionally confirmed that an advice in procurement or substantial change of reserve making insurance in accordance with Section 78 of the Act is an obligatory rule and the distributor must provide it, in accordance with the Act, before the procurement or substantial change in the reserve making insurance. The reserve making insurance therefore cannot be procured based on the execution only principle if the customer refuses to provide the distributor with any information.
Conflict of interest in mediation of insurance
The independent intermediary can be in two roles in accordance with the Act, either in the role of an insurance agent mediating insurance for an insurer, or an insurance broker mediating insurance for a customer. By definition, it is prohibited for the independent intermediary to play both roles at the same time, which is stipulated in Section 76 of the Act by a ban of concurrent activities.
The insurance claims handling is defined as “investigation necessary to ascertain the scope of obligation to provide performance from the agreed insurance, on behalf and on account of the insurer” and itself it does not have features of mediation of insurance. The situation is different in respect of help in exercise of rights arising from insurance which remains to be mediation of insurance by definition. The activities of independent insurance adjustors were additionally included under Act No. 455/1991 Coll., on Trades (Trade Licensing Act), as amended, when the Act took effect.
The CNB explains the issue as follows: an independent intermediary may provide help to its customer in the exercise of rights arising from insurance without violating the ban of concurrent activities, if it does not get into a situation when it acts as an insurance agent in procurement of insurance and as a broker in the exercise of rights arising from the insurance. The independent intermediary must additionally avoid a situation when the insurance intermediary would act as an insurance broker and concurrently perform claim adjusting for an insurer as an independent insurance adjuster under the Trade Licensing Act.
In addition to the above issues, FAQ answers the following questions:
Exemption in accordance with Section 3, par 2, of the Act – only provisions exhaustively listed in Section 3, par. 2, of the Act apply to persons providing insurance
as additional services to other products, e.g. travel agencies in respect of tours. The obligation to register as an additional insurance intermediary does not apply to these persons.
Termination of the authorisation for the activities of a tied agent – the notification of termination of the authorisation for the activities of a tied agent is made by the represented person through the Regis electronic application of the CNB for registration of entities. By this notification, the termination of the activities of a tied agent is concurrently announced.
Expertise – The Act introduced a new system for documentation of expertise for insurance distribution. For each of the groups listed in Section 57 of the Act, there is
a list if professional knowledge that have to be documented. In accordance with Section 59 of the Act, each distributor must pursue 15 hours of subsequent education for the calendar year. In respect of distributors authorised to mediate insurance from several expertise groups, it is the minimum number of subsequent education that has to be pursued for all expertise groups. The Act thus does not require the distributor to pursue subsequent education for each expertise group separately.
Product management – With effect from 1 December 2018, the Act imposes the obligation of “product management” (refer to Section 57 of the Act) to the insurers, independent intermediaries and insurance intermediaries with the home state different than the Czech Republic. These obligations must also be met in respect of the products approved before 1 December 2018 (i.e. the product which went through an approval process as set by the producer in respect of the product nature), and the proportionality principle can be used in the introduction and meet only the obligation of ongoing nature, i.e. ongoing review and regular assessment of an insurance product, assessment of suitability of a distribution channel and approval of the product in its substantial change.
Minutes from the meeting – a record of requirements, objectives and needs of a customer must be prepared from each meeting. However, a fine for the failure to prepare minutes from the meeting can be imposed only if the meeting resulted in the procurement of insurance. In practice, there was an opinion that it is possible to prepare minutes additionally, which the CNB identified as incorrect. In accordance with Section 92, par. 3, of the Act, it is necessary to present the minutes from the meeting to
a customer with sufficient advance before the procurement or substantial change in insurance. It is necessary to bear in mind that the minutes are prepared for the purpose of protection of customer’s interests and have to be prepared always as a precaution.