Transparency in Insurance Regulation and Supervisory Law: A Comparative Analysis (AIDA Europe Research Series on Insurance Law and Regulation, 4) 3030636208, 9783030636203

Table of contents :
Foreword
Preface
AIDA Europe
Contents
Abbreviations
Part I: Transparency in European Jurisdictions
Transparency in Insurance Intermediation and Regulation in Austria
1 Introduction
2 Transparency in Insurance Intermediation
2.1 Legal Sources and System of the Insurance Intermediation in Austria
2.2 Disclosure Duties of the Insurance Intermediary Against the Policyholder
2.3 Information Duties of the Insurance Intermediary Against the Policyholder
2.4 Penalties in Case of Non-fulfilment
3 Transparency in Austrian Insurance Supervision Law
3.1 The Old Regime
3.2 Turning Point Solvency II
3.3 The Current Regime from an Austrian Perspective
3.3.1 Transparency in the Ratio of Insurance Supervision and Insurance Undertakings
3.3.1.1 Periodic Reporting Duties of the Insurance Undertakings
3.3.1.2 Situation-Related Information and Notification Duties of the Insurance Undertaking and Third Parties
3.3.2 Transparency in the Ratio of Insurance Undertakings to the Policyholders
References
Transparency in Insurance Regulation and Supervisory Law of Croatia
1 Transparency in Insurance Mediation and Insurance Representation in Croatian Law
1.1 Insurance Broker´s Obligations to the Client (the Insured)
1.1.1 Broker´s Duty to Inform the Client (Insured)
1.1.1.1 Broker´s Precontractual Information Duty
1.1.1.2 Giving Advice and Standards for Providing Information
1.1.1.3 Terms and Form of Information Provision
1.1.2 Duty to Make the Risk Analysis and to Provide an Appropriate Form of Risk Cover
1.1.3 Broker´s Duty to Counsel the Client (the Insured) and to Give Recommendations Regarding the Choice of the Insurer
1.1.4 Duty to Provide Assistance When Concluding the Contract
1.1.5 Protection of Personal Data and Business Secrets
1.2 Insurance Broker´s Obligations to the Insurer
1.2.1 Duty to Inform the Insurer About Seeking an Insurance Offer
1.2.2 Duty to Protect the Insurer´s Interest
1.2.3 Other Duties of the Insurance Broker
1.3 Insurance Agent´s Obligations
1.3.1 Duty to Inform the Policyholder
1.3.2 Duty to Inform the Insurer
1.3.3 Duty to Look After the Interests of the Insurer
1.4 Insurer´s Duties to Inform the Insurance Agent
1.5 Legal Consequences of the Breach of Insurance Broker´s or Agent´s Duties
2 Transparency of Intermediaries/Insurance Undertakings in Croatia
2.1 Reporting Duties of Intermediaries/Insurance Undertakings in Croatia
2.1.1 Regular Reporting Duties of Insurance Undertakings Toward HANFA
2.1.2 Reporting Duties of Insurance Undertakings at the Request of HANFA
2.1.3 Limitation of Reporting Duties of Insurance Undertakings
2.1.4 Public Disclosure of the Report on Solvency and Financial Condition of the Insurance Undertaking
3 Supervision of Intermediaries/Undertakings in Croatia
3.1 Supervised Entities
3.2 Providing the Information for the Purposes of Supervision
3.3 Supervisory Measures of HANFA
3.4 Disclosure of General Information on Supervision by HANFA
4 Conclusion
References
Legal Sources
Transparency in Insurance Regulation and Supervisory Law of Cyprus
1 Overview of the Insurance Regulatory Regime and Scope of Research
2 Supervisory Authority
2.1 Competent Authority
2.2 General Transparency Principles
2.3 Objectives and Scope
2.4 General Competencies
2.5 An Alternative Model?
3 Transparency Duties of Insurance and Reinsurance Undertakings
3.1 Reports
3.1.1 Solvency and Financial Condition Reports
3.1.2 Regular Supervisory Reporting
3.2 Governance
3.3 Changes in Qualifying Holdings
3.4 Duties of Groups
3.5 Audited Financial Statements
3.6 Exercise of Regulatory Options for Specific Insurance Branches
4 Transparency Duties of Insurance Distributors
4.1 Registration
4.1.1 Registers
4.1.2 Registration Requirements
4.2 Information Duties and Conduct of Business
4.3 Other Duties
4.4 Code of Conduct
5 Transparency Duties Under the AML Regime
5.1 Scope
5.2 Customer Due Diligence
5.3 Beneficial Ownership
6 Transparency of Enforcement
6.1 Investigatory Powers
6.2 Administrative Sanctions
6.2.1 Violations and Procedure
6.2.2 Remedies Against the Superintendent´s Decision
6.2.3 Concurrent Competence and Interaction with Potential Violations of Other Instruments
6.3 Criminal Sanctions
6.4 Interaction Between Administrative and Criminal Sanctions
6.4.1 Right to a Fair Trial
6.4.1.1 Doctrinal Submissions and Case Law
6.4.1.2 Discussion
6.4.2 Ne bis in Idem
6.4.2.1 Requirements of the Principle
6.4.2.2 Exceptions
6.4.2.3 Discussion
7 Transparency in Alternative Dispute Resolution
7.1 Complaint Handling by Undertakings and Intermediaries
7.2 Mediation by the Financial Ombudsman
8 Conclusion
References
Transparency in Insurance Regulation and Supervisory Law of England
1 Introduction
1.1 The Notion of Transparency in Insurance Regulation
1.2 The Need for Transparency
1.2.1 The Legal Framework
1.2.2 The FSA/FCA Rules
2 Transparency of Intermediaries/Undertakings
3 The Insurance Supervision Regime in England and Its Approach Towards Transparency in Insurance Regulation
3.1 The Old Regime (FSA) and the Move to the New Regime (FCA, PRA)
3.2 Progress and Market Response
4 Conclusions
References
Transparency in Insurance Regulation and Supervisory Law of France
1 Introduction
2 Legal Framework of French Insurance Supervisory Law
3 Transparency of the Insurers
3.1 Duties to Report to the Supervisory Authority
3.1.1 General Provisions on Duties to Report
3.1.2 Additional Reporting Obligations
3.1.3 Exceptions to the Duty to Report to the Supervisory Authority
3.1.4 The Reporting Obligation of the Statutory Auditor
3.1.5 Report on Own-Risk and Solvency Assessment (ORSA)
3.2 Duty to Disclose to the Public
3.2.1 Solvency and Financial Condition Report (SFCR)
3.2.2 Exceptions to the Disclosure of SFCR
3.2.3 Additional Voluntary Disclosure and Updates
4 Transparency of the Supervisory Authority
4.1 Transparency Towards the Public
4.1.1 Publication of Insurers´ Registration
4.1.2 Publication of Decisions
4.1.3 Other Publications on the Functioning of the Supervisory Authority and the Market
4.1.4 Disclosure and Confidentiality
4.2 Report to European Bodies and Other Authorities
4.2.1 Reporting to and Communication with EIOPA, European Bodies and National Supervisory Authorities
4.2.2 Communication with and Duty to Report to Other National Administrative Bodies
5 Transparency of Insurance Distributors
5.1 Overview
5.2 Product Oversight and Governance
5.3 Duty to Disclose Remuneration
5.4 Conflicts of Interests
5.5 Duty to Inform
5.6 Transparency Role of Supervisory Authorities
5.6.1 Mandatory Registration of (Re)insurance Distributors
5.6.2 Naming and Shaming Applied to Insurance Distributors
6 Conclusion
References
Transparency in Insurance Regulation and Supervisory Law of Germany
1 Introduction
2 German Insurance Supervisory Law: the Outset
3 Scope of Research
4 Stipulations on Transparency of the Insurers
4.1 Duties to Report to the Supervisory Authority
4.1.1 General Duty to Report, Section 43 VAG
4.1.2 Statutory Audits, Sections 35 to 39 VAG
4.1.3 Information for Supervisory Purposes, Sections 44 to 47 VAG
4.1.4 Report on Own-Risk and Solvency Assessment (ORSA), Section 27 VAG
4.1.5 Additional Supervisory Reporting, Sections 305 and 306 VAG
4.2 Public Disclosure
4.2.1 Solvency and Financial Condition Report (SFCR), Section 40 VAG
4.2.2 Exceptional Non-disclosure, Section 41 VAG
4.2.3 Updates and Additional Voluntary Information, Section 42 VAG
4.2.4 Additional Reporting Duties in the German Commercial Code (HGB)
4.3 Naming and Shaming
4.3.1 Outline of Section 319 VAG
4.3.2 Interpretation of Section 319 VAG
4.3.3 Controversies
5 Stipulations on Transparency of the Supervisory Authority Towards the Public
5.1 Blanket Clause on Notifications by the Supervisory Authority
5.2 Publishing of Complaint Statistics by the Supervisory Authority
5.3 Protection of Confidential Information
5.4 Predictability of Measures of the Supervisory Authority
5.5 Reporting as a Self-reinforcing Tendency
6 The Role of EIOPA When Pursuing Transparency
7 Transparency of Insurance Distribution
7.1 Overview
7.2 Product Oversight and Governance (POG)
7.3 Naming and Shaming Regarding the Distribution
7.4 Prohibition to Pass on Commissions to Policyholders, Section 48b VAG
8 Conclusion on Transparency in German Insurance Supervisory Law
References
Transparency in Insurance Regulation and Supervisory Law of Italy
1 Introduction
2 The Evolving Meaning of Transparency in Insurance Supervision
3 General Duties to Report to the Supervisory Authority
4 Information Requirements and Supervisory Review Process
5 The Supervisory Review Process and Capital Add-on
6 Report on Solvency and Financial Condition (SFCR)
7 External Audit on the SFCR
8 Exceptional Non-disclosure, Updates and Additional Voluntary Information
9 The Transparency as a General Principle for Distributors
10 The Transparency of the Activities Carried Out by the Italian Supervisory Authority
10.1 Consultations in the Decision-Making Process on Regulatory Measures
10.2 Dissemination of Information on Official Actions and the Insurance Sector
11 Conclusion
References
Doctrine
Case Law
Transparency in Insurance Regulation and Supervisory Law of Malta
1 Introduction
2 The Regulator
2.1 The Malta Financial Services Authority (MFSA)
2.2 The Financial Services Tribunal
2.3 The Financial Intelligence Analysis Unit (FIAU)
3 The Legal Framework
4 Consumer Protection
5 Authorisation
5.1 Application Procedure
5.2 Capital Requirements
5.3 Shareholding
5.4 Solvency II
5.5 Personnel Qualifications
6 Prudential Supervision
6.1 Supervisory Network
6.2 Supervision of Financial Institutions
6.3 Protection and Compensation Fund
7 Conduct Supervision
7.1 Insurance Business Rules
8 Risk Management
9 Contracts
9.1 General Contract Application
9.2 Contract Law in Malta
9.3 Smart Contracts
10 Claims
10.1 Dispute Resolution
10.2 Arbitration
10.3 Office of the Arbiter for Financial Services (OAFS)
11 Tax
12 Insolvency
13 The General Data Protection Regulation (GDPR)
14 Future Prospects and Trends
References
Transparency in Insurance Regulation and Supervisory Law of Poland
1 Transparency and Insurance Regulation: Setting the Scene
1.1 Notion and Origins of Transparency
1.2 Attempts to Organize the Concept of Transparency
1.3 Objectives and Expected Benefits: What Is Transparency For?
1.4 Transparency as a Regulatory Tool
2 Transparency in Practice: Polish Insurance Regulation
2.1 Act on Insurance and Reinsurance Activity
2.1.1 Market Transparency
2.1.2 Business Organization
2.1.3 Transparency Toward the Supervisory Authority
2.2 Act on Insurance Distribution
2.2.1 Insurance Distributor
2.2.2 Insurance Product
2.3 Transparency of the PFSA and Other Insurance Market Entities
3 Conclusions
References
Documents
Transparency in Insurance Regulation and Supervisory Law of Portugal
1 Introduction
2 Brief Overview of Insurance Regulatory Law in Portugal
3 References to `Transparency´ in Portuguese Insurance Regulatory Law
3.1 PISA and the Solvency II Directive
3.2 PIDA and the Insurance Distribution Directive
4 Conclusion: The Meaning and Implications of `Transparency´ Requirements in Insurance Regulatory Law in Portugal
References
Transparency in Insurance Law and Regulation in Spain
1 Transparency of Intermediaries/Undertakings
1.1 A Specific Act for Insurance Intermediaries
1.2 Obligations of Information of Insurance Intermediaries
1.2.1 General Information Obligation: Truthful and Sufficient
1.2.2 Obligation of Information Prior to the Signing of the Insurance Contract
1.2.3 Ways of Transmitting the Information
1.3 Protection of the Insured Through Out-of-Court Dispute Resolution: The Obligation to Deal with and Resolve Complaints and ...
1.3.1 The Departments and Services of Customer of the Insurance Companies
1.3.2 The Customer Ombudsman
1.3.3 The Administrative Protection of Insurance Services for the Costumer
2 The Insurance Supervision Regime
2.1 Introductory Notes
2.2 Express Concern About Transparency
2.3 Preventive Protection Tools
2.3.1 Again a General Duty of Information to the Insured
2.3.2 Prior Information to Contracting People´s Insurance
2.4 Ways of Conflict Resolution
2.4.1 A Whole Set of Possibilities
2.4.2 The Judicial Path: Last Resort
2.4.3 The Arbitration Alternative
2.4.3.1 Common Arbitration
2.4.3.2 Consumer Arbitration
2.4.4 Mediation as a Means of Conflict Resolution
3 The Register of Death Coverage Insurance Contracts
4 Discussion: Conclusions
References
Further Reading
Transparency in Insurance Regulation and Supervisory Law in Sweden
1 Introduction
2 The Notion of Transparency
3 Intermediaries
3.1 Rules and Regulations on Intermediaries
3.2 Transparency of Intermediaries
3.2.1 Identity and Competence
3.2.2 ``Marketing´´ or ``Advice´´?
3.2.3 Conflicts of Interest
3.2.4 Liability Insurance
4 Insurance Undertakings
4.1 Transparency of Insurance Undertakings
4.1.1 Identity
4.1.2 Solvency
4.1.3 Investment Guidelines
5 Supervision of Transparency
5.1 Bodies Supervising Intermediaries and Undertakings
5.2 The SFSA´s Approach Towards Transparency
5.2.1 Commissions
5.2.2 Complex Products to Consumers
5.2.3 The Product Developers´ Responsibility for Consumer Protection
5.2.4 The Advisors´ Need to Receive Better Information About the Consumers Before the Advice
5.2.5 Educational Efforts
5.2.6 Surpluses
6 Conclusions and Discussion
Appendix
References
Literature
Transparency in Dutch Insurance Regulation and Financial Supervision
1 Introduction
1.1 The Dutch Insurance Regulatory Framework
1.2 Scope of This Chapter
1.3 Governance Principles Insurers and the Insurance Code of Conduct
2 Dutch Act on Transparent Supervision
3 Transparency of Remuneration
4 Transparency in Insurance Supervision
4.1 Transparency of Supervisory Practices
4.2 General Good Provisions
4.3 Fit and Proper Assessments
4.4 Transparency on the Scope of Supervision
5 Transparency by Insurance Undertakings
5.1 Introduction
5.2 Changes in Reporting and Disclosure Compared to Solvency I
5.3 Reporting and Disclosures for Small and Medium-Sized Insurers in the Netherlands
5.4 Statutory Audit of the Consolidated Supervisory Group Reporting and Disclosure
5.5 National Specificities with Respect to Supervisory Reporting and Disclosures
5.6 Non-disclosure of Capital Add-ons
6 Market Conduct
6.1 Transparency on Financial Services and Commissions
6.2 Product Disclosures
6.3 The Role of Financial Services Disclosures
7 Conclusion
References
A Comparative Analysis of Transparency in Insurance Regulation and Supervisory Law of Selected European Jurisdictions
1 Introduction
2 Transparency of the Supervisory Authorities
3 Transparency of the Insurance Undertakings
4 Transparency of the Insurance Intermediaries
5 Conclusions
References
Part II: Transparency in Non-European Jurisdictions
Transparency in Australian Insurance Law and Regulation: Regulation and Intermediaries
1 Introduction
2 Overview of the Regulation of Australia´s Financial Services Industry
3 Regulation of Insurers and Intermediaries: Pre-contractual
3.1 The First Quadrant of Utmost Good Faith: Obligations of Intermediaries When Advising Insureds About Their Disclosure Oblig...
3.2 The Second Quadrant of Utmost Good Faith: Obligations of Insurers and Intermediaries When Selling Insurance
3.2.1 Regulation of Insurers As Issuers of Financial Products
3.2.1.1 ASIC´s Monitoring of the Selling of Consumer Credit Insurance by Financial Institutions
3.2.1.2 ASIC´s Monitoring of the Selling of Add-on Consumer Credit Insurance Through Car Dealers
3.2.1.3 ASIC´s Monitoring of the Selling of Home and Contents Insurance
3.2.1.4 ASIC´s Monitoring of the Advertising of Consumer Forms of Insurance
3.2.1.5 ASIC´s Monitoring in the Marketing of Life Insurance
3.2.2 Regulation of Intermediaries in Arranging Insurance for Clients
3.2.2.1 Obligations of Intermediaries
3.2.2.2 Regulatory Enforcement Actions Against Insurance Intermediaries
4 Regulation of Insurers and Intermediaries: Post-contractual
4.1 The Third Quadrant of Utmost Good Faith: Obligations of Intermediaries on Behalf of Insureds
4.2 The Fourth Quadrant of Utmost Good Faith: Regulation of Insurers´ Claims and Complaints Handling Processes
4.2.1 APRA´s Prudential Regulation of Insurance
4.2.2 Regulation of Consumer Claims and Complaints Processes
4.2.2.1 Industry Codes of Practice
4.2.2.2 Monitoring of Insurers´ Claims Handling Practices
4.2.2.3 Dispute Resolution Arrangements for Consumer Forms of Insurance
5 Conclusion: Transparency in the Regulation of the Australian Insurance Industry
References
Legislation
Insurance Law and Regulation: The Transparency of the Brazilian Superintendence of Private Insurance (SUSEP)
1 Introduction
2 The Meaning of Transparency in the Context of Insurance Regulation
3 Transparency of the Brazilian Superintendence of Private Insurance: An Overview
4 SUSEP´s Transparency: Binding Rules and Practice
5 Transparency of the Decision-Making Process Involved in Setting Rules and Standards
5.1 Normative Construction Process: The Example of the Public Consultations on the Regulatory Sandbox
5.2 Normative Construction Process: The Example of the Public Consultations on the Regulatory Sandbox
5.3 Regulatory Decision-Making II: Ending With Brokers´ Regulation
6 Transparency of Insurance Companies
7 Transparency of the Insured Parties
8 Transparency of the Intermediaries
9 Transparency of the Feedback Processes
10 Institutional Contingencies Harming the Betterment of SUSEP´s Regulatory Decision-Making Transparency
10.1 Regulatory Opacity
10.2 Independence
10.3 Regulatory Impact Assessments
11 Conclusions
References
Legislation and Regulation
Transparency in the Chilean Insurance Law, Intermediation, and Supervisory
1 Transparency in Insurance Intermediation
1.1 Introduction
1.2 Access Requisites to the Insurance Intermediation Activities
1.3 Advice Obligation
1.4 Duty of Information on Insurance Broker Business Diversification
1.5 Standards or Principles of Business Conduct
1.5.1 Preliminary Comment
1.5.2 The Rules of Market Conduct in the Chilean System
1.5.3 Overview of NCG 420
1.5.3.1 A Fair Treatment of Customers
1.5.3.2 Management of Conflicts of Interest
1.5.3.3 Protection of Customer Information
1.5.3.4 Promoting Market Development Through Transparency
2 Transparency in Insurance Supervisory Law
2.1 Introduction
2.2 The Commission for the Financial Market (CMF)
2.3 Transparency in the Supervisory Organism Law
2.4 Transparency in the Supervisory Organ Function
2.5 The Policy Deposit System
References
Regulatory Requirements on Transparency of Insurance Contracts to the Insureds in China
1 Introduction
2 The Insurance Regulatory Framework in China
3 Regulation of Insurance Clauses and Premium Rates
3.1 Statutory Requirements
3.2 Regulatory Requirements
3.2.1 Regulation of Insurance Clauses and Premium Rates of Property Insurance
3.2.2 Regulation of Insurance Clauses and Premium Rates of Personal Insurance
4 Regulation on Information Disclosure of Insurance Products
4.1 General Requirements on Information Disclosure of Personal Insurance Products
4.2 Specific Requirements on Information Disclosure for Universal Insurance Products
5 Regulation on Conduct of Insurers in Advertising or Selling Insurance Products
5.1 Regulation on Conduct of Insurers
5.2 Regulation on Conduct of Salespersons
5.3 Notification of Important Information in the Process of Sales
5.3.1 Requirements on Sales of Insurance
5.3.2 Requirements for Notification of Importance Insurance Clauses
5.3.3 Requirements on Salespersons at the Time of the Proposer´s Application for Insurance
6 Regulation on Information Disclosure by Insurance Companies
6.1 Contents of Information Disclosure
6.2 The Manners and Time of Information Disclosure
6.3 Management of Information Disclosure
7 Conclusion
References
Transparency in New Zealand Insurance Law
1 Introduction
2 Transparency in Legislation
2.1 Supervisory Legislation Affecting Insurers
2.2 Supervisory Legislation Affecting Intermediaries
2.3 Legislation Affecting Contract Terms
3 Transparency in the Courts
4 Transparency and Self-Regulation
4.1 Life and Health Insurance: The Financial Services Council
4.2 General Insurance: The Fair Insurance Code
4.3 Enforcing the Codes
References
Transparency in Insurance Regulation in Peru
1 Mandatory Information in the Policies
2 Precontractual Good Faith
2.1 Transparency Information on Insurance Contract and Through the Website
2.2 Tariffs and/or Online Quotations and Marketing Brochures
3 Minimum Requirements for Personal, Massive, and Mandatory Insurance
4 Rules Applicable to the Policy and the Documentation That Should Be Available for the Insurer Before the Contract
4.1 Contractual Conditions and the Insurance Application
4.2 Delivery of Policies or Certificates, Contents, and the Summary
5 Abusive Clauses and Practices
5.1 Unilateral, Adhesion, or Standard Contracts
5.2 Abusive Clauses and Forbidden Provisions
5.3 Abusive Practices
6 Consequences of Breach of Transparency or Supervisory Rules
7 Special Regulations for Certain Insurance Lines
7.1 Life Insurance and Compulsory Insurance
7.2 Property Damage Insurance
7.3 Medical Insurance
8 Information During the Time of Hiring and Right to Return the Policy
8.1 Termination of the Contract Without Explanation
8.2 Duty to Inform the Customers (Insured)
9 Transparency During the Term of Insurance Contract
9.1 Media to Be Used and Communications
9.2 Endorsements, Modifications, and Registration of Payments
10 Customer Services
10.1 Customer Attention: Minimum Elements
10.2 Responsibility of the Board and the Management
11 Responsibilities of the Customer Service Officer
11.1 Customer Service Officer: Duties and Responsibilities
11.2 Annual Report of the Customer Service Officer
12 Transparency in Insurance Intermediation
12.1 Importance and Regulatory Trends
12.2 Intermediation of Insurance in Peruvian Legislation
12.3 Insurance Agents and Broker Types and Consequences of Default
12.4 Sanctions and Advertising
12.5 Advertising Control and Consequences of Noncompliance
12.6 Intermediation in the RTI
12.7 Additional Information in Case of Supply Through Marketers
13 Claims Adjusters
14 Transparency in Insurance Supervision
14.1 Importance
14.2 Regulatory Trends in Transparency in Insurance Supervision Law
15 Conclusions
References
Transparency in Insurance Regulation and Supervisory Law of Russia
1 Introduction
2 Transparency in Insurance Intermediation: Agents
2.1 Duty to Disclose Information to the Policyholder
2.2 Professional Conduct Rules
3 Transparency in Insurance Intermediation: Brokers
3.1 Duty to Disclose Specific Information to the Consumer About the Broker and the Insurance Contract According to the Insuran...
3.2 Professional Conduct Rules to Provide Intermediary Services to the Consumers of Insurance Services in Accordance with the ...
4 Impact of Insurance Supervision on the Transparency of Insurance Contract
4.1 General Description of Transparency Required by Insurance Law and Special Laws on the Compulsory Classes of Insurance
4.1.1 Transparency Requirements in Accordance with Compulsory Motor Third Party Liability Law
4.2 Special Transparency Requirements in the Insurance Law in Case of Portfolio Transfer
4.3 Transparency and Information Availability for the Consumer in Case of Bankruptcy of the Insurance Company
5 Transparency Issues Within Insurance Supervisory Laws
5.1 Transparency Within New Regulation Development
5.2 Special Transparency Rules in the Licensing Process and License Withdrawal
6 Conclusion
References
Transparency in Insurance Law and Regulation: In South Africa
1 Transparency Duties of Intermediaries
1.1 Common Law Duties Stemming from Agency and Representation
1.2 Financial Advisory and Intermediary Services Act
2 General Code of Conduct in Terms of the FAIS Act
2.1 Disclosure
2.2 Conflict of Interest
2.3 Remuneration and the Retail Distribution Review
2.4 Onerous Terms in Insurance Contracts
2.5 Dispute Resolution
2.5.1 Dispute Resolution Schemes
2.5.2 Regulation of Ombud Schemes
2.5.3 Internal Dispute Resolution Schemes
2.5.4 The Short-Term Ombud
2.5.5 The Long-Term Ombud
2.5.6 Intermediaries and Dispute Resolution
2.5.7 Appeals
2.5.8 Special Adjudicators
3 The Insurance Supervision Regime in South Africa and Its Approach Towards Transparency in Insurance Law
3.1 Statutory Rules on the Conduct of Insurance Business
3.2 Supervision and Enforcement
3.3 Transformation of Insurance Law
3.3.1 Financial Sector Regulation Act
3.3.2 Insurance Act 18 of 2017
4 Conclusion: Transparency in Insurance Contracts and Insurers´ Transparency Duties
References
Books
Case Law
Legislation
Transparency of Insurance Regulation in Taiwan
1 Introduction
2 Taiwan´s Insurance Supervisory System and Transparency Issues
2.1 General Concerns of Insurance Regulations and Transparent Issues
2.2 The Framework of Insurance Regulation in Taiwan
3 Important Rules and Regulations
3.1 Interested Party Transactions
3.2 Investment in Real Estate
3.3 Model Clauses
3.4 Internal Controls
3.5 Disciplinary Actions
3.6 Number of Offense
4 Conclusion
References
Transparency in Insurance Regulation and Supervisory Law of Turkey
1 Supervisory Law
1.1 Introduction
1.1.1 Regulation
1.1.2 Definition of ``Supervisory Authority´´
1.1.3 The Purpose of the Supervision
1.2 Issues Subject to Supervision for Ensuring Transparency
1.2.1 Establishment, Field of Activity, and Limitations of the Capacity to Have Rights
1.2.1.1 Establishment
1.2.1.2 Not Being Engaged in Another Business (Prohibition of Engagement)
1.2.1.3 Limitations of the Capacity to Have Rights
1.2.1.4 Obligation to Establish an Internal Control System
1.2.2 Operating with an Insurance License
1.2.3 Accuracy and Publicity of Company Accounts
1.2.4 Informing the Public About the Insurance Activities
1.2.5 Activities of Insurance Experts
1.3 Information Obligation
2 Law of Insurance Mediators
2.1 Definition of Insurance Mediators
2.2 Transparency of the Legal Relationship Between the Insurer and Mediator
2.2.1 Supervision of Insurance Mediators During Commencement of Activity
2.2.1.1 Status, Registration, and License
2.2.1.2 Being Legally and Financially Independent
2.2.1.3 Not Being Engaged in Any Business Other Than Insurance
2.2.2 Supervision During Activity
2.2.2.1 Notifications and Providing Information
2.2.2.2 Transferring the Collected Premium in Time
2.2.2.3 Confidentiality Obligation
2.2.2.4 Conducting Activities in Accordance with the Rules of Goodwill
2.3 Duty to Provide Information
2.3.1 Obliged Insurance Mediators and Insurance Contracts Under Such Obligation
2.3.2 Duty at the Conclusion of the Insurance Contract
2.3.3 Duty During the Contract Period
References
Transparency in Insurance Regulation and Supervisory Law of the United States
1 Introduction
2 Transparency in the US Legal Tradition
2.1 Transparency As a Democratic Ideal
2.2 Transparency As a Market Ideal
3 U.S. Insurance Regulation: An Overview
3.1 The Primacy of State Regulation
3.2 Legislatures, Agencies, and Courts
3.3 The Goals and Tools of US Insurance Regulation and the Role of Transparency
4 How Transparency Is Promoted in US Insurance Regulation
4.1 Direct Transparency Rules
4.1.1 Disclosure and Notification Requirements
4.1.2 Policy Clarity and Readability Requirements
4.1.3 Truth-in-Advertising Regulation
4.1.4 Unfair Trade Practice Regulation
4.1.5 The Duties to Explain and Advise
4.1.6 Special Transparency Rules in Health Insurance
4.2 Indirect Tools and Effects
4.2.1 Consumer Education
4.2.2 Indirect Transparency Effects: State Agency Regulation
4.2.3 Indirect Transparency Effects: Courts
5 Current Initiatives Supporting Transparency
6 Closing Thoughts: An Assessment of Transparency in US Insurance Law
References
Books, Chapters, and Journals
Websites and Webpages
Newspaper and Magazine Articles, Blog Entries, and Similar References
Government Publications (including Web Materials)
Comparative Analysis of Transparency in Insurance Regulation and Supervisory Law of the Countries Outside the EU and Europe (R...
1 Introduction
2 Rules and Regulations on Transparency
3 Conclusions
References
Transparency in the Insurance Core Principles
1 Introduction
2 Transparency of the Insurance Regulation
3 Transparency of the Supervisor
3.1 Institutional Aspects. Organization of the Supervisor and Supervision
3.2 Disclosures Enhancing Customer´s Protection, Market Transparency, and Competition
4 Transparency of the Supervised Entities
4.1 Institutional Aspects and Transparency of the Insurance Activity
4.2 Disclosures and Reporting Duties
4.2.1 Transparency Toward the Supervisor
4.2.2 Transparency Toward the Customers and Market Participants
4.2.2.1 Insurers
4.2.2.2 Insurance Intermediaries
4.2.2.3 Insurance Product and Advice
4.2.2.4 Customer´s Rights and Obligations
5 Summary

Citation preview

AIDA Europe Research Series on Insurance Law and Regulation 4

Pierpaolo Marano Kyriaki Noussia  Editors

Transparency in Insurance Regulation and Supervisory Law A Comparative Analysis

AIDA Europe Research Series on Insurance Law and Regulation Volume 4

Series Editor Pierpaolo Marano, Catholic University of the Sacred Heart, Milano, Italy Editorial Board Members Juan Bataller Grau, Polytechnic University of Valencia, Valencia, Spain Johnny Chang, National Chengchi University, Taipei, Taiwan Christos S Chrissanthis, University of Athens, Athens, Greece Herman Cousy, KU Leuven, Leuven, Belgium Simon Grima , University of Malta, Msida, Malta Ozlem Gurses, King’s College London, London, UK Helmut Heiss, University of Zurich, Zurich, Switzerland Peter Kochenburger, University of Connecticut, Hartford, CT, USA Tadao Koezuka, Kagawa University, Takamatsu, Japan Jérôme Kullmann, Paris Dauphine University, Paris, France Birgit Kursche, University of Pretoria, Pretoria, South Africa W. Jean J. Kwon, St. John’s University, New York, NY, USA Sara Landini, University of Florence, Florence, Italy Margarida Lima Rego , NOVA University Lisbon, Lisbon, Portugal JJ Lin, National Chengchi University, Taipei, Taiwan Katarzyna Malinowska, Kozminski University, Warsaw, Poland Leo P. Martinez, University of California - Hastings, San Francisco, CA, USA Patricia McCoy, Boston College, Newton, MA, USA Gary Meggit, University of Hong Kong, Hong Kong, Hong Kong Robert Merkin, University of Exeter, Exeter, UK Daleen Millard, University of Johannesburg, Johannesburg, South Africa Satoshi Nakaide, Waseda University, Tokyo, Japan Jaana Norio, University of Helsinki, Helsinki, Finland Kyriaki Noussia , University of Exeter, Exeter, UK Laura Núñez, IE Business School, Madrid, Spain Stefan Perner, University of Linz, Linz, Austria Ioannis Rokas, Athens University of Economics and Business, Athens, Greece Michele Siri, University of Genoa, Genoa, Italy Caroline Van Schoubroeck, KU Leuven, Leuven, The Netherlands Wouter Verheyen, University of Antwerp, Antwerp, Belgium Manfred Wandt, Goethe University Frankfurt, Frankfurt am Main, Germany

Hsin-Chun Wang, National Taiwan University, Taipei, Taiwan Ecehan Yeşilova Aras, Izmir Democracy University, Izmir, Turkey Ling Zhu, Hong Kong Polytechnic University, Hong Kong, Hong Kong

The AIDA Europe Research Series on Insurance Law and Regulation is the first book series of its kind and area of specialization. It comprises volumes on topics researched and written with an international, comparative or European perspective. The regulatory response to the financial crisis in 2008 has pushed towards the adoption of transnational principles and rules also in the field of insurance by encouraging the convergence of national regulations to common regulatory framework. The need for a common legal language emerges to fully understand the process of transnational convergence in place and its impact on national legislation. On the other hand, persisting national peculiarities must be examined in the light of the transnational convergence of rules and concepts. Moreover, new risks, business practices and customers’ issues are emerging worldwide, so requiring increasingly global responses. The scope of the series is to bring together academics, practitioners and policy makers in order to exchange views and approaches to the topics concerned, which are based on the new transnational dimension of insurance law, business and regulation. All contributions are peer reviewed.

More information about this series at http://www.springer.com/series/16331

Pierpaolo Marano • Kyriaki Noussia Editors

Transparency in Insurance Regulation and Supervisory Law A Comparative Analysis

Editors Pierpaolo Marano Department of Legal Studies Catholic University of the Sacred Heart Milan, Italy

Kyriaki Noussia School of Law University of Exeter Exeter, United Kingdom

ISSN 2662-1770 ISSN 2662-1789 (electronic) AIDA Europe Research Series on Insurance Law and Regulation ISBN 978-3-030-63620-3 ISBN 978-3-030-63621-0 (eBook) https://doi.org/10.1007/978-3-030-63621-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Foreword

Transparency is a fundamental principle which transcends the entire financial sector. It constitutes a priority of the Financial Stability Board, primarily because it reinforces investors’ confidence in the market. In (re)insurance undertakings, transparency is expressed among others through reporting obligations which in the EU compose one of the three pillars of the Solvency II system. The (re)insurance company shall report, inter alia, information on its financial standing, its organizational structure, the external auditor, qualifying holdings, any significant activity or events which occurred during the reporting period, information on the remuneration policy for directors, significant transactions with shareholders, persons with significant influence on the undertaking and on members of the management, as well as data on any complaints or penalties imposed on the undertaking by insurance supervisory authorities. The transparency obligations also extend on persons who are empowered to issue regulations or are entrusted with supervisory duties in the (re)insurance sector and encompass the procedures affecting their appointment and termination. Similar insurance supervisory systems are to be found in non-European countries, which apply rules on reporting of financial statements, quality of assets covering reserves, etc. or where codes of practice have to be adhered to when distributing insurance products. Other jurisdictions require that the exclusions of the coverage and points of importance for the interest of the insured shall be properly explained to the insured so as to make an informed decision while selecting the insurance product. Transparency rules are more or less to be found in all jurisdictions. There are differences from country to country as to the extent and degree of transparency and disclosure obligations. Transparency further aims at facilitating the cross-border business of (re)insurance companies, as well as that of insurance intermediaries in the EU. Insurance intermediaries are called to disclose to the insurance applicant any direct or indirect participation which the insurance undertaking, which they propose, may have in their share capital and vice versa; they shall also disclose the manner in which they are remunerated. Notably, there is a tendency in a number of jurisdictions to introduce strict supervisory rules ensuring that the insured is informed as to how v

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Foreword

the insurance intermediary is remunerated. This exchange of information makes the intermediary's relations with the customer more transparent and reduces potential conflicts of interest. In effect, the transparency principle serves to make it unnecessary that restrictive rules are introduced in order to prohibit certain business schemes and behaviours between insurance undertakings and intermediaries, which could prejudice the interests of the customer. This can be seen in the above example, where the transparency principle reinforces the duty to provide information to the applicant on the degree of the broker’s dependence on an insurance undertaking, instead of prohibiting such dependence. The EU has come a long way in infiltrating the principle of transparency in the insurance industry. This is the case in non-EU countries too, as the reader will find in the chapters contained in this book. This shows that the increasingly robust application of transparency rules is not just a local phenomenon, or a response to a periodical phenomenon, even a severe one such as a financial crisis. It is also a reaction to the ever-increasing complexity of the supervisory rules, of the composition and structure of (re)insurance companies and of the complexity of their products, which are a global evolution. The result is that the principle of transparency puts both supervisory authorities and customers in a better position to understand the insurance products offered, as well as the functions and the quality of the insurance undertakings and of intermediaries. Consequently, transparency serves as a tool to fight illegalities and pathologies. In addition, the supervisory control is facilitated, the customer is protected and the quality of services offered is improved, while at the same time the self-regulation of the market operators is observed and reinforced: the less they can operate obscurely, the more they will be prone to operating fairly and in compliance with regulatory requirements. This book consists of chapters which examine the transparency rules found in the insurance regulation and supervisory laws of several legal systems, ranging from civil to common law. It also encompasses useful overview chapters written by the editors. These chapters attribute to the book a genuine comparative element and an insight on how regulatory frameworks are shaped at a global context. They allow the reader to detect the common underlying principles and to identify the different approaches adopted in the studied jurisdictions. The authors are leaders in their respective fields, and all have strong links with the International Association of Insurance Law (AIDA). The two editors, Pierpaolo Marano and Kyriaki Noussia, are both highly respected academics in insurance law. The book is a valuable asset for any academic or professional insurance lawyer or organization. Academics, legal and insurance practitioners, researchers, regulators and law reform bodies will profit from the discussion, research and analysis contained in this volume. Athens, Greece July 2020

Ioannis Rokas

Preface

The role of transparency in insurance is overall important, i.e. not only in relation to the insurance contract law but also in relation to the insurance regulation and supervisory laws of each jurisdiction. In addition to being important, transparency in insurance regulation and supervisory laws is essential as the various regulatory and supervising authorities act as “gatekeepers” in ensuring the lawful operations of insurers to the benefit of the policyholders and of other insurance stakeholders. The current work is the second of two parts of an edited and comparative work, which is looking into the topic of transparency in insurance law and regulation in various common law and civil/continental law jurisdictions. This book, following from Volume I—whereby transparency in insurance contract law in the major common law and civil/continental law jurisdictions was discussed—describes, discusses and critically analyses transparency in insurance regulation in the various common law and civil/continental law jurisdictions, in Europe and in the rest of the world. The jurisdictions selected form some of the major players worldwide in insurance law and in the insurance market. As with Volume I, it has been felt that identifying and critically discussing transparency in insurance regulation and supervisory laws of the countries examined would help better assess the contemporary challenges imposed in the various legal systems. The study and analysis have allowed us to conclude that while the European jurisdictions reflect different facets of the principle as emerging from EU law on insurance, the principle has developed quite differently in other jurisdictions. In Europe, the Solvency II Directive and the Insurance Distribution Directive (IDD) introduced harmonised rules across the European Union. The Solvency II and IDD Directives alongside with the national regulatory and supervisory laws in the EU Member States act as guarantee for the observance of transparency, as demonstrated by the analysis carried out in this book. The different harmonisation levels found in the protection level offered by the above Directives, i.e. at times maximum and at times minimum harmonisation levels, depict the differences in the transposition of the principle of transparency in these Member States. In addition, the EU standards on transparency in insurance supervision act as a benchmark for national vii

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regulations. It follows that these standards help achieve the focal objective of insurance and reinsurance regulation and supervision at EU level, i.e. help the policyholders and beneficiaries to get adequate protection, and in effect their enactment is instrumental in achieving the goal of establishing a homogenous EU single market. In relation to transparency in insurance regulation and supervisory law of the countries outside the EU and Europe, i.e. countries grouped in this book under the heading “Rest of World”, it is observed that transparency is a much-needed principle and prerequisite in insurance regulation and supervisory law, where it helps the homogeneity of practices pertaining to the abidance of good faith. The framework of insurance regulation and its transparency issues in the national legal systems of Australia, Brazil, Chile, China, New Zealand, Peru, Russia, South Africa, Taiwan, Turkey and the USA allows us to conclude that, in the jurisdictions examined, such regulation exists in order to enhance transparency and promote financial soundness, good market conduct and to protect the interests of the insurer and of the policyholders. At the same time, it is notable that transparency should not lead to overregulation which might hinder the further development of the market. The final remark is that transparency in insurance regulation is important for consumers and insurers, and it is within this ambit that regulators should enhance the provision of the duty for transparency via the obligation of disclosure of information. Hence, it is apparent that in all jurisdictions transparency is not only important for consumers but also for insurers. Milan, Italy Exeter, UK

Pierpaolo Marano Kyriaki Noussia

AIDA Europe

AIDA Europe was established in 2007 with the aim of promoting, either directly or through its members, the development of insurance and related laws. It attempts to achieve this, mainly through: • furtherance of the study and knowledge of international and national insurance law and of related matters; • proposition of measures aiming at the harmonization of insurance law or the means for resolution of insurance disputes; • facilitation of exchange of academic know-how between its members or any other European organization dealing with insurance-related matters, similar to those of AIDA Europe; • support of academic work in the field of insurance, e.g. through cooperation with universities or the sponsoring of academic research and papers. AIDA Europe organizes conferences mainly geared to the European-based jurisdictions, offering to all interested stakeholders a platform for an open- and solutionminded scientific- and practice-related dialogue on key developments in the area of insurance, reinsurance and related law also supporting its members in their respective endeavours. Conferences are open to all stakeholders and regularly attract representatives from the insurance sector, academia, private practice, regulatory authorities or law-making bodies. AIDA Europe also maintains a keen focus on supporting the development of young academic talents by sponsoring academic work and by inviting young academics to its conferences. AIDA Europe’s Scientific Committee, which supports

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AIDA Europe

AIDA Europe through the scientific agenda setting, also manages AIDA Europe’s Calls for Papers. AIDA Europe is a non-profit organization, pursuing altruistic goals and has its seat in Zurich, Switzerland. Its events are open to all interested parties. For further information, please see https://aidainsurance.org/regional-groupings/aida-europe.

Contents

Part I

Transparency in European Jurisdictions

Transparency in Insurance Intermediation and Regulation in Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sebastian Wöss

3

Transparency in Insurance Regulation and Supervisory Law of Croatia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loris Belanić and Dionis Jurić

19

Transparency in Insurance Regulation and Supervisory Law of Cyprus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael Chatzipanagiotis

45

Transparency in Insurance Regulation and Supervisory Law of England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kyriaki Noussia

81

Transparency in Insurance Regulation and Supervisory Law of France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louise Bouvery

95

Transparency in Insurance Regulation and Supervisory Law of Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Kevin Bork and Manfred Wandt Transparency in Insurance Regulation and Supervisory Law of Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Pierpaolo Marano and Michele Siri Transparency in Insurance Regulation and Supervisory Law of Malta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Geoffrey Bezzina, Simon Grima, and Andre Farrugia

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Transparency in Insurance Regulation and Supervisory Law of Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 Marta Ostrowska Transparency in Insurance Regulation and Supervisory Law of Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 Margarida Lima Rego and Diogo Costa Seixas Transparency in Insurance Law and Regulation in Spain . . . . . . . . . . . 249 Rafael Lara Transparency in Insurance Regulation and Supervisory Law in Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Jessika van der Sluijs Transparency in Dutch Insurance Regulation and Financial Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 Arthur van den Hurk A Comparative Analysis of Transparency in Insurance Regulation and Supervisory Law of Selected European Jurisdictions . . . . . . . . . . . . 309 Pierpaolo Marano Part II

Transparency in Non-European Jurisdictions

Transparency in Australian Insurance Law and Regulation: Regulation and Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 Robin Bowley Insurance Law and Regulation: The Transparency of the Brazilian Superintendence of Private Insurance (SUSEP) . . . . . . . . . . . . . . . . . . . 359 Vitor Boaventura Xavier Transparency in the Chilean Insurance Law, Intermediation, and Supervisory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Roberto Ríos Ossa Regulatory Requirements on Transparency of Insurance Contracts to the Insureds in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407 Zhen Jing Transparency in New Zealand Insurance Law . . . . . . . . . . . . . . . . . . . . 433 Jonathan Scragg and Rob Merkin QC Transparency in Insurance Regulation in Peru . . . . . . . . . . . . . . . . . . . 443 Alonso Núñez del Prado Simons Transparency in Insurance Regulation and Supervisory Law of Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473 Capitolina Tourbina

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Transparency in Insurance Law and Regulation: In South Africa . . . . . 491 Birgit Kuschke and Daleen Millard Transparency of Insurance Regulation in Taiwan . . . . . . . . . . . . . . . . . 519 Chun-Yuan Chen Transparency in Insurance Regulation and Supervisory Law of Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533 Ecehan Yeşilova Aras Transparency in Insurance Regulation and Supervisory Law of the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547 Robert H. Jerry II Comparative Analysis of Transparency in Insurance Regulation and Supervisory Law of the Countries Outside the EU and Europe (Rest of World) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595 Kyriaki Noussia Transparency in the Insurance Core Principles . . . . . . . . . . . . . . . . . . . 605 Marta Ostrowska

Abbreviations

AID AIRA AML AML/CFT ASF Art CMLR CMVM EBA EIOPA EIOPA Regulation

ELJ ESMA FAIS Act FSA FSB FSCA GCC GTC IAIS IBIPs IDD IDD Directive IMD

Act of 15 December 2017 on insurance distribution Act of 11 September 2015 on insurance and reinsurance activity Anti money laundering Anti money laundering/combating of terrorism financing Portuguese Insurance and Pension Funds Supervisory Authority Article Common Market Law Review Portuguese Securities Market Commission European Banking Authority European Insurance and Occupational Pensions Authority Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (EIOPA) European Law Journal European Court of Human Rights European Securities and Markets Authority Financial Advisory and Intermediary Services Act British Financial Services Authority Financial Services Board Financial Services Control Authority General Code of Conduct Insurance general terms and conditions International Association of Insurance Supervisors Insurance-based investment products Insurance Distribution Directive Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 xv

xvi

IPID J. Civ. L. Stud. J.I.B.L.R KID LIRB LOPF LTIA P PFSA PICA

PIDA PISA PPR’S PRIIPs PRIIPs Regulation Solvency II Directive

STIA Tul L. Rev.

Abbreviations

Insurance product information document Journal of Civil Law Studies Journal of International Banking Law and Regulation Key information document Laws on insurance and reinsurance business and other related matters of 2016 to 2019 Law on occupational and pension funds of 2020 Long-term Insurance Act Page Polish Financial Supervision Authority Portuguese Insurance Contract Act as approved by DecreeLaw 72/2008 of 16 April 2008 and amended by Law 147/ 2015 of 9 September 2015 Portuguese Insurance Distribution Act: Law 7/2019 of 16 January Portuguese Insurance Supervision Act as approved by Law 147/2015 of 9 September 2015 Policyholder Protection Rules Packaged retail and insurance-based investment products Regulation (EU) No. 1286/2014 of the European Parliament and of the Council of 26 November 2014 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009, as amended by Directive 2011/89/EU of the European Parliament and of the Council of 16 November 2011, Directive 2012/23/EU of the European Parliament and of the Council of 12 September 2012, Directive 2013/23/EU of the Council of 13 May 2013, Directive 2013/58/EU of the European Parliament and of the Council of 11 December 2013, and Directive 2014/51/EU of the European Parliament and of the Council of 16 April 2014, Directive 2016/2341 of the European Parliament and of the Council of 14 December 2016, Regulation 2017/2402 of the European Parliament and of the Council of 12 December 2017 and Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 Short-term Insurance Act Tulane Law Review

Part I

Transparency in European Jurisdictions

Transparency in Insurance Intermediation and Regulation in Austria Sebastian Wöss

1 Introduction This contribution will focus on the role and importance of transparency in insurance intermediation and insurance supervision. It can be anticipated that transparency also plays an essential role in these fields, albeit from other points of view than in insurance contract law: insurance contract law tries to create a transparent product “insurance”. The objective shall be achieved by timely provided sufficient information. In insurance intermediation, however, it is tried to make the relationship between the insurance intermediary and the policyholder transparent and comprehensible for the (future) policyholder.1 In the field of insurance supervision, transparency should finally help to establish a competitive but stable insurance market.2 More than insurance contract law, the insurance intermediation as well as the insurance supervisory—and therefore also the efforts to increase transparency in these fields—are characterized by European legislation. In insurance intermediation, the Insurance Distribution Directive (IDD),3 which replaced the Insurance Mediation

1

Cf. Wandt (2012), p. 341. Cf. Wandt (2012), p. 341. 3 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) (IDD), OJ n
L 26/19 of 02.02.2016. 2

S. Wöss (*) Wess Kux Kispert & Eckert Attorneys at Law, Vienna, Austria e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Marano, K. Noussia (eds.), Transparency in Insurance Regulation and Supervisory Law, AIDA Europe Research Series on Insurance Law and Regulation 4, https://doi.org/10.1007/978-3-030-63621-0_1

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S. Wöss

Directive (IMD),4,5 should be mentioned. In the field of insurance supervision, apart from the IDD, the Solvency II Directive plays a central part.6 The promotion of transparency plays an important role in all these legal acts. However, it is never self-purpose. Rather, greatest possible transparency should help to strengthen customer protection and to realize the overall objective of a functioning internal insurance market.7

2 Transparency in Insurance Intermediation The need for transparency in insurance intermediation, especially regarding the relationship between insurance intermediaries and policyholders, is obvious. The need for transparency arises from the fact that the insurance intermediary— no matter in which form he occurs8—always takes a position between the insurer and the policyholder. Although the insurance intermediary already has a mediating role between the insurer and the policyholder by definition, the interests of insurance intermediaries regularly tend to meet with those of insurers rather than with those of policyholders.9 These interests, however, often collide with the (protective) interests of the policyholder. Therefore, one of the objectives of the legislator is to make the existing links between insurers and insurance intermediaries more visible for policyholders. Furthermore, the need for transparency is not only based on the fact that the product “insurance” is a very consultancy-intense product but also on the complex legal framework of insurance law as such. In terms of protection of policyholders, this requires disclosing the professional qualification to the policyholders. The same applies to the powers granted by the insurer or by law. Regarding the complexity of the legal framework, it is necessary to inform policyholders about the obligations that they undertake by concluding this contract. The same applies to the rights established by the contract. Finally, policyholders must be provided with the information necessary for legal enforcement. All these objectives are tried to be achieved

4 Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation (IMD), OJ n
L 009 of 15.3.2003. 5 See Artt 43, 44 IDD. 6 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ n
L 335/1 of 17.12.2009. 7 See only recital
19 and recital
36 IDD. 8 To the various types of insurance intermediaries possible in Austria see below Sect. 2.1. 9 The insurer is generally interested that the insurance contract with the highest scope and the highest possible premium is concluded. The interest regularly coincides with the interest of the insurance intermediary, whose claim on intermediation commission presupposes the conclusion of an insurance contract and depends on the amount of the agreed premiums (cf. Koban 2014, annex Art 43–48, para 111).

Transparency in Insurance Intermediation and Regulation in Austria

5

in particular by means of far-reaching disclosure, information and documentation duties.

2.1

Legal Sources and System of the Insurance Intermediation in Austria

At the European level, the IDD regulates insurance distribution and therefore also insurance intermediation. The IDD was—with delay—transposed into national law by the Austrian Insurance Distribution Amendment Act10 (Versicherungsvertriebsrechts-Änderungsgesetz 2018 – VersVertrRÄG 2018), which entered into force on 1 October 2018, as well as the Austrian Insurance Intermediation Amendment Act11 (Versicherungsvermittlungsnovelle 2018), which entered into force on 28 January 2019. The transposition of the directive resulted in (here relevant) changes in the Austrian Insurance Contract Act12 (Versicherungsvertragsgesetz – VersVG), the Austrian Insurance Supervisory Act 201613 (Versicherungsaufsichtsgesetz 2016 – VAG 2016), the Austrian Industrial Code 199414 (Gewerbeordnung 1994 – GewO) and the Austrian Brokers Act15 (Maklergesetz – MaklerG). Also, in the implementation of the IDD, the Code of Conduct for Insurance Intermediation16 (Standesregeln für Versicherungsvermittlung) has been issued. These legal acts, combined with the Regulation on Insurance Intermediaries17 (Versicherungsvermittler-Verordnung) and the Austrian Commercial Representatives Act18 (Handelsvertretergesetz – HVertrG), also essentially form the framework governing the insurance intermediation in Austria: the Insurance Contract Act, the Brokers Act and the Austrian Commercial Representatives Act19 from a civil law perspective and the Industrial Code 1994 and the Insurance Supervisory Act 2016 from a professional law respectively supervisory law perspective. Insurance intermediation in Austria can generally take place in two ways, namely in the form of an insurance agent (Versicherungsvertreter) and in the form of an

10

BGBl I 2018/14. BGBl I 2018/112. 12 BGBl 1959/2. 13 BGBl I 2015/34. 14 BGBl 1994/314. 15 BGBl I 2001/98. 16 BGBl II 2019/162. 17 BGBl II 2010/156. 18 BGBl 1993/88. 19 BGBl 1993/88. 11

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insurance broker (Versicherungsmakler).20 The insurance agent is regulated by civil law in Artt 43–48 Insurance Contract Act. An insurance agent can be a person who performs the activity of insurance intermediation self-employed (insurance agent in a wider sense) or an employee of an insurance undertaking in insurance distribution (insurance agent in a narrow sense) (see Art 43 sentence 1 leg cit).21 It is irrelevant whether the intermediation activity is done for one or more insurance undertakings.22 The essential criterion is rather that the insurance agent as such is constantly entrusted (ständig betraut) with the intermediation. According to the prevailing opinion,23 this element is fulfilled when the obligation of the agent to carry on his intermediation results from a permanent legal relationship between the insurer and the insurance agent. At the same time, this element forms its demarcation from the insurance broker (see Art 26 para 1 Brokers Act).24 The insurance broker is governed by civil law in accordance with the Brokers Act, more specifically in the general provisions (Artt 1–15), the provisions for the commercial broker (Handelsmakler) (Artt 19–25) and the special provisions for insurance brokers (Artt 26–32). According to Austrian law, an insurance broker is a person who, on a commercial basis, i.e. independently and with a view to making profit,25 intermediates insurance contracts without constantly being entrusted by one or more insurance undertakings (see Art 19 in conjunction with Art 26 para 1 Brokers Act).26 From the view of professional law, the insurance intermediary is regulated in the Industrial Code 1994, supplemented by the Regulation on Insurance Intermediaries and the Code of Conduct for Insurance Intermediation. Based on the implementation of the requirements of the European legislator in the IDD (as well as previously in the IMD), the aspect of “transparency” runs through the entire body of law regulating insurance intermediation (and insurance distribution). Aspects aimed at transparency in insurance intermediation therefore can be found, e.g., in the Austrian Industrial Code 1994 (e.g. Art 137 para 2 and Art 137b), supplemented by the Regulation on Insurance Intermediaries, and in the Code of Conduct for Insurance Intermediation and the Insurance Supervisory Act 2016 (concerning insurance distribution) (e.g. Artt 241 et seqq). This fragmentation of legal provisions, which reflects partly the scope of the European legislator’s requirements and partly the legal implementation by the Austrian legislator, is rightly criticized in the academic world27 as it makes it more

20

Koban (2014), annex Art 43–48, para 5; Gruber (2014), Art 43, para 4 et seqq; Koban (2014), annex Art 43–48, para 1 et seqq. Baier (2019), p. 135. 21 Fenyves (2018), p. 29. 22 Gruber (2014), Art 43, para 8. 23 Cf. Fenyves (1998), Art 43, para 3. 24 Gruber (2014), Art 43, para 5. 25 Cf. Fromherz (1997), Art 26 para. 7. 26 Whereby neither a mere framework agreement with an insurer nor the permanent entrustment by a policyholder shall harm the classification as an insurance broker. 27 Cf. Jabornegg (2018), p. 39.

Transparency in Insurance Intermediation and Regulation in Austria

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difficult for insurance intermediaries to comply with standards and to assess any misconduct of a insurance intermediary (including its consequences) from the perspective of a policyholder. A detailed presentation of all provisions aiming at transparency would exceed the scope of this contribution. Therefore, only some selected aspects shall be dealt with in the following.

2.2

Disclosure Duties of the Insurance Intermediary Against the Policyholder

The Austrian Industrial Code 1994, supplemented by the Code of Conduct for Insurance Intermediation, essentially contains the professional and organizational requirements for exercising of the activity of insurance intermediation (see Art 137b Austrian Industrial Code). The provision of the Austrian Industrial Code 1994 that is decisive from the transparency point of view is found in Art 137 para 2 sentence 2, which stipulates the so-called “clarity of status” (Statusklarheit): before the implementation of the IDD— since the amendment of the IMD, which came into force on 15 January 200528—it was possible to act as an insurance broker and as an insurance agent at the same time.29 Now the activity of insurance intermediation may only be exercised in the form of an insurance agent or an insurance broker, depending on the actual relationship with the insurance undertaking respectively the insurance undertakings. In addition, the clarity of status is supplemented by Art 1 paras 4 to 7 Code of Conduct for Insurance Intermediation, which stipulates how insurance agents respectively the insurance brokers have to disclosure that they are working in one way or the other. In particular, the commercial documents must clearly indicate whether the person concerned is an insurance agent or an insurance broker (Art 1 paras 4 and 5 Code of Conduct for Insurance Intermediation).

2.3

Information Duties of the Insurance Intermediary Against the Policyholder

Information duties are primarily contained in Art 1 para 9 n
1 to n
10 Code of Conduct for Insurance Intermediation and also in Art 1 paras 10 and 11 leg cit.

28

BGBl I 2004/131. Thus, according to the former Art 137f para 1 Industrial Code 1994, insurance intermediaries also had to appear in business in the form in which they actually acted. Only in case of a consultation the insurance intermediary had to disclosure whether is in the concrete matter he was acting in the form of an insurance agent or in the form of an insurance broker (Art 137f para 8 Industrial Code 1994). 29

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Insurance intermediaries must disclose the following facts in time before a policyholder submits his/her contractual declaration:30 the identity and address, as well as the fact that he/she is an insurance intermediary (Z 1 leg cit); whether he/she offers advice on the offered insurance products (Z 2 leg cit);31 an indication of the procedure referred to in Art 365 Z 1 Austrian Industrial Code 1994 (Z 3 leg cit);32 the register in which he/she has been entered and the manner in which the entry can be verified (Z 4 leg cit);33 whether he/she represents the policyholder (insurance broker) or acts on behalf and for the account of an insurance undertaking (insurance agent) (Z 5 leg cit); whether he/she has a direct or indirect holding of at least 10 percent of the voting rights or capital of a particular insurance undertaking (Z 6 leg cit); whether a particular insurance undertaking has a direct or indirect holding of at least 10 percent of the voting rights or capital of the insurance broker (Z 7 leg cit); with regard to the insurance intermediary’s actual relationship with the insurance undertaking pursuant to Art 137 para 2 Austrian Industrial Code 1994 (Z 8 leg cit),34 a) whether the insurance intermediary bases his/her advice on a balanced and personal examination pursuant to Art 3 para 5 Code of Conduct for Code, b) whether the insurance intermediary is contractually obliged to conduct insurance distribution business exclusively with one or more insurance undertakings—in which case the insurance intermediary must disclose the names of these insurance undertakings, or c) whether the insurance intermediary is not contractually obliged to conduct insurance distribution business exclusively with one or more insurance undertakings and does not base his advice on a balanced and personal examination—in which case the insurance intermediary must disclose the names of those insurance undertakings with which he is allowed to conduct insurance business and also conducts insurance business; the type of remuneration received in connection with the insurance contract (Z 9 leg cit); and whether the insurance intermediary works in connection with the insurance contract a) on the basis of a fee, i.e. the remuneration is paid directly by the policyholder; b) on the basis of a commission, i.e. the remuneration is included in the insurance premium; c) on the basis of another type of remuneration, including economic benefits of any kind offered or granted in connection with the insurance

30 Less stringent requirements apply to insurance intermediaries who pursue the activity only as a part-time profession (see Art 2 Code of Conduct for Insurance Intermediation). Further restrictions exist with regard to the insurance of major risks in case the policyholder is a legal entity (see Art 4 para 1 Code of Conduct for Insurance Intermediation). 31 See below Sect. 2.4. 32 According to Art 365 Z 1 Austrian Industrial Code the Federal Ministry of Economics and Labour (Bundesministerium für Wirtschaft und Arbeit) shall receive complaints from policyholders and other interested parties, in particular from organizations for consumer protection. The complaints are free of charge and must be answered and handled by the ministry in any case. If possible, efforts shall be made to achieve mediation. 33 The respective register query can be made under the following address: https://www.gisa.gv.at/ f s h o s t - g i s a - p / u s e r / f o r m u l a r . a s p x ? p i d ¼3 e 8 b 8 1 d 1 2 2 d f 4 1 5 d b 6 5 b 1 e c 3 1 2 d 5 a 4 5 2 & pn¼Be2102a48c44b427fa29b85296c7f6b3f. 34 See above Sect. 2.2.

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contract; or d) on the basis of a combination of the described types a) to c). If the fee is to be paid directly by the policyholder, the insurance intermediary must inform the policyholder about the amount or—if this is not possible—of the method of calculating the fee (Art 1 para 10 Code of Conduct for Insurance Intermediation). According to Art 1 para 11 Code of Conduct for Insurance Intermediation, finally the insurance intermediary must also disclose the information required above for each such payment in the event of subsequent payments by the policyholder. According to Art 5 Code of Conduct for Insurance Intermediation, the information according to Art 1 paras 9 to 11 shall be provided on paper, on the website or a durable medium and in a clear, precise and understandable form.

2.4

Penalties in Case of Non-fulfilment

The provisions in the Industrial Code 1994 as well as the provisions in the Code of Conduct for Insurance Intermediation and thus also the information, documentation and disclosure duties are of public-law nature.35 Their violation is therefore primarily sanctioned by administrative criminal law. If insurance intermediaries does not fulfil the requirements stipulated in the Regulation on the Rules of Professional Ethics and Professional Conduct in Insurance Intermediation, it may result—for example—in a fine of up to EUR 700,000 in case of an infringement by a natural person and up to EUR 5,000,000 or 5% of the total annual revenues in case of an infringement by a legal entity (see Art 366c Industrial Code 1994). Despite the public-law nature of the provision, the information duties are attributed to civil law.36 As pre-contractual information duties, their infringement may (also) result in claims of damages against the insurance intermediary.37

3 Transparency in Austrian Insurance Supervision Law If one tries to capture the (Austrian) insurance supervisory law under transparency aspects, it seems helpful to take a general look at the objectives of insurance supervision first. Modern insurance supervisory law respectively modern insurance supervisory basically pursues two objectives:38 first, it is intended to ensure a stable insurance market. Insurance undertakings should be able to meet their obligations to

35

Schauer (2005), p. 161. Cf. Schauer (2005), p. 158. 37 Schauer (2005), p. 167. 38 This, however, is, in a sense, again subordinated to the objective of creating a single European market for insurance products (Baran and Peschetz 2015, p. 6). 36

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pay in the event of a specific insurance case.39 Furthermore, appropriate regulations should ensure that the insurance sector, which—like the banking sector—consists of only a few players, will not collapse due to uncertainties on the capital market.40 Second, the insurance supervisory law respectively an effective insurance supervisory authority should help to create sufficient market transparency and an informed policyholder in order to guarantee a competitive insurance market. In the first case, the legislator tries to achieve the goal through a transparent ratio between insurance supervision and insurance undertakings and, in the second case, through a transparent ratio between insurance undertakings and policyholders.

3.1

The Old Regime41

Already the Austrian Insurance Supervisory Act 197842 (Versicherungsaufsichtsgesetz 1978 – VAG 1978), which was based on the German insurance supervisory law, contained in provisions that were aimed at the transparency of the insurance industry. One example is the obligation to draw up, submit and approve a business plan which also had to contain the general insurance conditions intended for use in business transactions (Art 8 leg cit). The act contained further regulations in terms of the own funds of the insurance undertaking (Art 4 para 3 n
3 leg cit).43 Finally, it contained the right of the insurance supervisory authority44 to review the insurance undertaking (Art 99 leg cit).45 In order to do that, the insurance undertaking had information, publication und disclosure duties towards the insurance supervisory authority (Art 100 leg cit).46 Already these measures were aimed at market transparency and customer protection,47 and thus the objectives of the Austrian legislator largely coincided with those of the European legislator (although

39

Wagner and Lou (2012), p. 319. Cf. also Baran and Peschetz (2015), p. 2, 14 et seqq. 41 On history of Austrian insurance supervisory law. 42 BGBl 1979/568. 43 Thus, a concession was only to be granted if the own funds were sufficient to cover both the startup costs as well as the costs of the organization and the running insurance business. 44 Until 1.4.2002, this was the Federal Ministry of Finance, since then the Financial Market Supervisory Authority (Finanzmarktaufsicht – FMA) (Art 1 para 1 Financial Market Supervisory Act, BGBl 2001/97 [Finanzmarktaufsichtsgesetz – FMAG] in conjunction with Art 268 para 1 and 2 Insurance Supervisory Act 2016). 45 According to Art 99, the insurance supervisory authority had to supervise the entire business of the insurance undertaking, in particular the compliance with the regulations applicable to the operation of the insurance and the business plan. 46 Art 100 leg cit had already provided that the supervisory authority can at any time request insurance companies to provide information and documents on matters relating to the business of the company (see also Art 272 Insurance Supervisory Act 2016). 47 Ertl (1997), p. 2. 40

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those of the European legislator has been and still are complemented by the objective of the European internal insurance market). The principles of the Insurance Supervisory Act 1978, which were aimed at transparency in the insurance industry, still apply today. Since the accession of Austria to the European Economic Area (EEA) on 1 January 1994 and to the European Union on 1 January 1995, they have, however, been continuously expanded, refined and supplemented by new ones.48

3.2

Turning Point Solvency II

The directive,49 which entered into force on 6 January 2010, pursues the objectives mentioned above50 and stipulates measures to achieve them. As a directive, which at the same time summarizes nearly all the directives issued before in this field,51 it also forms the framework for the European and therefore also Austrian insurance supervision.52 The objectives are to be achieved through a wide range of measures. Thereby, the directive follows a three-pillar model:53 in the first and the second pillars, requirements regarding the capital requirement, the business conduct as well as the organizations of the (re)insurance undertakings are intended; in the third pillar, information and reporting duties for the insurance undertakings towards the insurance supervisory authority and the public are stated. In detail, the first pillar stipulates quantitative requirements for the capital of insurance undertakings. This should ensure that insurance undertakings can entirely fulfil their obligations at all times, which is achieved by evaluating the risk profile for each insurance

48 An exception is only the pre-approval of the general insurance conditions originally laid down in the law in the course of the submission of the business plan. This was not consistent with the objective of the realization of the single European insurance market. The provisions therefore had to be canceled. In order to escape the risk of a potential market intransparency respectively a deficit in customer protection, extensive information duties for the insurance undertakings were introduced (Artt 9a, 18b VAG 1978 in the version of BGBl 1994/652). These provisions too are to be found today in the Insurance Supervisory Act 2016 (Artt 128 et seqq leg cit). 49 The Directive has already been amended several times, e.g. by the Directive 2014/51/EU of 16.4.2014 (Omnibus II-Directive) and most recently by the Directive 2018/843/EU of 30.5.2018. 50 See only recital
2, 3, 11, 14, 18 Solvency II Directive. 51 In addition to the Solvency II provisions, the Directive also contains a new codification of 13 existing Directives. Parts of these directives, which are not affected by Solvency II, were largely adopted unchanged. At national level, only minor adjustments were necessary. 52 However, supplemented by further national legal acts like the Austrian Tax Authority Supervisory Act (Finanzbehördenaufsichtsgesetz – FMABG, BGBl I 2001/97) as well as by other (directly) applicable acts of the Union, e.g. the delegated regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). 53 The following also apply to re-insurance undertakings. For the sake of simplicity, however, in the following only insurance undertakings are mentioned.

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undertaking according to market values (see Art 129 Solvency II Directive).54 The second pillar stipulates qualitative requirements for insurance undertakings’ business conduct. According to Art 41 Solvency II Directive, an effective system of governance is to be introduced which enables a sound and prudent management of the business.55 The third pillar stipulates the duty of insurance undertakings to report to the insurance supervisory authority on the system of governance applied, the business they are pursuing, the valuation principles applied for solvency purposes, the risks faced, the risk-management systems as well as their capital structure, needs and management. The reports must be compiled in a transparent way (see Art 35 para 4 Solvency II Directive). Finally, reporting duties against the public are also included in the third pillar. Its content is intended to provide information on the solvency and financial situation of insurance undertakings (see Art 52 Solvency II Directive).

3.3

The Current Regime from an Austrian Perspective

The Solvency II Directive required extensive changes to the Austrian law. The transposition was not carried out by amending the existing law. Rather, it was taken as an opportunity to replace the old Austrian Insurance Supervisory Act, which dated back to 1979.56,57 The Austrian Insurance Supervisory Act 2016 has entered into force on 1 January 2016.58 Yet the legal act is not a complete new codification. Parts of the old Austrian Insurance Supervisory Act 1978 were transposed to the new as far as possible and only changed in the way the Solvency II Directive made it necessary.59 Parts that have largely been transferred without changes are the provisions on shareholder control (Artt 24 et seqq Austrian Insurance Supervisory Act 2016), mutual insurance undertakings (Versicherungsvereine auf Gegenseitigkeit) (Artt 35 et seqq leg cit), the special provisions for the different types of insurance (Artt 91 et seqq leg cit), provisions regarding accounting and group accounting (Artt 136 et seqq leg cit), provisions regarding the cover pool (Artt et 300 seqq leg cit) and provisions regarding the insolvency of insurance undertakings (Artt 307 et seqq leg cit). The same applies to the pre-contractual information duties of insurance undertakings which already existed before the transposition of the Solvency II Directive into

54

Wandt (2012), p. 351. The system used shall contain a transparent organizational structure with a clear allocation and appropriate segregation of responsibilities as well as an effective system for ensuring the transmission of information. 56 The Austrian Insurance Supervisory Act 1978 has only been enacted in 1979. 57 The national legislator even considered a re-codification as mandatory (see the materials of the Insurance Supervisory Act 2016 354 BlgNR 25. GP 3). 58 Art 339 para 1 leg cit. 59 Cf. Baran and Peschetz (2015), p. 4 seqq. 55

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Austrian law in the Insurance Supervisory Act 1978 (see Artt 128 et seqq leg cit).60 Also, these provisions were—with the explicit will of the Austrian legislator—taken over as far as possible.61 The innovations in the Insurance Supervisory Act 2016 are thus essentially limited to the innovations introduced by the Solvency II Directive. The provisions of the first pillar regarding the capital requirements are found mainly in Artt 157 et seqq leg cit. The provisions of the second pillar regarding the business conduct are contained mainly in Artt 106 et seqq leg cit.62 The third pillar is finally mainly transposed in Artt 241 et seqq leg cit. As part of the third pillar, Artt 247 et seqq leg cit also form the core of the measures to create transparency, both in the ratio of insurance supervision to insurance undertakings and in the ratio insurance undertakings to the public respectively to the policyholders. They shall be discussed more detailed below.

3.3.1

Transparency in the Ratio of Insurance Supervision and Insurance Undertakings

The first objective of the third pillar is—at least as far as insurance supervision is concerned—to ensure a largely transparent insurance undertaking that enables the insurance supervisory authority to check the requirements placed in the first and second pillars and, if necessary, to intervene. Therefore, the insurance undertakings have to provide a large number of information to the insurance supervisory authority. The corresponding provisions can be found in Artt 247 et seqq Austrian Insurance Supervisory Act 2016.

3.3.1.1

Periodic Reporting Duties of the Insurance Undertakings

According to Art 248 para 2 Austrian Insurance Supervisory Act 2016, an insurance undertaking has to submit a report on the annual accounts to the insurance supervisory authority.63 The report must include annual financial statements, management report, corporate governance report and auditor’s report. The transmission has to be

60

The provisions were to be found in Artt 252 seqq before the IDD has been transposed to national law. In the Insurance Supervisory Act 1978 they were to be found in Artt 9a, 18b and 75 Insurance Supervisory Act 1978. 61 Materials of the Austrian Insurance Supervisory Act 2016 354 BlgNr 25 GP 9. 62 A presentation of the transposition of the first and second pillar as well as parts of the third pillar into Austrian law must be omitted here for reasons of space even though they also contain aspects of transparency (see only the reporting duties of the authority, Artt 256, 257 Austrian Insurance Supervisory Act 2016). Regarding these provisions, reference is to be made to relevant literature: Hirner (2016), Art 157 et seqq; Korinek (2016), Art 106 et seqq; Gruber and Sprohar-Heimlich (2016), Art 247 et seqq. 63 The same applies to domestic branches of third-country insurance undertakings (Art 248 para 4 Austrian Insurance Supervisory Act 2016).

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made immediately after the approval of the annual financial statements but no later than five months after the end of the financial year. The deadline for the consolidated annual accounts is extended by 6 weeks. The report on the financial statements also has to provide additional information, in particular a breakdown of items in the annual financial statements and a list of the assets, according to the rules applicable to accounting (Art 248 para 8 in conjunction with Art 1 of the Insurance Undertakings Notification Regulation (Versicherungsunternehmen Meldeverordnung – VU-MV)).64 Partly, this information has to be provided at shorter intervals than annually.65 Pursuant to Art 248 para 3 Austrian Insurance Supervisory Act 2016, without undue delay but no later than six months after the end of the financial year, insurance undertakings have to transmit a copy of the minutes of the general meeting, in which the management board and the supervisory board respectively the administrative board have been relieved in favor of the supervisory authority. Furthermore, proof of publication of the annual financial statements as well as proof of publication of the consolidated financial statements have to be provided.66 Finally, according to Art 248 para 1 Austrian Insurance Supervisory Act 2016,67 certain criteria must be met with regard to the scope and form of presentation of the information in the report. Thus, the information has to contain all essential aspects in a complete, comparable, timely consistent way. The information has to be accessible, reliable and understandable and has to meet the challenges of the nature, the extent and the complexity of the operations of the undertaking concerned and in particular the risks inherent in that business.

3.3.1.2

Situation-Related Information and Notification Duties of the Insurance Undertaking and Third Parties

According to Art 272 para 1 sentence 1 Austrian Insurance Supervisory Act 2016, the supervisory authority may at any time request information regarding all matters relating to the business of the insurance undertaking. Furthermore, it can request all relevant documents. The insurance undertakings have to comply with the call for

64

BGBl II 2015/217. Thus, Art 2 of the Insurance Undertakings Notification Regulation provides for a quarterly submission. 66 In addition to the report on the annual financial statements, insurance undertakings must report regularly to the supervisory authority. The regular supervisory reporting is based on the report on the solvency and financial position. It consists of the public report on the solvency and financial situation (Art 304 para 1 1it a of the delegated regulation) as well as the actual report, the content of which is stipulated in art 307–311 of the delegated regulation. The regular supervisory report shall be submitted no later than 14 weeks after the end of the financial year (Article 312 para 1 lit a of the delegated regulation). 67 The provision transposes Art 35 para 1 and 4 of the Solvency II Directive. 65

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cooperation.68 A factual justification is not necessary.69 Also, the insurance undertaking is not able to invoke the existence of business secrecies.70 However, the obligation to submit the information and documents is limited by the fact that the supervisory authority is not allowed to request a systematic (i.e. regular) submission of general policy conditions and forms used in business transactions with policyholders (Art 272 para 1 sentence 2 leg cit).71 In turn, it is, however, permissible to request information and documents in individual cases if there are indications that the interests of the policyholder are infringed.72 Article 272 para 3 Austrian Insurance Supervisory Act 2016 also stipulates an obligation of the insurance intermediary to provide requested information and documents. The supervisory authority may at any time request information and documents from the insurance intermediary in order to ensure the legality of insurance business. “The legality of insurance business” is at the same time the limit of the claim for information.73 In particular, Art 272 para 3 does not stipulate a right of the supervisory authority to supervise the insurance intermediary.74 Rather, information from the insurance intermediaries can only be used to audit insurance undertakings. According to Art 272 paras 4 and 5 Insurance Supervisory Act 2016, the supervisory authority can finally also request information and documents from all other persons who may have knowledge of relevant information about the business of an insurance undertaking. These people are also obliged to comply with the call for cooperation.75 Anyone who has knowledge of any business matters can be obliged, such as auditors, employees, and policyholders. The limit of the obligation to provide information is statutory secrecy duties, which shall, however, not apply to the auditor since he is of particular importance for the supervisory authority (para 4 last sentence leg cit). Article 272 para 2 Austrian Insurance Supervisory Act 2016 sets out a notification duty for insurance undertakings. Accordingly, the latter is obligated to promptly notify all circumstances that might threaten the possibility of a permanent fulfilment of the obligations under the insurance contracts. Such circumstances shall be indicated irrespective of whether or not deterioration in the financial capacity of the

68

Baran and Peschetz (2015), p. 163. Korinek (2016), Art 272, para 7. 70 This is, however, unproblematic, as the Austrian Authority is in according to Art. 20 para 3 of the Federal Constitutional Act (Bundesverfassungsgestz – B-VG, BGBl 1930/1) is obliged to maintain confidentiality. 71 The prohibition of systematic submission is based on Art 181 and 182 Solvency II-Directive. 72 Baran and Peschetz (2015), p. 166. 73 Korinek (2016), Art 272, para 19. 74 This right is the responsibility of the competent commercial authority according to the Industrial Code 1994. 75 Cf. Korinek (2016), Art 272, para 21. 69

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insurance undertaking has occurred.76 Rather, it is sufficient that there is only potential of such a hazard.77 Other subject-related notification duties are situated in Artt 278, 279, and 280 Insurance Supervisory Act 2016. According to Art 278 leg cit, the supervisory authority must be notified immediately as soon as the deterioration in financial capacity has reached an extent that jeopardizes the coverage of the solvency capital requirement. According to Art 279 leg cit, the supervisory authority must be notified immediately if the insurance undertaking notices that the solvency capital requirement is no longer covered or there is a risk that this case will occur within the next three months.78 Under Art 280 leg cit, the supervisory authority must be notified immediately if it notices that the minimum capital requirement is no longer covered or there is a risk that this case will occur within the next three months. The infringement of the notification obligations according to Art 272 para 2, Art 279 para 1 and Art 280 para 1 is sanctioned by administrative penalties with a fine of up to EUR 60,000 (Art 317 para 1 n
17 Austrian Insurance Supervisory Act 2016). Finally, certain persons are subject to special notification duties against the supervisory authority, which relate to the business of the insurance undertakings:79 the responsible actuary (Art 116 para 4 sentence 2 Austrian Insurance Supervisory Act 2016), the auditor (Art 265 Austrian Insurance Supervisory Act 2016), and the trustee for the supervision of the cover (Art 305 para 1 n
3 Insurance Supervisory Act 2016). The infringement of these reporting duties is sanctioned by administrative penalties with a fine of up to EUR 60.000 according to Art 17 para 1 n
9, n
16 and n
19 Austrian Insurance Supervisory Act 2016.

3.3.2

Transparency in the Ratio of Insurance Undertakings to the Policyholders

The third pillar, as a second essential element, states comprehensive reporting requirements on the solvency and financial position of the insurance undertaking, which must be provided to the public. These disclosure duties should lead to increased market discipline.80 At the same time, mandatory publication by all insurance undertakings should contribute to their comparability among themselves and thus increase the transparency of the insurance market.81 The provisions are found in Artt 241 et seqq Insurance Supervisory Act 2016, which transposes Artt 53 et seqq Solvency II Directive. The provisions are

76

Baran and Peschetz (2015), p. 166. Korinek (2016), Art 272, para 19. 78 See also Art 202 leg cit for insurance holding companies and mixed financial holding companies. 79 Cf. Baran and Peschetz (2015), p. 167. 80 Baran and Peschetz (2015), p. 132. 81 See the materials of the Insurance Supervisory Act 2016 354 BlgNr 25 GP 53; Wandt (2012), p. 341. 77

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supplemented by the comprehensive provisions of the Delegated Regulation (EU) 2015/35 (Artt 290 et seqq), which specifically regulates the content of the report. The report has to provide information on the company’s business, the governance system used, the risk profile, the solvency balance sheet, the explanations and the capital management applied.82 The reports itself have to comply with principles, which apply to the reports provided to the supervisory authority (Art 241 para 1 in conjunction with Art 248 para 1 Austrian Insurance Supervisory Act 2016). When issuing the reports, other publications that have been drawn up in compliance with other legal or regulatory requirements can also be used. Also, references to such reports shall be possible. A prerequisite is, however, that the information to be published is equivalent in nature and scope (Art 241 para 2 leg cit). Insurance undertakings may, on a voluntary basis, also publish further information and explanations regarding their solvency and financial situation. However, the voluntary publication of additional information must not lead to the veiling of the mandatory information—for example by publishing extensive but less relevant company information.83 The report itself must not necessarily contain all the information stipulated in Artt 293–297 of the Delegated Regulation. Exceptionally and only after approval of the supervisory authority, the publication of certain information can be waived (Art 242 para 1 Austrian Insurance Supervisory Act 2016), when competitors of the undertaking would gain a significant undue advantage through publication84 or— and insofar as—an insurance undertaking is subjected to a duty of confidentiality against a third party.85 However, the description of the capital management is excepted. The reasons for the (approved) non-publication are to be mentioned in the report (Art 242 para 2 leg cit). According to Art 243 para 1 Austrian Insurance Supervisory Act 2016, the report must always be kept up to date. Major developments that significantly alter the importance of the information published in the report on the solvency and financial position have to be published. In that case, appropriate information about the reason and the possible effects of the development must be provided. An essential development is expressis verbis, given in particular if certain minimum or solvency capital requirements are not met (see Art 243 para 1 n
1 and n
2 leg cit). In the event of an essential development, the insurance undertaking shall immediately report the amount of non-compliance, an explanation of the reasons for the non-compliance, its consequences and any remedial measures to be applied (Art 243 para 2 leg cit). In order to meet the requirements of the report, Art 244 Austrian Insurance Supervisory Act 2016 provides that the insurance undertaking has to create

82

Cf. Baran and Peschetz (2015), p. 133 et seqq. See also the materials of the Insurance Supervisory Act 2016 354 BlgNr 25 GP 53. 84 Baran and Peschetz (2015), p. 133. 85 In this context, such duties of confidentiality should be customary, which are usually agreed upon by contractual parties on the basis of justified interests (see the materials of the Insurance Supervisory Act 2016 354 BlgNr 25 GP 53). 83

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appropriate systems and structures in order to be able to meet these reporting requirements. Also, written guidelines must be drawn up. They should ensure the quality of the published information.86 The report must contain all the information of the parent company as well as of the subsidiaries. An infringement of the duty to publish a report on the solvency or financial situation is punished by the authority with a fine of up to EUR 60,000 (Art 318 Austrian Insurance Supervisory Act 2016).

References Baier J (2019) Versicherungsvermittlung und Statusklarheit nach der Versicherungsvermittlungsnovelle 2018. ZVers:135 et seqq Baran B, Peschetz A (2015) Österreichisches Versicherungsrecht, 3rd edn. Manz, Wien Ertl G (1997) Neuerungen im Versicherungsvertragsrecht. ZVR:2 et seqq Fenyves A (1998) Article 43. In: Fenyves A, Kronsteiner F, Schauer M (eds) Kommentar zu den Novellen zum VersVG. Springer, Wien Fenyves A (2018) Die Neuerungen im VersVG — ein Überblick. VR:27–38 Fromherz W (1997) Kommentar zum MaklerG. Springer, Wien Gruber M (2014) Article 43. In: Fenyves A, Schauer M (eds) Kommentar zum VersVG. Verlag Österreich, Wien, pp 1–35 Gruber M, Sprohar-Heimlich H (2016) Article 241 et seqq. In: Korinek S, Saria G, Saria S (eds) VAG - Versicherungsaufsichtsgestz. Manz, Wien Hirner L (2016) Article 157 et seqq. In: Korinek S, Saria G, Saria S (eds) VAG Versicherungsaufsichtsgestz. Manz, Wien Jabornegg P (2018) Statusklarheit und die Umsetzung im Zivilrecht. VR:50 seqq Koban K (2014) annex Article 43–48. In: Fenyves A, Schauer M (eds) Kommentar zum VersVG. Verlag Österreich, Wien, pp 1–73 Korinek S (2016) Article 106. In: Korinek S, Saria G, Saria S (eds) VAG Versicherungsaufsichtsgestz. Manz, Wien Schauer M (2005) Die Informationspflichten im neuen Versicherungsvermittlerrecht. VR:158 et seqq Wagner F, Lou J (2012) Solvency II: Ein neues aufsichtsrechtliches Regime und dessen Konsequenzen für Versicherungsunternehmen. In: Beckmann RM, Mansel H-P, MatuscheBeckmann A (eds) Weitsicht in Versicherung und Wirtschaft, Gedenkschrift für Ulrich Hübner. C.F. Müller, Heidelberg, pp 341–353 Wandt M (2012) Transparenz als allgemeines Prinzip des Versicherungsrechts. In: Beckmann RM, Mansel H-P, Matusche-Beckmann A (eds) Weitsicht in Versicherung und Wirtschaft, Gedenkschrift für Ulrich Hübner. C.F. Müller, Heidelberg, pp 341–353

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Baran and Peschetz (2015), p. 133.

Transparency in Insurance Regulation and Supervisory Law of Croatia Loris Belanić and Dionis Jurić

1 Transparency in Insurance Mediation and Insurance Representation in Croatian Law An important segment of the insurance market is the sale or distribution of insurance products. In this insurance sale between the seller-insurer and the buyerpolicyholder, an insurance intermediary is often interpolated as someone who helps the insurer find a buyer-policyholder and helps the buyer-policyholder find the insurance product (insurance cover) that best suits his/her needs. However, the role of the intermediary is not exhausted solely to assist the parties in selling the relevant purchase of the insurance product, but it also extends to the so-called postpay, which includes notifying the insured, claiming damages, inspecting the damage, and even liquidating the damage (Ćurković 2011, p. 7). In the broader sense, the insurance intermediary is any person who is involved in the process of selling (and postselling) the insurance between the insurer and the insurer/insured person. In Croatian law, there is no common term for the insurance broker and agent, but the term “insurance intermediary” refers exclusively to the term “insurance broker”, while the insurance representative (agent) is a specific term. Both the broker and the insurance representative (agent) in the insurance are commonly paid for through commission. The difference is that the broker predominantly represents the interests of the policyholder and the representative (agent) the insurer’s interests. The broker works with multiple insurers and the agent with only one. The client is not responsible for the broker’s actions, while the insurer is responsible for the representative’s actions (Ćurković 2011, p. 19). Directive

L. Belanić (*) · D. Jurić University of Rijeka, Faculty of Law, Rijeka, Croatia e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Marano, K. Noussia (eds.), Transparency in Insurance Regulation and Supervisory Law, AIDA Europe Research Series on Insurance Law and Regulation 4, https://doi.org/10.1007/978-3-030-63621-0_2

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2016/97 on insurance distribution1 has been implemented with amendments to the Insurance Act of December 2018.2,3 Those amendments fully harmonized Croatian law with European law regarding insurance distribution (Ćurković 2019, p. 29). Following the Directive, the Insurance Act introduces the terms “insurance distribution” and “insurance distributors.” These terms include insurance intermediaries and agents; i.e., agents are considered one of the categories of insurance intermediaries.4 The main legal sources regulating the matter of insurance intermediaries (insurance brokers and insurance agents) in Croatian law are the Civil Obligations Act and the Insurance Act (Ćurković 2017, pp. 68–69). The Civil Obligations Act as lex generalis regulates the brokerage contract,5 the contract of representation,6 and the trade agency contract,7 whose provisions also apply to insurance brokerage contracts and insurance representation contracts (with an additional specific provision expressly related only to insurance agents within the chapter on the insurance contract).8 The Insurance Act contains statutory legal provisions on insurance agents and insurance brokers. These provisions prescribe the conditions for carrying out activities and obtaining a work permit and legal form of insurance agency and insurance brokerage. However, the Insurance Act also contains certain provisions of a contractual nature relating to the insurance broker’s/insurance agent’s obligations as well as to those of the policyholder/insured party (in particular, the obligation to inform the policyholder referred to below). The Companies Act applicable to the Insurance Brokerage Agency and the Insurance Agency is also relevant, unless otherwise provided by the Insurance Act. Important is also the Act on Licensing of Trades since insurance agents can perform business as a tradesman. In addition to the abovementioned regulations, it should be noted that legal regulations and decisions issued by the Croatian Financial Services Supervisory Agency (HANFA)9 regarding 1 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on the insurance distribution (revised text) (Text with EEA relevance). 2 Official Gazette, no. 112/18 of 14 December 2018. 3 Art. 399–436g of the Insurance Act. 4 Art. 401 para 1 and 2, art. 402, para 1 of the Insurance Act. 5 Art. 835–848 of the Civil Obligations Act. 6 Art. 308–318 of the Civil Obligations Act. 7 Art. 804–825 of the Civil Obligations Act. 8 Art. 930 of the Civil Obligations Act. 9 HANFA is a supervisory body whose scope of activities and competence cover the supervision of financial markets, financial services and supervised entities providing those services. HANFA supervises business operations of stock exchanges and regulated public markets, companies authorised to provide investment services and perform investment activities, investment firms and securities issuers, brokers and investment advisors, tied agents, central clearing and depository company, insurance and reinsurance companies, insurance and reinsurance intermediaries, investment and pension fund management companies, pension insurance companies, investment and pension funds, Central Register of Insured Persons, Fund for Croatian Homeland War Veterans and Members of their Families, Retired Persons’ Fund and legal persons carrying out leasing and factoring operations unless they are provided by banks as part of their registered activities. It was

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brokerage and insurance agency are included among the legal sources. In Croatia, there is no professional ethics code of mediators and insurance agents, although their professional associations do exist. However, in Croatia does exist the Code of Insurance and Reinsurance Business Ethics.10 This Code primarily refers to the conduct of insurance companies, but it is applied in an appropriate manner to insurance intermediaries as well as to insurance agents. Each insurance company shall continuously monitor and oversee all natural and legal persons that render insurance services on its behalf and for its account. If, in performing insurance services, any such person violates the provisions of the Code, such violation shall be deemed committed by the insurance company on behalf and for the account of which said person acted or the insurance company that permitted such conduct.11

1.1

Insurance Broker’s Obligations to the Client (the Insured)

This chapter deals with the insurance broker’s obligations toward the policyholder/ insured person regarding transparency in the work of the insurance broker. The insurance broker’s obligations arise from insurance brokerage contracts. In Croatian law, the insurance brokerage contract is not specifically regulated, but the contract is governed by general provisions of the Civil Obligations Act on the brokerage contract,12 while the Insurance Act only contains specific provisions relating to an insurance brokerage contract (e.g., specific obligations of the insurance broker with regard to the protection of the interests of the contracting parties,13 specific obligations to provide the information to the insured person,14 special provisions on the right to commission15).

established in 2005, integrating three existing supervisory institutions. HANFA is an independent legal person with public authority within the scope of its activities and competence laid down in the Act on the Croatian Financial Services Supervisory Agency (Official Gazette no. 140/2005, 154/2011, 12/2012) and other laws. It is accountable to the Croatian Parliament. See on HANFA’s web sites https://www.hanfa.hr/about-us/. 10 The Code is available at: https://www.hgk.hr/udruzenje-osiguravatelja. 11 Art. 2.2. of the Code of Insurance and Reinsurance Business Ethics. 12 Art. 835–848 of the Civil Obligations Act. 13 Art. 424 of the Insurance Act. 14 Art. 430–434 of the Insurance Act. 15 Art. 435, par. 3–16 of the Insurance Act.

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Broker’s Duty to Inform the Client (Insured) Broker’s Precontractual Information Duty

Just as the insurer has a precontractual information duty, it is understandable that the insurance broker also has such a duty. The Insurance Act lists which information is to be given to the policyholder before the conclusion of the insurance contract, as well as any amendments to the existing insurance contract. These are the following information:16 1) full name and address of the broker, 2) registry in which he/she has been registered and the manner of its verification, 3) the insurance brokerage and reinsurance agency in which he/she operates, 4) information about providing advice relating to insurance products that are subject to distribution, 5) information on the out-of-court dispute resolution procedure and the internal procedure for addressing the complaints of interested persons 6) other information as provided under Articles 380 and 382 of the Insurance Act (all information that the insurer is obliged to provide the policyholder with prior to the conclusion of the contract).17 Furthermore, and in order to maximize transparency, the insurance intermediary is obliged to provide the client with information on the affiliation with the insurance undertaking: whether he/she holds a share representing 10% or more of the voting rights or the capital in a given insurance undertaking as well as whether the insurance undertaking has an identical share in the insurance intermediary.18 Then the intermediary must provide information whether he/she gives advice based on a fair and personal analysis or whether he/she is contracted with one or more insurance undertakings (in which case, he/she must provide the names of those insurance undertakings).19 In particular, the intermediary is required to inform the party of the nature of the remuneration received and the commission and whether the compensation is paid directly by the party.20 Familiarizing the client (policyholder) with the aforementioned information aims at enabling the client to make an informed decision as to whether the broker’s activity will protect his/her (i.e., his/her client’s) interests toward the insurer and whether a conflict of interests between the insurers and the broker will be prevented (Slavnić 2014, p. 442). It has already been stated that the information provided by the insurance broker must be submitted before the conclusion of the insurance contract, but it has not been defined how much sooner. It should be taken into account that a certain amount of time is required for the insurer to inspect this information and decide on the conclusion of the insurance contract. Therefore, such information must be provided

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Art. 431 of the Insurance Act. The pre-contractual obligations from Articles 380 and 382 of the Insurance Act are described in more detail in: Belanić and Jurić (2019), pp. 38–43. 18 Art. 432. para 1, item 1 and 2 of the Insurance Act. 19 Art. 432 para 1, item 3 of the Insurance Act. 20 Art. 432 para 1, item 4 and 5, and Art. 432, para 2 of the Insurance Act. 17

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to the policyholder in good time before the conclusion of the contract (Ćurković 2011, p. 107). Concerning the distribution of insurance-based investment products, additional information is required that the insurance intermediary must provide to the client:21 1) periodic assessment of the suitability of the insurance-based investment products, 2) appropriate guidance on, and warnings of, the risks associated with the insurancebased investment products, 3) information on costs and related charges, including consultancy costs.

1.1.1.2

Giving Advice and Standards for Providing Information

It is the general obligation of every insurance distributor, including the insurance intermediary, to provide the client with objective information about the type of insurance (i.e., the insurance contract offered). The purpose of such an obligation is to enable the party to make a decision on the conclusion of the insurance contract. Each insurance contract offered must comply with the requirements and needs of the party.22 The Insurance Act sets specific standards in the provision of the information to be applied by insurance intermediaries. These standards relate to the provision of relevant insurance product information in an understandable form called the Insurance product information document.23 This document must be concise and selfcontained, presented in a simple and straightforward manner in a readable size, accurately, and unambiguously. It must contain a statement that all precontractual and contractual information is contained in other documents. This document must be submitted together with other precontractual information (provided under Articles 380 and 382 of the Insurance Act).24 The said document must include the following information: 1) information about the type of insurer; 2) summary of the insurance cover and a summary of the excluded risks; 3) the means of payment of premiums and the duration of payments; 4) main exclusions where claims cannot be made; 5) obligations at the start of the contract, 6) obligations during the term of the contract; 7) obligations in the event that the claim is made; 8) the term of the contract, including the start and end dates of the contract; and 9) the means of terminating the contract.25 The insurance product information document is required to be issued

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Art. 436. f para 1 of the Insurance Act. Art. 433, para 1 and 2 of the Insurance Act. 23 Art. 433, para 8 of the Insurance Act. 24 See footnote 17. 25 Art. 433, para 11 of the Insurance Act. 22

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by the so-called manufacturer of nonlife insurance product and the manufacturer26 of life insurance product except for insurance-based investment products.27 The issuing of the information document described above is the responsibility of the insurance intermediary in any case, regardless of whether there is an additional obligation to provide advice to the client.28 The Insurance Act prescribes additional obligations for the insurance intermediary if there is also an obligation to advise the client. In this case, the intermediary is required to provide a personalized recommendation explaining why a particular product would best meet the client’s requirements and needs.29 A recommendation can only be made based on an analysis of a sufficiently large number of insurance contracts available on the market.30

1.1.1.3

Terms and Form of Information Provision

The Insurance Act also prescribes the form in which the broker must provide information to the policyholder.31 This information must be in writing—on paper or on some other durable medium available to the policyholder. The information must be provided in a manner that is understandable to the policyholder and in the Croatian language. The information may also be in the official language of the Member State in which the risk is situated or of the Member State in which the obligation originated or in another language agreed upon between the parties. Certainly the information should be clearly and precisely formulated and not be misleading. Also, the information must be free of charge. Rather than in writing, insurance distributors may provide parties with information on a durable medium other than paper as well as through a website subject to prescribed conditions32 (that the use of another medium or website is appropriate for business between the distributor and the party, that the party has consented to the delivery of information through a durable medium or website).

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An insurance manufacturer is an insurance undertaking or insurance intermediary that manufactures or designs insurance products and makes available to distributors all relevant information about an insurance product. (Art. 399, para 1, item 18 of the Insurance Act). 27 Art. 433, para 8 and 13 of the Insurance Act. 28 Art. 433, para 6 of the Insurance Act. 29 Art. 433, para 3 of the Insurance Act. 30 Art. 433, para 5 of the Insurance Act. 31 Art. 425, par. 1 of the Insurance Act. 32 Art. 436. para 4 and 5 of the Insurance Act.

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Duty to Make the Risk Analysis and to Provide an Appropriate Form of Risk Cover

The next insurance broker’s duty, which has an impact on the transparency of the policyholder-broker-insurer relationship, is the risk analysis and the appropriate insurance cover analysis (so-called insurance market analysis). The Insurance Act prescribes an insurance broker’s obligation to undertake a risk analysis and appropriate insurance cover principles33 but does not specify what this means. This primarily means that the insurance broker is obliged to determine and evaluate the need of the policyholder for future coverage (Ćurković 2011, p. 110). In this way, the broker can determine whether certain coverage is appropriate for the client’s purpose. The broker determines the needs and wishes of the policyholder on the basis of the information provided to him/her by the policyholder and before the conclusion of the insurance contract.34 The insurance broker can also use various forms and questionnaires that the broker provides to the policyholder for completion. After the obligation to undergo a risk analysis, the insurance broker is obliged to carry out an analysis of the insurance market, i.e., to conduct a comparison of the offer and cover on the insurance market and propose to the insurer the insurance contractor with which he/she should conclude an insurance contract (Ćurković 2011, p. 111). Under the Insurance Act, an insurance broker is required to make an analysis of the insurance market on the basis of a sufficiently large number of insurance contracts available on the market that enable him/her to make recommendations in accordance with the professional criteria so that the policyholder can, by concluding such a contract, fulfill his/her needs and requirements.35 The broker does not have to analyze all offers available on the insurance market, nor does he/she have to obtain the best or least expensive cover. He/she has to obtain adequate coverage, which suits the needs of the client (the policyholder) with an appropriate premium.

1.1.3

Broker’s Duty to Counsel the Client (the Insured) and to Give Recommendations Regarding the Choice of the Insurer

After the insurance broker has fulfilled the obligation to conduct an analysis of risks and the insurance market, he/she must give the future policyholder a recommendation on which insurer to choose.36 He/she thereby must explain in writing the reasons37 for proposing the choice of a particular insurer and is obliged to inform the policyholder about the amount of the commission determined for the conclusion

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Art. 403, par. 3, item 3 of the Insurance Act. Art. 433, par. 1 of the Insurance Act. 35 Art. 433, par. 5 of the Insurance Act. 36 Art. 433, par. 3 of the Insurance Act. 37 For example, the broker should take into account the financial abilities of the insurer, the security, solvency, insurance terms, special and general coverage, the premium level, etc. 34

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of the insurance contract.38 On the other hand, according to the general rules of the Civil Obligations Act on the brokerage contract, the client (potential policyholder) is not required to accept the suggestion of the insurance broker for the selection of a particular insurer.39 The Insurance Act does not provide that the insurance broker is obliged to document in writing or in any other form the fulfillment of the obligation to provide the client with a recommendation for the selection of an insurer. An intermediary has an obligation to advise parties regarding the conclusion of an insurance contract only if he/she has explicitly informed the party that he/she is providing advice on insurance products.40 In such a case, he/she is entitled to remuneration for such advice services (i.e., for it to be included in the commission). Regarding the distribution of insurance-based investment products, the insurance intermediary has the additional obligation to collect the necessary information regarding the client’s knowledge and experience in the investment field relevant to the specific type of product or service.41 In addition, he/she must collect information about the client’s financial situation, his/her ability to bear losses, and his/her investment goals. The reason for such an obligation of the intermediary in collecting the information above is that the client may be advised about certain insurance products that are appropriate for him/her and are consistent with his/her ability to accept the risks and ability to bear the losses. If he/she considers that the requested information is insufficient or has not been provided by the party, the intermediary shall warn the client that he/she cannot identify a suitable insurance investment product.42

1.1.4

Duty to Provide Assistance When Concluding the Contract

The insurance broker is obliged to provide assistance during the conclusion of the insurance contract and also throughout the duration of the contract. Providing assistance with regard to insurance contracts also directly affects the transparency of the relationship between the broker and the policyholder. The aforementioned assistance contains several obligations prescribed by the Insurance Act: to 1) mediate in the conclusion of insurance contracts on behalf of the policyholder and in accordance with his/her request (which includes negotiation of an individual contract, and in practice this often includes the power of attorney to conclude insurance contracts);43 2) hand over the insurance policy to the policyholder and other acts pertaining to the insurance contract;44 3) check the contents of the insurance

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Art. 403, par. 6, and art. 435 par. 14 of the Insurance Act. Art. 839 of the Civil Obligations Act. 40 Art. 431, para 1, item 3, and Art. 431, para 2, item 3 of the Insurance Act. 41 Art. 436 g, para 1 of the Insurance Act. 42 Art. 436 g, para 5 of the Insurance Act. 43 Art. 403, par. 3 item 5. of the Insurance Act. 44 Art. 403, par. 3 item 7 of the Insurance Act. 39

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policy;45 4) provide assistance to the policyholder, i.e., the insured person, throughout the duration of the insurance contract and before or after the occurrence of the insured event and to ensure that the policyholder, i.e., the insured person, takes all legal actions that are essential for the preservation and realization of the insurance contract;46 5) continuously check the insurance contracts concluded by the policyholder with the assistance of the insurance broker and make proposals for amendments to such contracts in order to better protect the policyholder, i.e., the insured person.47

1.1.5

Protection of Personal Data and Business Secrets

The protection of personal data of the policyholder and the business secrets must not adversely affect the transparency of the policyholder-broker-insurer relationship. The insurance distributors are obliged to keep all personal information of the policyholder and the insured person in accordance with the regulations on the protection of personal data.48 The transparency of the relationship will not be compromised if personal information obtained from the broker is kept secret in the same way by the insurer. In other words, the policyholder’s and the insured person’s personal data from the existing insurance contract may be exchanged by the broker and the insurer, but they are obliged to keep them secret in relation to third parties (Ćurković 2011, p. 116). The broker is also obliged to protect a business secret49 that he/she has learned from his/her client or insurer during mediation. The broker shall be liable for damages if he/she has notified a third party (the insurer is not considered a third party) about the contents of the order or the negotiation or the terms of the contract without the consent of the policyholder.50

1.2

Insurance Broker’s Obligations to the Insurer

The insurance broker, as a rule, is not in a contractual relationship with the insurer on the basis of a brokerage contract, but there are certain broker duties to notify and

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Art. 403, par. 3 item 6 of the Insurance Act. Art. 403, par. 4 item 8 of the Insurance Act. 47 Art. 403, par. 3 item 9 of the Insurance Act. 48 Art. 211 e, Art. 388, para 1, and Art. 403 para 4 of the Insurance Act. This primarily concerns the Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of individuals with regard to the processing of personal data and the free movement of such data, and repealing Directive 95/46/EC (General Regulation) on data protection), SL EU L119. 49 Art. 386, par 2 of the Insurance Act. 50 Art. 842, par. 2 of the Civil Obligations Act. 46

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submit data to the insurer. Such obligations are best prescribed by the Insurance Act, and also by the business cooperation agreement, which is often concluded between insurers and insurance brokers, which generally governs their mutual relationships (Ćurković 2011, p. 120).

1.2.1

Duty to Inform the Insurer About Seeking an Insurance Offer

Once the insurance broker establishes the needs and wishes of the future policyholder and conducts an analysis of the insurance market, he/she is required to provide such information to the insurer and request an insurance offer from him/her.51 On the other hand, the insurer has an obligation to provide the insurance broker with relevant information regarding the insurance, insurance conditions, and coverage activities. Of course, the insurance broker is obliged to provide the insurer with all information about the policyholder, which are otherwise required under the Insurance Act and the Civil Obligations Act (e.g., data relevant for risk assessment).

1.2.2

Duty to Protect the Insurer’s Interest

It is the legal obligation of the insurance broker to protect the interests of the insurer. In principle, it is determined under the Insurance Act that these are the interests of the insurer that must be considered by the policyholder before and after the conclusion of the insurance contract. This includes the broker’s obligation to inform the insurer of all the circumstances relevant for risk assessment and that the broker has knowledge of.52 In addition, the insurance broker is obliged to notify the insurer of 1) any changes in risk throughout the duration of the insurance contract, whether they refer to increase53 or decrease of risk;54 2) the requirements for an amendment of the insurance contract in accordance with the insurance conditions; 3) the occurrence of the insured event,55 if the insured person has not already made the notification; and 4) measures to prevent the occurrence of the insured event or reduce its adverse consequences.56

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Art. 403, par. 3, item 2 of the Insurance Act. Art. 931 of the Civil Obligations Act. 53 Art. 938 of the Civil Obligations Act. 54 Art. 940 of the Civil Obligations Act. 55 Art. 941 of the Civil Obligations Act. 56 Art. 950 of the Civil Obligations Act. 52

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Other Duties of the Insurance Broker

Among the other duties that the broker has toward the insurer is not to mediate contracts that would not be regarded as insurance contracts. Furthermore, the broker is obliged to keep all the documentation and information provided by the insurer for the purpose of making the offer and concluding the insurance contract, as well as information about the client (policyholder) and the insurance policies. This obligation of the insurance broker does not cease with the termination of the business cooperation agreement but lasts even thereafter (Ćurković 2011, p. 123).

1.3 1.3.1

Insurance Agent’s Obligations Duty to Inform the Policyholder

The insurance representative (agent) is considered as the insurer’s extension; therefore, it is the agent’s duty to notify that the insurance contract is of great importance for achieving transparency between the insurer and the policyholder. Of course, this is true when the insurance contract is concluded with the help of the insurance agent. The Insurance Act prescribes what information must be provided by the agent to the policyholder, and, to a greater extent, it is the same information that the mediator (broker) is required to provide. These are the following information:57 1) full name and address of the agent, 2) registry in which he/she has been registered and the manner of its verification, 3) insurance agency in which he/she operates, 4) names of the insurance companies with whom he/she has a signed a contract 5) information on the out-of-court dispute resolution procedure and the internal procedure for addressing the complaints of interested persons, 6) information on the relationship with the insurance company, 7) other information as provided under Article 380 of the Insurance Act (all information that the insurer is obliged to provide the policyholder with prior to the conclusion of the contract).58 The insurance agent is not obliged to carry out an analysis of risks and of the insurance market or to make recommendations and provide advice to the policyholder on the basis of the information obtained. The insurance agent shall provide the above information to the policyholder before the conclusion of the insurance contract, as well as in the event of any subsequent amendment of the contract. The information shall be provided in writing or in another permanent medium, in Croatian or in another language, if so agreed (i.e., the same as the insurance broker), whereby the content of a particular information form is not prescribed.

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Art. 431 of the Insurance Act. See footnote 17.

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1.3.2

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Duty to Inform the Insurer

The agent shall provide the insurer with all necessary information about the market, especially those that are relevant to each individual business.59 This is understandable because the agent operating in a certain area has the most reliable and accurate information about its local character (e.g., whether the potential policyholder is solvent or not). In addition to the information about the market in which he/she operates, the insurance agent is obliged to inform the insurer about 1) fulfilling his/her contractual obligations, 2) third parties who are ready to negotiate with the insurer or conclude an insurance contract with him/her, 3) the contract that he/she has concluded on behalf and for the account of the insurer.60

1.3.3

Duty to Look After the Interests of the Insurer

The agent shall take care of the interests of the insurer, and in all the affairs he/she undertakes he/she shall act in accordance with the principle of conscientiousness and honesty and with the care of a good businessman.61 He/she must do all that is required to mediate and arrange the tasks for which he/she has been authorized, keeping in mind the reasonable instructions given by the insurer.62 The insurer has an obligation to provide the agent with instructions, but it is not the agent’s role to evaluate whether these instructions are reasonable or not. The insurance agent is obliged to act upon the insurer’s instructions when conducting negotiations and concluding an insurance contract,63 and if he/she finds any misunderstanding in the instructions, he/she must inform the insurer thereof (Ćurković 2011, p. 167).

1.4

Insurer’s Duties to Inform the Insurance Agent

In addition to the duty of the insurance agent to inform the potential policyholder and the insurer, the insurer’s duty to notify the insurance agent also contributes to the transparency of the insurance. These obligations are not specifically provided by the Insurance Act but are generally subject to the provisions of the Civil Obligations Act under the agency contract. The following obligations are stipulated: 1) the insurer is obliged in general to provide the agent with all the information he/she needs to fulfill his/her obligations under the agency contract;64 2) the insurer is obliged (at his own

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Art. 81, par. 1 of the Civil Obligations Act. Art. 812, par. 2 of the Civil Obligations Act. 61 Art. 811, par. 1 of the Civil Obligations Act. 62 Art. 811, par. 2 of the Civil Obligations Act. 63 Art. 813 of the Civil Obligations Act. 64 Art. 818, par. 1 of the Civil Obligations Act. 60

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expense) to place at the agent’s disposal the insurance conditions, price lists, promotional materials, and all other necessary documentation;65 and 3) the insurer is obliged to notify the agent within a reasonable time whether or not he/she accepts the insurance offer as well as of the nonfulfillment of the contract in whose conclusion the agent participated.66

1.5

Legal Consequences of the Breach of Insurance Broker’s or Agent’s Duties

It should be emphasized that the Insurance Act does not contain specific rules on the consequences of a breach of the obligations of brokers and insurance agents, so that the Civil Obligations Act is applied. The Insurance Act prescribes only misdemeanor financial sanctions for insurance agents and brokers who do not deliver or deliver incorrect information provided under Article 431 and Article 432 of the Insurance Act (supra 1.1.1.1 and 1.1.1.2) to the policyholder,67 i.e., if this information is not provided in the prescribed form (supra 1.1.1.3).68 The insurance broker is liable for any damage caused by his/her fault, suffered by one or another party between whom he/she has mediated (thus, he/she is liable for the damage to the policyholder/insured person and also to the insurer).69 Such liability for damages exists if the broker has failed to communicate the information referred to in Article 431 of the Insurance Act (supra 1.1.1) to the policyholder, i.e., that he/she did not fulfill his/her obligations under Article 403 of the Insurance Act (supra 1.1.2, 1.1.3, 1.2.1, 1.2.2). This is a liability for damage due to a breach, i.e., failure to comply with a contractual obligation to provide information that may arise from a brokerage contract with a client or from a business cooperation agreement with the insurer. This further results in the client (policyholder) being able to unilaterally terminate the brokerage contract on the basis of the general rules of the Civil Obligations Act.70 The same can be done by the insurer with regard to the business cooperation agreement with the broker. In addition, if the insurance broker has failed to inform the policyholder of any information that the insurer would otherwise have been required to provide before the conclusion of the insurance contract, then the policyholder (information referred to under Article 380 of the Insurance Act) would, in addition to the aforementioned rights, also have the right to waive the insurance contract concluded with the broker’s assistance, terminate such

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Art. 817, par. 2 of the Civil Obligations Act. Art. 818, par. 2 of the Civil Obligations Act. 67 Art. 443, par. 8, item 4 and Art. 444, par. 1, item 1–34, and Art. 444, par. 4, item 1–24 of the Insurance Act. 68 Art. 443, par. 8, item 5 of the Insurance Act. 69 Art. 842, par. 1 of the Civil Obligations Act. 70 Art. 360 of the Civil Obligations Act. 66

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a contract, and receive compensation for the damage caused by conducting negotiations contrary to the principle of conscientiousness and honesty (Belanić and Jurić 2019, pp. 54–55). On the other hand, the insurance agent is usually not in contractual relationship with the policyholder but is rather in a contractual relationship with the insurer on the basis of a contract of representation. This results in the fact that if he/she violated his/her legal duty to provide the policyholder with the information under Article 431 and Article 432 of the Insurance Act, then the policyholder shall be liable in accordance with the rules on extrajudicial liability for damages on the principle of assumed guilt.71 However, if the insurance agent has failed to inform the policyholder of any information that the insurer would otherwise have been required to provide before the conclusion of the insurance contract (Article 380 of the Insurance Act), then the same principle is applied as with the insurance agent (contractor’s right to waive the contract, terminate it, and receive compensation for damages). If the insurance agent violated the obligation to notify the insurer about the market situation, the commitments assumed, or the contracts concluded (supra 1.3.3), the insurer shall be entitled to a unilateral termination of the insurance agency contract and the right to compensation (contractual liability for damage due the injury caused by failure to perform the notification duty).

2 Transparency of Intermediaries/Insurance Undertakings in Croatia The Croatian Insurance Act72 was harmonized with the provisions of the Solvency Directive II, Omnibus II Directive, and Delegated Regulation 2015/35 in 2015. It was amended in 2018 by the introduction of new provisions on conducting insurance and reinsurance distribution activities in the Republic of Croatia and cross-border countries, implementing the Insurance Distribution Directive. In order to implement Regulation (EU) No 537/20144,73 the provisions on auditing the annual financial statements of intermediaries and insurance undertakings have been adjusted terminologically. In February 2020, there were 16 registered insurance and reinsurance companies, 311 registered insurance agencies, and 53 registered insurance and

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Art. 1045 of the Civil Obligations Act. Insurance Act, Official Gazette no. 30/2015, 112/18. The new Insurance Act was adopted on 6 March 2015, with the full effect from 1 January 2016. 73 Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC, OJ L 158. 72

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reinsurance brokerage service companies in Croatia.74 Their activities are supervised by HANFA (Jurić 2020, p. 5).75

2.1

Reporting Duties of Intermediaries/Insurance Undertakings in Croatia

The third pillar of the Solvency Directive II sets new rules on reporting duties to supervisory authorities, public disclosure and the market discipline of insurance undertakings. The frequency of disclosure and the information that should be disclosed are regulated by the Delegated Regulation.

2.1.1

Regular Reporting Duties of Insurance Undertakings Toward HANFA

An insurance undertaking shall keep business books, business documentation, and records and create and publish annual financial statements and annual report in accordance with the Companies Act, Accounting Act, Insurance Act, and other relevant bylaws.76 It shall submit to HANFA auditor’s report,77 annual financial

74 There were 4 branches of insurance and reinsurance companies from EU member states, 566 notifications from EU Members States related to direct performance of insurance operations by insurance undertakings and 1892 notifications from EU Members States related to performance of operations of insurance agencies and brokers. See in Insurance Market Registers, available on HANFA’s web sites https://www.hanfa.hr/insurance-market/registers/. 75 See footnote 9. 76 Art. 190 and 191 of the Insurance Act. These reporting duties are regulated in detail by Ordinance on the form and content of financial statements and additional reports of insurance and reinsurance companies (Official Gazette no. 37/2016, 96/2018, 50/2019). 77 Annual financial statements of the insurance undertaking shall be audited for each financial year. The audit shall be carried out in accordance with provisions of the Accounting Act and the Audit Act, unless otherwise provided for in the Insurance Act and bylaws (Art. 194 of the Insurance Act). The audit of annual financial statements is regulated in detail by Ordinance on the audit in insurance companies (Official Gazette no. 78/2016, 60/2019). The management board of the insurance undertaking shall submit to the HANFA a decision appointing an audit firm within eight days of the adoption of the decision. The audit firm shall, by 31 October of the current year, submit to the HANFA an audit plan for the business year in question for each insurance undertaking which has entrusted it with the carrying out of audit, indicating the areas of operation which shall be subjected to audit, a description of the content of the audits planned by individual area, as well as the envisaged duration of the audits (Article 195 of the Insurance Act). The audit firm shall notify the HANFA in writing and without delay of any facts, or decisions of which it became aware while carrying out the audit, which could: (a) result in a serious breach of the acts, regulations or provisions based on which an authorization to pursue the insurance business has been granted to the insurance undertaking; (b) jeopardise further operations of the insurance undertaking; (c) result in a qualified opinion, an adverse opinion or a disclaimer of opinion on the accounts; (d) lead to

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statements, annual report, and actuary’s report on the formation and adequacy of premiums and technical provisions within 15 days from acceptance of the auditor’s report or within four months of the last day of the financial year at the latest.78 These statements and reports shall be published on its websites within five months of the last day of the financial year. The insurance undertaking’s annual financial statements for the last five financial years shall be available on its websites.79 The insurance undertaking shall create additional reports on its financial position, business performance, and activities for each financial year.80 The insurance undertaking shall inform HANFA of the occurrence of all events that may or may not have led to significant changes in operations and results, system of governance, risk profile and solvency, and the financial position of the insurance undertaking, which shall include at least the following information: (a) entry and changes of information, which must be entered into the Court Register; (b) convocation of the shareholders’ meeting and all decisions accepted during the meeting; (c) shareholders’ acquisition or changes of qualifying holdings at least once a year; (d) appointment and revocation of members of the management board or the supervisory board; (e) appointment and revocation of persons who effectively run the undertaking or have other key functions; (f) planned establishment, relocation, or cessation of a branch or agency and changes of activities of a branch; (g) investments of the undertaking in other legal entitites that make qualifying holdings in them and any further investments in them; (h) significant changes in the capital structure of the undertaking; (i) cessation of certain insurance activities of the undertaking; and (j) complaints of policyholders, insured persons, or beneficiaries concerning insurance contracts.81

non-compliance with the Solvency Capital Requirement; (e) lead to non-compliance with the Minimum Capital Requirement (Art. 198 of the Insurance Act). 78 Annual financial statements of the insurance undertaking are: (a) balance sheet; (b) statement of comprehensive income (profit and loss account and statement of other comprehensive income); (c) cash flow statement; (d) statement on changes in equity; (e) notes to the financial statements. In addition, balance sheet and statement of comprehensive income shall be composed quarterly during the financial year. These quarterly financial statements shall be submitted to HANFA within one month of the last day of the reporting period (Article 8 of the Ordinance on the form and content of financial statements and additional reports of insurance and reinsurance companies). Financial statements and additional reports shall be submitted to HANFA in electronic form and exceptionally in written form (Article 9 of the Ordinance on the form and content of financial statements and additional reports of insurance and reinsurance companies). 79 Art. 192 and 193 of the Insurance Act. 80 Art. 4, 7 and 8 of the Ordinance on the form and content of financial statements and additional reports of insurance and reinsurance companies. Those are reports on insurance undertaking’s investments, assets held to cover technical and mathematical provisions, reinsurance activities, etc. Certain additional reports shall be composed monthly and quarterly during the financial year and submitted to HANFA in prescribed deadlines. 81 Art. 201 of the Insurance Act, These reporting duties are regulated in detail by Ordinance on the significant changes reports and reports submitted at the request of the HANFA, Official Gazette no. 66/2019, 15/2020.

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The management board of the insurance undertaking shall inform HANFA without delay of the following: (a) if liquidity of the undertaking is endangered, (b) if it declares noncompliance with the Minimum Capital Requirement or noncompliance with the Solvency Capital Requirement or if there is a risk of such noncompliance in the following three months; (c) if there are reasons for the termination or withdrawal of the authorization for the performance of insurance activities; (d) the result of the recalculation of the Solvency Capital Requirement when the risk profile of the undertaking significantly deviates from the assumptions underlying the last calculation of the Solvency Capital Requirement submitted to HANFA, and (e) own risk and solvency assessment made after a significant change in risk profile. The insurance undertaking shall cooperate with HANFA and submit reports and provide all necessary information on the request of HANFA.82 The insurance undertaking shall calculate the Solvency Capital Requirement in accordance with the standard formula or use an internal model at least once a year and report the result of that calculation to HANFA.83 The Minimum Capital Requirement shall be calculated by the insurance undertaking at least quarterly, and the results of that calculation shall be reported to HANFA.84 Intermediaries (insurance agencies, insurance and reinsurance brokerage service companies) shall create semi-annual and annual financial statements and statistical reports. They shall submit to HANFA their annual financial statements within three months of the last day of the financial year and their semi-annual financial statements and statistical reports within 30 days of the last day of the reporting period.85

2.1.2

Reporting Duties of Insurance Undertakings at the Request of HANFA

At the request of HANFA, the insurance undertaking shall provide the information required for supervision, which shall at least include the information required for (a) the assessment of the system of governance applied by the undertaking, the business it is pursuing, the valuation principles applied for solvency purposes, the risks faced and the risk-management systems, and its capital structure and (b) appropriate decision-making resulting from the exercise of HANFA’s supervisory rights and duties. HANFA shall determine the nature, the scope, and the format of the information that it requires an insurance undertaking to submit at the following points in time: (a) at predefined periods, (b) upon the occurrence of predefined

82

Art. 201 of the Insurance Act. Art. 132 of the Insurance Act. 84 Art. 158 of the Insurance Act. 85 Art. 429 of the Insurance Act. These reporting duties are regulated in detail by Ordinance on the structure and content of financial and statistical reports of persons authorized to conduct insurance representation business and insurance and reinsurance brokerage business, Official Gazette no. 37/2016, 28/2019. 83

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events, and (c) during inquiries regarding the situation of an insurance undertaking. An insurance undertaking shall obtain any information regarding contracts that are held by brokers or regarding contracts that are entered into with third parties on the request of HANFA. HANFA may require information from external experts, such as auditors and actuaries.86

2.1.3

Limitation of Reporting Duties of Insurance Undertakings

Without prejudice to Articles 158 and 215 of the Insurance Act, where the predefined periods for regular supervisory reporting are shorter than one year, HANFA may limit regular supervisory reporting where (a) the submission of that information would be overly burdensome in relation to the nature, scale, and complexity of the risks inherent in the business of the undertaking and (b) the information is reported at least annually. HANFA may limit regular supervisory reporting or exempt insurance undertaking from reporting on an item-by-item basis, where (a) the submission of that information would be overly burdensome in relation to the nature, scale, and complexity of the risks inherent in the business of the undertaking; (b) the submission of that information is not necessary for the effective supervision of the undertaking; (c) the exemption does not undermine the stability of the financial systems concerned in the EU; and (d) the undertaking is able to provide the information on an ad hoc basis.87 According to proportionality principle, small insurance undertakings do not need to comply with the provisions of the Insurance Act on business plan, public disclosure of the report on solvency and financial condition, certain rules on system of governance88 and rules relating to the valuation of assets and liabilities, technical provisions, own funds, solvency capital requirement, minimum capital requirement, and investment rules.89

2.1.4

Public Disclosure of the Report on Solvency and Financial Condition of the Insurance Undertaking

An insurance undertaking shall prepare and publish on its websites an annual report on solvency and financial condition. This report must state (a) a description of the business and the performance of the undertaking; (b) a description of the system of governance and an assessment of its adequacy for the risk profile of the undertaking; (c) a description, made separately for each category of risk, of the risk exposure,

86

Art. 215 of the Insurance Act. Art. 217 of the Insurance Act. 88 They must apply provisions of the Insurance Act on internal audit and outsourcing. 89 Art. 6 of the Insurance Act. These questions are arranged by Ordinance on additional requirements for small insurance companies, Official Gazette no. 72/2016. 87

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concentration, mitigation, and sensitivity; (d) a description, made separately for assets, technical provisions, and other liabilities, of the bases and methods used for their valuation, together with an explanation of any major differences in the bases and methods used for their valuation in financial statements; and (e) a description of the capital management.90 HANFA shall permit the insurance undertaking, on its request, not to disclose information if (a) by disclosing such information the competitors of the undertaking would gain significant undue advantage or (b) there are obligations to policyholders or other counterparty relationships binding an undertaking to secrecy or confidentiality. Where nondisclosure of information is permitted by HANFA, the insurance undertaking shall make a statement to this effect in its report on solvency and financial condition and shall state the reasons. This exemption shall not apply to information on the description of the capital management.91 In the event of any major development affecting significantly the relevance of the information disclosed in accordance with Articles 168 and 169 of the Insurance Act (noncompliance with the Minimum Capital Requirement and significant noncompliance with the Solvency Capital Requirement), the insurance undertaking shall disclose appropriate information on the nature and effects of that major development. It may disclose, on a voluntary basis, any information or explanation related to its solvency and financial condition which is not required to be disclosed in accordance with Articles 168, 169, and 170 of the Insurance Act.92 The solvency and financial condition report shall be prepared by the management board and approved by the supervisory board of the insurance undertaking. It shall be published only after such approval.93

3 Supervision of Intermediaries/Undertakings in Croatia HANFA supervises insurance undertakings and intermediaries in accordance with the HANFA Act,94 Insurance Act, and other provisions that regulate their business activities. It has the right to investigate all information and documentation of insurance undertakings and intermediaries.95

90

Art.168 of the Insurance Act. Art. 169 of the Insurance Act. 92 Art. 170 of the Insurance Act. 93 Art. 171 of the Insurance Act. 94 HANFA Act, Official Gazette no. 140/2005, 154/2011, 12/2012. 95 Art. 203 of the Insurance Act. Supervision of the persons who perform insurance and reinsurance distribution activities is regulated by Articles 211.-211.f of the Insurance Act. HANFA shall publish on its website without delay any measure imposed on an insurance and reinsurance distributor for violation of the provisions of the Insurance Act, as well as the decision on the offense referred to in Articles 444 and 445 of the Insurance Act. 91

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The supervision shall be based on a prospective and risk-based approach. It shall include the verification on a continuous basis of the proper operation of the insurance undertakings and of compliance with supervisory provisions by insurance undertakings. Supervisory powers shall be applied in a timely and proportionate manner. The main aims of the supervision are verification of the legality and assessment of the security and stability of undertakings’ operations for the following purposes: (a) protection of interests of insured persons, policyholders, or beneficiaries and protection of public interest and (b) promotion of the stability of the financial system and promotion of confidence in the insurance market.96 HANFA especially reviews and evaluates (a) the system of governance, strategies, policies, and reporting procedures established by an undertaking; (b) the financial stability and financial position of an undertaking and its risks; (c) the solvency of an undertaking, the formation of technical provisions, the assets and quality and quantity of funds of an undertaking; (d) the adequacy of the methods and practices of an undertaking designed to identify possible events or future changes in economic conditions that could have adverse effects on the overall financial standing of an undertaking.97

3.1

Supervised Entities

HANFA supervises the following entities and persons: (a) domestic insurance and reinsurance undertakings and their branches in Croatia and abroad; (b) domestic mutual insurance undertakings and their branches in Croatia and abroad; (c) persons who perform insurance and reinsurance distribution activities (intermediaries); (d) groups of insurance or reinsurance undertakings; (e) insurance or reinsurance pools and associations of insurers; (f) the Croatian Insurance Bureau; (g) persons with qualifying holdings in insurance undertakings, persons with close links with insurance undertakings, persons that perform outsourced activities for insurance undertakings, and persons with key functions in insurance undertakings; (h) insurance undertakings from third countries that perform insurance activities through branches in Croatia; (i) certified actuaries; (j) service providers that perform outsourced services or activities for insurance undertakings; (k) insurance or reinsurance undertakings and persons who perform insurance and reinsurance distribution activities from other EU Member States that perform insurance or distribution activities in Croatia in accordance with the freedom of establishment or the freedom to provide services; and (l) other legal and natural persons (i.e., investment firms and credit institutions as intermediaries). When another supervisory authority is competent for the supervision of the supervised entity, HANFA may participate in the supervision of the operations of that supervised entity or request information from

96 97

Art. 204 of the Insurance Act. Art. 214 of the Insurance Act.

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the competent supervisory authority for the purpose of supervision of the supervised entity (i.e., passporting rights).98

3.2

Providing the Information for the Purposes of Supervision

HANFA monitors insurance undertakings ex officio through on-site supervision99 in the business premises of the undertakings or through off-site supervision100 by an analysis of the undertakings’ regular supervisory reports and of the information provided by the undertakings on the request of HANFA.101 The supervision shall be performed by employees of HANFA (authorized persons), and in exceptional cases HANFA may engage auditors, audit firms and other external experts.102 Members of the management and supervisory board and persons who have key functions in the insurance undertaking shall submit documentation and reports and provide all necessary information on request of HANFA.103 The insurance undertaking shall be informed in writing of the on-site supervision at least three days before the start of such supervision. In exceptional cases, authorized persons of HANFA shall deliver this notice on the day of the start of the on-site supervision if this is necessary for a prompt and effective supervision. HANFA may supplement the notice during the supervision.104 The insurance undertaking shall allow the supervision by the authorized persons of HANFA in its business premises, and the responsible persons within the undertaking shall cooperate with the authorized persons of HANFA.105 Such authorized persons shall draw up minutes after conducting the supervision, which shall be delivered

98

Art. 203 of the Insurance Act. In 2018 HANFA carried out five on-site supervisions of insurance undertakings, two of which were targeted and three regular. HANFA issued four decisions relating to on-site supervisions completed in 2017 and 2018. Three of these decisions related to the elimination of illegalities and irregularities, and insurance companies acted in accordance with the operative part of the decisions and deadlines prescribed by them. One decision concerned the termination of an on-site examination in the insurance company that acted in accordance with the decisions ordering the elimination of illegalities and irregularities. See in HANFA Annual Report 2018, available on HANFA web sites https://www.hanfa.hr/media/4249/annual-report-for-2018.pdf, pp. 34–35. 100 In 2018 HANFA carried out five off-site supervisions of insurance companies. Majority Majority of them were supervisions that had started in previous years, while one was initiated in 2018. One decision was issued ordering the elimination of illegalities and irregularities established during off-site supervisions started in previous years. See in HANFA Annual Report 2018, p. 35. 101 Art. 219 of the Insurance Act. 102 Art. 220 of the Insurance Act. 103 Article 221 of the Insurance Act. 104 Article 222 of the Insurance Act. 105 Article 223 of the Insurance Act. 99

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to the insurance undertaking, and the management board shall submit the minutes of the supervision without delay to the supervisory board of the insurance undertaking. The insurance undertaking may file a written complaint concerning the minutes of the supervision within 15 days from the delivery of the minutes.106 The authorized persons of HANFA, during the off-site supervision of the insurance undertaking, (a) shall determine if the required reports and other information were delivered to HANFA within the prescribed deadline and form; (b) shall determine if the information in the reports and other documentation are true, accurate, and correct; (c) shall determine if the undertaking operates in accordance with the provisions on risk management and consumer protection and if their bylaws were issued pursuant to the Insurance Act, as well as with other provisions governing the business of the insurance undertakings; (d) shall verify and assess the financial stability and financial condition of the undertaking and the faced risks and future risks inherent to the undertaking’s business operations; and (e) will determine worsering of the financial conditions of the undertaking and monitor their removal.107 In the case of identified deficiencies, illegalities, and irregularities in the business operations of the undertaking, the authorized persons of HANFA shall draw up minutes of the supervision, which shall likewise be delivered to the insurance undertaking.108

3.3

Supervisory Measures of HANFA

HANFA shall impose supervisory measures to an insurance undertaking in case of illegalities and irregularities in its business operations. It shall also file criminal or misdemeanor charges against the undertaking before competent authorities. Finally, it shall issue a misdemeanor warrant upon the undertaking for misdemeanors under the Insurance Act.109 HANFA shall initiate preventive measures in case of inappropriate influence of the shareholders on the management of the undertaking. It can further request a competent court to impose a temporary suspension of the voting rights of such shareholders.110 The following are the supervisory measures that HANFA may impose: (a) warning, (b) elimination of illegalities and irregularities, (c) special supervisory measures (i.e., capital add-ons), (d) appointment of a commissioner, (e) withdrawal of authorization for the performance of insurance activities, (f) withdrawal of authorization for the acquisition of qualifying holdings, (g) withdrawal of

106

Article 226 of the Insurance Act. Article 229 of the Insurance Act. 108 Article 230 of the Insurance Act. 109 Art. 231 of the Insurance Act. 110 Art. 232 of the Insurance Act. 107

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authorization for the appointment of a member of the management board, (h) withdrawal of an authorization given to a certified actuary or temporary suspension of his/her activities; (i) reorganization of an undertaking and appointment of a special administrator; (j) compulsory winding up of an undertaking, and (k) initiation of insolvency proceedings.111

3.4

Disclosure of General Information on Supervision by HANFA

HANFA shall disclose and regularly update on its websites the following information: (a) the texts of laws, regulations, administrative rules, and general guidance on insurance regulation; (b) the general criteria and methods, including the quantitative tools, used in the supervisory review process; (c) aggregate statistical data on the key aspects of the supervision and risk management of insurance undertakings in Croatia; (d) the manner of exercise of the supervision and risk management; and (e) the objectives of the supervision and its main functions and activities. The disclosure shall be sufficient to enable a comparison of the supervisory approaches adopted by the supervisory authorities of the different Member States.112

4 Conclusion The basic question on the transparency of the contractual relations between insurance brokers and insurance agents is how much information provided by insurance brokers and insurance agents to their clients/future policyholders can help these same clients in deciding whether or not to conclude an insurance contract and whether their interests in relation to the interests of the insurer are sufficiently protected. It is considered that such a question is more favorable to insurance brokers than persons who intend to conclude an insurance contract with the participation of an insurance agent. This is because the insurance broker, acting from the policyholder’s point of view, has an obligation to analyze insurance market offers and to propose to the policyholder an offer that suits his/her needs and wishes. He/she also has the obligation to provide advice and explain the differences between individual insurance offers as well as the obligation to assist the policyholder after the conclusion of the insurance contract (so-called postsale). The abovementioned advantages of cooperation between the broker and the client are not present in the relationship between an agent and a person intending to conclude an insurance

111 112

Art. 233 of the Insurance Act. Art. 213 of the Insurance Act.

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contract with the assistance of the agent. Here, the future policyholder, if we exclude the information provided by the insurance agent, is acting on his/her own right. The insurance agent has only the insurance offer of one or several insurers that he/she represents and not the offer of the entire insurance market, which further reduces the ability of the policyholder to conclude an insurance policy that best meets his/her needs and wishes. From the insurer’s point of view, transparency in relation to brokers and insurance agents is achieved by providing information that these brokers/agents are contractually obligated to provide to the insurer. Brokers conclude a business cooperation agreement with the insurer, and the agents conclude a contract in representation of the insurer. These contracts are not subject to the regulations of the Insurance Act but are subject to the rules of the Civil Obligations Act. However, the Insurance Act prescribes a statutory obligation on brokers and insurance agents to provide certain information to the insurer (e.g., information on contractual arrangements, assumed risks, etc.). Therefore, the obligation to provide such information to the insurer should be part of the mandatory content of the business cooperation agreement or representation agreement concluded between the insurer and the broker/insurance agent. The Croatian Insurance Act covers the regulation of the business activities of domestic insurance undertakings and intermediaries, groups of insurance undertakings, and foreign insurance undertakings that perform their activities in Croatia. Their activities are supervised by HANFA as a national supervisory authority. The provisions of the Insurance Act was harmonized with the Solvency Directive II in March 2015, with full effect from January 1, 2016. Insurance undertakings perform their regular reporting duties by creating and submitting annual and quarterly financial statements and additional reports to HANFA. They also must inform HANFA on a regular basis of certain circumstances that occur while in the performance of their business activities and especially those that may endanger their liquidity and solvency. They must prepare and publish on their websites annual report on their solvency and financial condition. HANFA, on the other hand, may request from insurance undertakings and intermediaries all the information needed for their supervision. The supervision is based on a prospective and risk-based approach and is applied in a timely and proportionate manner. HANFA monitors insurance undertakings and intermediaries ex officio through on-site supervision in their business premises or off-site supervision by an analysis of their regular supervisory reports and of the information provided by them on request of HANFA. HANFA shall impose supervisory measures on insurance undertakings and intermediaries in case of illegalities and irregularities in their business activities and shall file criminal or misdemeanor charges against them before the competent authorities. Finally, it may issue misdemeanor warrants to insurance undertakings and intermediaries for misdemeanors referred to under the Insurance Act. Acknowledgment This chapter is written under support of the University of Rijeka Research Project “Legal Aspects of Companies Restructuring and Transition Towards New Corporate Governance Culture” (uniri-drustv-18-43).

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References Belanić L, Jurić D (2019) Transparency in the insurance contract law of Croatia. In: Marano P, Noussia K (eds) Transparency in insurance contract law. Springer Nature, Switzerland, pp 33–62 Ćurković M (2011) Posredovanje i zastupanje u osiguranju. Inženjerski biro, Zagreb. [Ćurković M (2011) Insurance Mediation and Insurance Repesentation. Inženjerski biro, Zagreb] Ćurković M (2017) Ugovor o osiguranju – Komentar odredaba Zakona o obveznim odnosima. Inženjerski biro, Zagreb [Ćurković M (2017) Insurance Contract – The Commentary on the Civil Obligation Act, Inženjerski biro, Zagreb] Ćurković M (2019) Nastanak i obuhvat regulatornih odredbi o distribuciji osiguranja. Hrvatski časopis za osiguranje 1(2):23–38. [Ćurković M (2019) The Emergence and Coverage of Regulatory Provisions on Insurance Distribution, Croatian Insurance Journal 1(2):23–38] HANFA (2016) Ordinance on the audit in insurance companies, Official Gazette no. 78/2016, 60/2019 HANFA (2016) Ordinance on additional requirements for small insurance companies, Official Gazette no. 72/2016 HANFA (2016) Ordinance on the form and content of financial statements and additional reports of insurance and reinsurance companies, Official Gazette no. 37/2016, 96/2018, 50/2019 HANFA (2016) Ordinance on the structure and content of financial and statistical reports of persons authorized to conduct insurance representation business and insurance and reinsurance brokerage business, Official Gazette no. 37/2016, 28/2019 HANFA (2018) Annual Report 2018. https://www.hanfa.hr/media/4249/annual-report-for-2018. pdf HANFA (2019) Ordinance on the significant changes reports and reports submitted at the request of the HANFA, Official Gazette no. 66/2019, 15/2020 HANFA (2020) Insurance Market Registers. https://www.hanfa.hr/insurance-market/registers/ Jurić D (2020) Pravo društava, Sveučilište u Rijeci, Pravni fakultet, Rijeka [Jurić, D (2020) Company Law, University of Rijeka, Faculty of Law, Rijeka] Slavnić J (2014) Transparentnost provizije brokera osiguranja u evropskom pravu. Pravni život 63 (11):437–452. [Slavnić, J (2014) Transparency of the Insurance Broker’s Provision in the European Law. Pravni život 63(11):437–452]

Legal Sources Act on the Croatian Agency for Supervision of Financial Services, Official Gazette, n. 140/2005, 154/2011, 12/2012. Civil Obligations Act, Official Gazette, n. 35/2005, 41/2008, 125/2011, 78/2015. Code of Insurance and Reinsurance Business Ethics, https://www.hgk.hr/udruzenje-osiguravatelja. Directive 2002/92/EC of the European Parliament and the Council from 9 December 2002 on insurance mediation, OJ L 9, 15.1.2003, p. 3-10. Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Text with EEA relevance), OJ L 335, 17.12.2009, p. 1–155. Directive 2016/97 of the European Parliament and the Council from 20 January 2016 on the distribution of insurance (modified text) (Text relevant for EEA), OJ L 26, 2.2.2016, p. 19–59. Insurance Act, Official Gazette, n. 30/2015, 112/2018, 63/20. Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC, OJ L 158, 27.5.2014, p. 77–112.

Transparency in Insurance Regulation and Supervisory Law of Cyprus Michael Chatzipanagiotis

1 Overview of the Insurance Regulatory Regime and Scope of Research The insurance regulatory framework in Cyprus has been traditionally following English law, given that Cyprus was an English colony until 1960. Insurance companies operating in Cyprus were originally registered in England under English insurance legislation.1 It was not until 1967 that the registration of insurance companies was made possible.2 However, the accession of Cyprus to the EU resulted in its insurance legislation being shaped mainly by developments at the EU level. The main legislative instrument on insurance regulation is the Law on Insurance and Reinsurance Business of 2016 (38(I)/2016), as amended, officially referred to as the Laws on Insurance and Reinsurance Business and Other Related Matters of 2016 to 2020 (hereinafter LIRB). The LIRB transpose i.a. the Solvency II Directive and the Insurance Distribution Directive. They are complemented by the Commission Regulations and Decisions regarding the implementation of the above-mentioned EU Directives, the European Insurance and Occupational Pensions Authority (EIOPA) Guidelines and Opinions and the regulations of the Superintendent of Insurance, the Cypriot insurance supervision authority. At the same time, there is special legislation on the supervision of occupational pension funds (Law 10(I)/2020, hereinafter LOPF),3 which transposes Directive Glykis (2020), §15:2. Through the Insurance Companies Law of 1967 (27/1967). 3 Law on the establishment, activities and supervision of institutions for occupational retirement provision of 2020. 1 2

M. Chatzipanagiotis (*) University of Cyprus, Department of Law, Nicosia, Cyprus e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Marano, K. Noussia (eds.), Transparency in Insurance Regulation and Supervisory Law, AIDA Europe Research Series on Insurance Law and Regulation 4, https://doi.org/10.1007/978-3-030-63621-0_3

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2016/2341.4 However, a legislative reform is imminent and the supervision of (re)insurance entities, insurance distributors and occupational pensions funds will be unified under a single authority. The present chapter is concerned with particularities of the Cypriot law. Since the substantive rules on insurance regulation follow mostly by word the EU legal instruments, provisions on transparency duties of (re)insurance undertakings and distributors are summarily presented. A special brief section is devoted to transparency requirements under the anti-money laundering (AML) requirements, as Cyprus attributes particular importance thereto. Legal issues have arisen mainly regarding administrative enforcement, although these are not insurance specific. Therefore, this chapter lays emphasis on the latter. Finally, there is a short section on transparency in alternative dispute resolution (ADR). In some points, analogies are drawn to the situation in other financial sectors, namely banking and capital markets. Rules specific to occupational pension funds are not examined.

2 Supervisory Authority Transparency of the supervisory authority relates to transparency of the legal rules regarding the exercise of the authority’s supervisory, control and enforcement duties.5 In other words, the authority’s powers, its objectives, as well as the applicable rules and procedures need to be clear, accessible and comprehensible. In addition, transparency regards the authority’s composition, especially the procedures for appointment and the dismissal of its managing bodies.6 We will begin with some information on the competent authority and its composition.

2.1

Competent Authority

The current supervisory regime is about to change regarding the competent authority, as mentioned above. Reference is made to both regimes, yet emphasis is laid on the new regime. Currently, different authorities are responsible for insurance supervision. The main insurance supervisory authority is the Superintendent for Insurance (hereinafter Superintendent), under section 30 LIRB. He/she is the head of the Insurance

4

Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORPs), OJ L 354, 23.12.2016, pp. 37–85. 5 Wandt (2012), p. 18. 6 See Article 31(3) of the Solvency II Directive.

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Companies Control Office of the Ministry of Finance. The Superintendent and his/her deputies are public servants, selected by the Public Services Commission in accordance with the provisions of the Public Service Laws of 1990 to (Νo. 2) 2020, serving in principle under a five-year, full-time contract. They may not exercise any other professional activity during their term, and they are not allowed to work for any insurance or reinsurance company falling under the scope of the LIRB for up to two years after leaving their post. Especially for occupational pension funds, the competent authority is the Superintendent for Occupational Pensions Funds, who is a public servant serving at the Ministry of Labour and Social Insurance (section 7 LOPF). Under the new regime, there will be a unification of the insurance supervision. Insurance supervision will be exercised by the Cyprus Insurance and Occupational Pensions Authority, which will be an independent public entity and will take over the responsibilities of the above-mentioned superintendents. Such reform is based on the recommendations of a report by experts of the EIOPA and the respective Spanish authority, the implementation of which has been the subject of official recommendations to Cyprus by the European Commission.7 The explanatory note of the proposed bills refers also to the integrated approach adopted at EU level regarding the competences of EIOPA. The new Authority will be composed of a seven-member council, a president and a three-member executive committee. The Council will be formed by the president, two executive counsels and four members while the Executive Committee by the president and the two Council executive counsels, all of whom will be appointed by the Ministerial Council. The president and the executive counsels will be employed full time for a five-year term and will not be allowed to exercise any other professional activity. Moreover, the Authority will have a nine-member advisory committee for insurance and a 12-member committee for occupational pension funds. The members of the Insurance Committee will be the Authority’s president and executive counsels, one representative of the insurance and reinsurance undertakings, one of the insurance intermediaries, one of the actuaries, one insurance expert appointed by the Ministerial Council, the General Director of the Finance Ministry and the General Director of the Ministry of Labour and Social Insurance. The Occupational Funds Committee will be composed of the Authority’s president and executive counsels, two representatives of the employers, three representatives of the unions, one representative of the actuaries, one pension fund expert appointed by the Ministerial Council, the General Director of the Finance Ministry and the General Director of the Ministry of Labour and Social Insurance. The committee’s members will serve for four years, with possibility to renew their terms for another four years upon decision of the Ministerial Council. The existence and composition of the advisory committees reveal the effort of the new Authority to ensure inclusiveness of all competing interests. At the same time,

7

European Commission (2019a), pp. 16 and 59–60 (Country Specific Recommendation 3).

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they reveal the difficult compromises that the new Authority will have to strike in its decisions, especially in the politically sensitive domain of occupational pensions. It is noteworthy that the minutes of the sessions of the Executive Committee and the Council will not be made public, unless the Committee and the Council decide so or there is a judicial order. Such prima facie lack of transparency is justified by the need to focus on the supervisory work and limit the distractions due to criticism motivated by political criteria. Besides, legally important are not the exact decision-making internal deliberations but the stated grounds of the Authority’s decisions. The Authority will have and manage its own budget and will be obliged to submit its annual financial statements to the General Auditor of the Republic. Moreover, it will have to submit an annual report of its activities to the Finance Minister and the Ministerial Council.

2.2

General Transparency Principles

Transposing Article 31 of the Solvency II Directive, section 35 of the LIRB establishes a series of transparency principles. The Superintendent conducts his/her duties in a transparent and accountable manner, with due respect for the protection of confidential information. This provision reveals that in the exercise of supervisory duties, a proper balance should exist between transparency and confidentiality, to protect conflicting interests. The Superintendent ensures that the following information is disclosed: (a) the texts of laws, regulations, administrative rules and general guidance in the field of insurance regulation, (b) the general criteria and methods used in the supervisory review process, (c) aggregate statistical data on key aspects of the application of the prudential framework, (d) the manner of exercise of the options provided for in the Solvency II Directive, (e) the objectives of the supervision and its main functions and activities. Such disclosure has to be sufficient to enable a comparison of the supervisory approaches adopted by the supervisory authorities of the other EU Member States (MS). The information disclosed has to be updated regularly, published and made available in a concentrated manner at the website of the Superintendent, according to the basic parameters for disclosing aggregate data, as these are determined by implementing measures and technical standards. The above-mentioned information is available at a special section of the website of the Ministry of Finance regarding the Insurance Companies Control Office, under ‘Supervisory Disclosures’.8 However, the information referred to in elements (b) and (e) is available only in Greek, which is in practice the official language of Cyprus.

8

https://bit.ly/36tRAbO.

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The same applies also to a significant part of the information regarding the legal rules applicable to insurance regulation. Greek is an official EU language, and thus, formally, Cyprus has lived up to its obligations. Nevertheless, the absence of significant pieces of information in English creates practical problems: it not only fails to facilitate comparison with corresponding information provided by other MS but also creates a significant hurdle for entities and persons interested in pursuing an insurance business in Cyprus.

2.3

Objectives and Scope

The main objective of insurance supervision is the protection of policyholders and beneficiaries—section 30(1) of the Laws. Parallel objectives are the normal functioning of the private insurance market and the establishment of consumer confidence thereto, as well as contribution to the protection of financial stability in Cyprus.9 Insurance supervision is conducted pursuant to the provisions of the LIRB and the provisions adopted at EU level under Directive 2009/138/EC, as well as according to sound insurance principles. The latter are principles, as section 34(3) clarifies, that have been customarily or otherwise established regarding insurance or reinsurance and concern the professionalism that must be demonstrated by an insurance or reinsurance undertaking in its transactions with the insurance beneficiaries, its associates and the public and especially when fulfilling its obligations and in satisfying the claims of the beneficiaries. The combined meaning of section 34 (2) and section 34(3) is that the Superintendent examines conformity of the undertaking not only with applicable national and EU rules, but also with established sound industry practices, e.g. codes of conduct. Such practices are examined complementarily to the applicable provisions, to ensure pragmatic and fair exercise of supervisory duties.

2.4

General Competencies

According to section 31, the Superintendent for Insurance has competence to, among others, grant, suspend or withdraw an authorisation to pursue an insurance or reinsurance business in Cyprus; supervise the operation of insurance or reinsurance undertakings and ensure compliance with applicable laws and regulations; issue directives on matters concerning the application of the LIRB; and cooperate with supervisory authorities of other States. Moreover, the Superintendent is vested with

9 Insurance Company Control Service, Supervisory objectives, main functions and activities, available only in Greek https://bit.ly/2PIeuG9.

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extensive investigatory powers and powers to impose various administrative sanctions for violations of the applicable rules. Moreover, the Superintendent is responsible, under Part IV of the LIRB (sections 250–306), for supervising the solvency of groups of undertakings as well as individual undertakings that form the group. Part V of the LIRB (sections 307–346) empowers the Superintendent to adopt and publish measures on the reorganisation of insurance or reinsurance undertakings. Part VIII of the LIRB (sections 356–394) provides for the power of the Superintendent to keep registers of insurance intermediaries and to supervise insurance mediation activities. In addition, the Superintendent for Insurance is responsible for supervising and enforcing the provisions of the Prevention and Suppression of Money Laundering and Unlawful Activities Laws of 2007 to 2019 (188(I)/2007, as amended—hereinafter AML Laws10), which transpose Directive (EU) 2015/849,11 as amended, to the extent that these apply to the insurance sector (section 59(1)(c) AML Laws). Furthermore, the Superintendent is the competent authority for packaged retail and insurance-based investment products under Regulation 1286/2014,12 to the extent that these are produced by persons or entities supervised by the Superintendent.13 An important aspect of the Superintendent’s duties is the publication of any decisions against supervised undertakings regarding the revocation of the authorisation to pursue activities, reorganisation measures or winding-up proceedings,14 as well as of any sanctions imposed on insurance distributors for violations of the applicable provisions.15 These transpose almost by word the respective provisions of the Solvency II Directive and the IDD.

2.5

An Alternative Model?

As already mentioned, there will be an integration of the supervision of (re)insurance undertakings with the supervision of the occupational pension funds. As a result,

10

An English translation of the AML Law is available under https://bit.ly/2Z4wGLj. Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, OJ L 141, 5.6.2015, pp. 73–117. It is known as 4th AML Directive, and has been amended by Directive (EU) 2018/843 known as 5th AML Directive. 12 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, OJ L 352, 9.12.2014, pp. 1–23. 13 KΔΠ 283/2015, Article 3. 14 Sections 157, 311 and 330 LIRB respectively. 15 Section 394Λ(6) LIRB. 11

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Cyprus will create a regime of financial supervision using the EU regime as an example. At national level, there will be three independent authorities, the Central Bank of Cyprus, the Cyprus Securities and Exchange Commission and the Cyprus Insurance and Occupational Pensions Authority, mirroring the respective authorities at EU level, i.e. the European Banking Authority, the European Securities and Markets Authority and EIOPA. An alternative might be a division of supervisory powers as exemplified by the UK system, which is comprised of the Financial Conduct Authority (FCA), responsible for the conduct of insurance businesses, and the Prudential Regulation Authority (PRA), which acts under the control of the Bank of England and is competent for the financial regulation of insurance businesses.16 Such possibility has been examined in the context of banking supervision.17 It has been correctly rejected on the ground that the Cypriot economy is too small to have two regulatory authorities, while the existence of two authorities would create unnecessary complications.18 In the context of insurance supervision, a similar possibility would not be justified by the size of the economy. Moreover, it would be very challenging to implement it in practice: the current supervisory system is based on decades of regulatory supervision, which renders difficult even the coordination of the different financial supervisory authorities, let alone their merger into a single authority—especially given that the unification of insurance supervision has been achieved after years of efforts and external pressure. Although a unified approach might be worth considering, it appears that some sort of fragmentation is inevitable in any case.

3 Transparency Duties of Insurance and Reinsurance Undertakings Regarding insurance and reinsurance undertakings, transparency refers to organisation of their business, their solvency and their business activities.19 It comprises the governance of the undertakings, including their indirect control through qualifying holdings, and their financial condition. In this regard, Cypriot law follows closely the requirements of EU legislation. This section mentions briefly the main requirements, followed by the main legislative options exercised by Cyprus according to the Solvency II Directive.

16

Birds (2019), para. 2-01. Christofi (2017), pp. 60–61. 18 Idem. 19 Cf. Wandt (2012), pp. 9 and 18. 17

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Reports

The LIRB, in transposition of the respective requirements of the Solvency II Directive, provide for a public disclosure of certain key elements of the insurance and reinsurance undertakings (Solvency and Financial Condition report) as well as a regular submission of specific information to the Superintendent for Insurance (Regular Supervisory Reporting). The Superintendent for Insurance has issued Orders in relation to the Submission of Information, dated 2 May 2017,20 which specify the details and the procedure for submitting such reports, in accordance with pertinent Commission Regulations.21

3.1.1

Solvency and Financial Condition Reports

Under sections 52 and 54–56, which transpose Articles 51 and 53–55 of the Solvency II Directive, insurance or reinsurance undertakings have to publish annually a report on their solvency and financial condition. The Superintendent may allow the non-disclosure of certain pieces of information to protect fair competition and policyholders or other counter-parties. However, the description of capital management should always be disclosed. Should the Superintendent permit non-disclosure of information, undertakings must include a statement to this effect in their published report and state the reasons. Moreover, undertakings must publish information updates whenever there are major developments affecting the information already published. Such developments are considered to exist in at least two cases. First, if there is non-compliance with the Minimum Capital Requirements, which cannot be adequately dealt with in the short term; in these cases, the amount of non-compliance should be disclosed, alongside its origin, consequences and any remedial actions taken or planned. Second, if significant non-compliance with the Solvency Capital Requirement is observed and the Superintendent does not obtain a realistic recovery plan within two months from the date when the non-compliance was observed. The solvency and financial condition report is subject to the approval of the administrative, management or supervisory body of the undertaking and can be published only after that approval.

3.1.2

Regular Supervisory Reporting

The provisions of the LIRB on regular supervisory reporting transpose the respective provisions of the Solvency II Directive and are further specified by the 20

Available in English https://bit.ly/2qd9K0P. Commission Delegated Regulation (ΕU) 2015/35, Commission Implementing Regulation (ΕU) 2015/2450 and Commission Implementing Regulation (ΕU) 2015/2452.

21

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Superintendent’s Orders for the Submission of Information,22 which follow the EU implementing provisions, especially Delegated Regulation 2015/35 and Implementing Regulations 2015/2450 and 2015/2452. In general, there are no deviations by the LIRB from the Solvency II Directive. The regular supervisory reporting consists of (1) the Solvency and Financial Condition Report, (2) the Regular Supervisory Report, (3) the Own Risk and Assessment Report. (4) the Quantitative Reporting Templates and (5) the National Specific Templates.23 Quantitative Reporting Templates are submitted annually and quarterly unless the Superintendent has allowed their submission only annually under the conditions laid down in section 38(7)–(15). The information in the templates elaborates and supplements the information presented in the solvency and financial condition report and in the regular supervisory report.24 In addition, insurance and reinsurance undertakings have to submit to the Superintendent National Specific Templates in yearly and quarterly basis, pursuant to the pertinent Orders of the Superintendent for Insurance.25

3.2

Governance

The board of directors of an insurance or reinsurance undertaking has to ensure that an effective system of governance is in place, which provides for sound and prudent management of the business, with a clear allocation and appropriate segregation of responsibilities, and an effective system of transmission of information (sections 42 and 43(1)). Insurance and reinsurance undertakings must have in place and implement annually reviewed written policies on, at least, risk management, internal control, internal audit and, where relevant, outsourcing (section 43(3)–(4)). The Superintendent evaluates the governance system and may request from the undertakings to review or amend it (section 43(6)). Members of the Board and any person effectively running an insurance or reinsurance undertaking or having other key functions must fulfil the requirements on their professional qualifications, knowledge and experience, and be of good repute and integrity (section 44(1)). Such requirements are specified in section 44 (2) of the LIRB and in the implementing administrative regulations.26

22 Orders of the Superintendent for Insurance for the Submission of Information, 2nd May 2017 (updating Orders of February 2017), available at https://bit.ly/2WCSKwP. 23 Article 304(1) Delegated Regulation 2015/35, Orders of the Superintendent for Insurance for the Submission of Information, supra note 22, pp. 4–5. 24 Article 304(1)(d) Commission Delegated Regulation (EU) 2015/35. 25 Orders of the Superintendent for Insurance for the Submission of Information, supra note 22, 5. 26 Articles 11–14 of the Regulatory Administrative Law (K.Δ.Π.)116/2016 Insurance and Reinsurance Business and other Related Issues Regulations of 2016.

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Furthermore, the Superintendent has to be notified for approval of every subsequent change of governance, within one month of the occurrence of the change. If the Superintendent objects to the appointment of any person on the ground that such person does not meet the requisite qualifications, he/she is obliged to communicate such objections in a justified decision to the insurance or reinsurance undertaking within one month from the date of such appointment.

3.3

Changes in Qualifying Holdings

As to qualifying holdings, sections 58–64 of the LIRB, which transpose Articles 57–63 of the Solvency II Directive, contain extensive provisions on notifications regarding direct or indirect changes in qualifying holdings in the capital or the voting rights in an insurance or reinsurance undertaking. A ‘qualified holding’ is a direct or indirect holding in an undertaking that represents 10% or more of the capital or of the voting rights or that makes it possible to exercise a significant influence over the management of that undertaking (section 2). If such holding reaches, exceeds or falls below 20%, 30% or 50% of the voting rights or of the capital or has the result that the undertaking becomes or ceases to be a subsidiary, then the persons planning to acquire or dispose the holding should notify and seek approval from the Superintendent, indicating the size of the intended holding and relevant information (section 58). The Superintendent has to publish a list specifying the information necessary to carry out the assessment. Such information must be provided at the time of notification and cannot include pieces of information irrelevant with the prudential assessment (section 60(4)). The undertakings have to notify the Superintendent of planned changes to their qualifying holdings once they become aware of them (section 62(2)). Section 59 provides that the Superintendent has to acknowledge in writing, within two working days, the receipt of all necessary documents and inform the proposed acquirer of qualifying holdings on the period necessary to assess the proposed changes. Such period cannot exceed 60 working days unless there are special specific circumstances, as laid down in the LIRB. The Superintendent may request additional information on the financial statements of the acquiring entity and the identity of the natural persons who control it. Section 60 clarifies the criteria to be used in the assessment of the proposed changes. These relate to the prudential supervision and the prevention of unlawful acts and not to the appropriate level of the holding or the economic needs of the market. Pursuant to section 61(2), the supervised undertakings shall also, at least once a year, inform the Superintendent of the names of shareholders or members possessing qualifying holdings and the sizes of such holdings. Section 59 (5)–(6) foresees that if the Superintendent objects to the proposed changes, he/she has to notify in writing the proposed acquirer within two working days from completing the assessment; otherwise, the proposed changes are deemed

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approved. The Superintendent may publish the decision with his/her objections on his/her own initiative or at the request of the proposed acquirer. Such decision is subject to administrative review before the Permanent Secretary of the Finance Ministry and to judicial review before the Administrative Court.

3.4

Duties of Groups

Sections 293 and 295–297 of the LIRB, which transpose Articles 254, 256, 256a and 257 of the Solvency II Directive, impose on groups transparency duties similar to the duties of individual undertakings. Groups are obliged to submit regular supervisory reports, in accordance with the pertinent requirements for individual undertakings. The same applies to publishing reports on solvency and financial conditions of the group. Insurance and reinsurance undertakings, insurance holding companies and mixed participating financial holding companies must disclose annually at group level their legal, governance and organisational structure, including a description of all their subsidiaries, their material related undertakings and their significant branches. All persons who effectively run the insurance holding company or participating financial companies have to satisfy the requirements on professional qualifications, knowledge and experience, good repute and integrity, which are laid down for the respective persons of individual undertakings in section 44. Failure to comply with the transparency requirements may result in administrative fines against the insurance holding company and/or the persons effectively managing its board of directors.

3.5

Audited Financial Statements

Section 74, transposing Article 72 of the Solvency II Directive, contains provisions on the auditing of the insurance and reinsurance undertakings and the notification duties of the auditors. The Annual and Consolidated Accounts of the undertakings are examined by auditors pursuant to the Auditors Law of 2017 (L. 53(I)/2017), which transposes Directive 2006/43/EC,27 as amended and implements Regulation (EU) No 537/2014, as amended.28 Auditors have to verify the information submitted to the 27

Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, OJ L 157, 9.6.2006, 87–107. 28 Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC, OJ L 158, 27.5.2014, 77–112.

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Superintendent under section 38 of the LIRB.29 They are under a duty to report promptly to the Superintendent any fact or decision concerning the insurance or reinsurance undertaking of which they have become aware while carrying out that task and which is liable to bring about any of the following: (a) a material breach of the rules governing authorisation or that specifically govern the pursuit of the activities of insurance and reinsurance undertakings, (b) an impairment of the continuous functioning of the insurance or reinsurance undertaking, (c) a refusal to certify the accounts or the expression of reservations, (d) non-compliance with the Solvency Capital Requirement, (e) non-compliance with the Minimum Capital Requirement. Furthermore, they must report any facts or decisions of which they have become aware in their auditing capacity that regard another undertaking that has a control relationship with the audited undertaking. The Superintendent for Insurance has issued Orders in relation to the Annual Audit of the Solvency and Financial Condition Report, which contain specifics on the auditors’ report.30 Section 74(7)–(8) provides that in case of a serious breach of duty of the auditor, the Superintendent may request the insurance or reinsurance undertaking to immediately terminate the appointment of the auditor, as well as to impose an administrative fine.

3.6

Exercise of Regulatory Options for Specific Insurance Branches

Cyprus has exercised several regulatory options provided for in the Solvency II Directive. The main options exercised as to transparency in specific insurance branches are the following. Insurance undertakings referred in Article 73(2) of the Directive have to comply with accounting rules governing life insurance undertakings for all of their activities, including during winding up (section 75(3)). Non-life insurance undertakings covering motor vehicle liability risks established in other EU Member States have to submit to the Superintendent the additional information provided under Article 148(2) of the Directive (section 161(4)). Regarding EU branches of life-insurance undertakings established in a third country, the Superintendent may require insurance undertakings to submit a systematic notification of the technical bases used for calculating scales of premiums and technical provisions, without the requirement constituting a prior condition for a life 29 30

See supra, § 2.1. Available in English under https://bit.ly/2JMy5kK.

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insurance undertaking to pursue its business (section 178(3)), using the option under Article 163(3) of the Directive. Under section 221(4)(b), the Superintendent may require from every undertaking offering compulsory insurance a declaration confirming that the policy it is issuing complies with the specific provisions regulating the particular insurance, as Article 179(4) of the Directive allows. Section 223(2) requires non-life insurance undertakings to provide a non-systematic notification of policy conditions and other documents for the purpose of verifying compliance with national provisions concerning insurance contracts, using the option of Article 181(1) of the Directive. Under section 223(3), if a class of non-life insurance has been made compulsory in Cyprus, the Superintendent may require (a) that he/she is notified of the general and special terms of policies prior to their adoption or (b) the prior notification or approval of proposed increases in premium rates, as part of general price control systems, as allowed by Article 181 (2) of the Directive. Section 224(2), using the option under Article 182 of the Directive, allows the Superintendent to require, for the purpose of verifying compliance with the provisions concerning actuarial principles, systematic communication of the technical bases used in particular for calculating scales of premiums and technical provisions. Section 328(2) obliges insurance undertakings that cover not only life risks but also accident and sickness risks, to keep a single register for their activities, as allowed by Article 276(2) of the Directive.

4 Transparency Duties of Insurance Distributors Transparency in insurance distribution refers to the legal relationship between the insurer and the intermediary, the status and the legal powers and duties of the intermediaries, as well as their professional qualification and potential conflicts of interest.31 The duties of insurance distributors are laid down in Part VIII of the LIRB (sections 356–394ΛΒ), which transposes Directive (EU) 2016/97 on Insurance Distribution (IDD).32

31

Wandt (2012), p. 9. Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast), OJ L 26, 2.2.2016, 19–59. 32

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4.1

Registration

(Re)insurance undertakings, their employees and the employees of insurance intermediaries and legal entities directly involved in the distribution of (re)insurance products are registered in a special registry to ensure the supervision of their qualifications. Undertakings and intermediaries that are legal entities have to submit in the first quarter of each year a list of their employees who participate directly to the distribution of (re)insurance products (section 359(4)). Insurance distribution is allowed only if the person/legal entity is registered in the appropriate registry. (Re)insurance and ancillary insurance intermediaries have to be registered with the Superintendent for Insurance, if Cyprus is their home State; possess the appropriate knowledge and skills, as these are defined by the LIRB and implementing regulations;33 and hold professional indemnity insurance (section 361). (Re)insurance undertakings must have internal policies and procedures to ensure the fulfilment of these requirements (section 362).

4.1.1

Registers

Under section 383 of the LIRB, the Superintendent for Insurance retains the following registers for intermediaries: (a) In the case of natural persons – (i) (ii) (iii) (iv)

a register for insurance agents, sub-agents and consultants; a register for insurance brokers; a register for connected insurance consultants; a register for ancillary insurance intermediaries.

(b) In the case of legal persons – (i) (ii) (iii) (iv)

a register for insurance agency, sub-agency and consultancy companies; a register for insurance brokerage companies; a register for connected insurance consultancy companies; and a register for ancillary insurance intermediary companies.

The registers indicate the names of the natural persons within the management of the (re)insurance distributor who are responsible for insurance or reinsurance distribution. Furthermore, they specify the Member States in which the intermediary conducts business under the rules on the freedom of establishment or the freedom to provide services.34

33

Regulatory Administrative Law (K.Δ.Π.) 104/2019, which amends the Insurance and Reinsurance Insurance and Reinsurance Business and other Related Issues Regulations of 2016 (supra note 26). 34 Article 36(1) of Regulatory Administrative Law 104/2019.

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Under section 384(3), access to the registries is granted to any person interested to know if a person or entity is registered on the registers as well as, in the case of an entity, the names of the managing directors or partners who are responsible for the mediation activities.

4.1.2

Registration Requirements

The LIRB contain detailed provisions on the requirements for registration for natural persons and legal entities. Among others, insurance broker entities have to submit (a) information on the identities of shareholders or members, whether natural persons or legal entities, that have a holding in the intermediary that exceeds 10% and the amounts of those holdings; (b) information on the identities of persons who have close links with the intermediary; and (c) information that those holdings or close links do not prevent the effective exercise of the supervisory functions of the competent authority. Interested persons or entities submit a written application to the Superintendent with all necessary supporting documents. A natural person may not be registered in the register for ancillary insurance intermediaries unless the insurance undertaking or agent or broker has assumed responsibility in writing for the acts or omissions of such person (section 387(2)). Section 389 lays down special requirements for the registration of insurance intermediaries of third States. They can be registered as a branch, provided, among others, that they are licensed to exercise respective activities in the State they are established and that they have a representative in Cyprus who has registered himself/ herself as an insurance intermediary or, in case of a legal entity, at least one member of the board is registered as such. The Superintendent examines the application within three months from the date of submission of all necessary documents and informs the applicant in writing on his/her decision. If the Superintendent finds that all conditions are met, he/she issues a registration certificate and a special insurance ID in case of natural persons. The certificate and the ID should be displayed to all interested persons when signing the offer to conclude an insurance contract. The Superintendent may decide to remove registered persons or entities if they no longer fulfil the legal requirements for registration, especially the professional and organisational requirements, the rules of business conduct prescribed in Parts VI and VII of the LIRB as well as serious violations of the applicable laws and regulations, as specified in detail in that section.35

35

Section 394 of the LIRB.

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Information Duties and Conduct of Business

Sections 394Γ–394IZ of the LIRB, which transpose Articles 17–30 IDD, contain extensive provisions on information duties of insurance distributors towards their customers and related rules on business conduct. These refer to information disclosure, suitability of the insurance products, management of conflicts of interests as well as product oversight and governance (POG).36 As to information disclosure, insurance distributors must act honestly and in accordance with the best interests of their customers. Their marketing communications to (potential) customers must be fair, clear, not misleading and be clearly identifiable as marketing communications. Concerning conflict of interests and appropriateness of insurance products, the remuneration of distributors must not conflict with customer interest. Distributors may not use any incentives or incentive schemes for their employees that would lead to the recommendation of a product when they could offer another product more suitable for the customer’s needs. Regarding POG, insurance undertakings and intermediaries that manufacture insurance products for sale must employ and review pre-market approval processes for each insurance product or significant adaptations of an existing insurance product. These include identifying a target market and assessing relevant potential risks. Such information must be communicated to distributors. Sections 394 IB–IZ imposes additional duties on insurance distributors for insurance-based investment products. They transpose the respective provisions of the IDD, which have been influenced by the Markets in Financial Instruments Directive II (MiFID II).37 Distributors should maintain and manage appropriate controls of conflicts of interests and disclose the sources of conflicts of interests on a permanent medium to the customers before concluding a contract. They should also disclose all their costs and charges for the customer, whether any periodic assessment and warnings on the risks of the product will be carried out. Moreover, they have to assess their customer’s knowledge and experience in the proposed investment, as well as the customer’s financial loss-absorbing capacity, and tailor their advice to such assessment. In addition, distributors have to maintain records of the content of the contractual agreement with the customer and deliver periodic reports on the service provided on a durable medium. In this regard, important is also Regulation 1286/201438 regarding key information documents for packaged retail and insurance-based investment products (PRIIPs), which is complemented by

36

See on the respective provisions of the IDD Noussia (2018), pp. 120–123. See Noussia (2018), pp. 125–128; Marano (2017), pp. 219–234, who analyses extensively the influence of MiFID II on the IDD. 38 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, OJ L 352, 9.12.2014, pp. 1–23. 37

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Delegated Regulation EU/653/201739 and the relevant guidance of the Superintendent.40

4.3

Other Duties

(Re)insurance distributors incur additional duties, pursuant to sections 394IΗ and 394K–394KB LIRB. Re(insurance) distributors have to notify to the Superintendent of any change in the information that has been submitted for registration and supervision purposes. Failure to do so can result to an administrative fine of up to € 9000. Insurance brokerage companies must, within six months from the end of the financial year, submit a copy of every audited financial statement prepared in accordance with the Statutory Audits Laws of 2017 to 2020.41 Moreover, during the first quarter of every year, each insurance broker company must submit a statement regarding the collected insurance fees and the distribution of its business among insurance or reinsurance undertakings for the previous year. Insurance intermediaries that collect premiums on behalf of (re)insurance undertakings must keep strictly separated clients’ bank accounts. Where the premiums are kept for several insured, the intermediary must identify precisely in its books on behalf of which insured he/she holds every amount. Distributors need to have in place a fair and transparent system for customer complaint handling.42

39 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) by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents, OJ L 100, 12.4.2017, pp. 1–52. 40 Guidance of the Superintendent for Insurance on personalised information regarding insurancebased investment products, 14 Dec. 2018, https://bit.ly/3a8VDf8 [available in Greek only]. 41 Law on Statutory Audits of Annual Accounts and Consolidated Accounts conducted by Statutory Auditors and Audit Firms and on Related Matters (53(I)/2017) as amended. The Law transposes Directive 2006/43/EC on Statutory Audits of Annual Accounts and Consolidated Accounts (OJ L 157, 9 June 2006, p. 87), as amended. 42 See infra, §5.1.

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Code of Conduct

The Cypriot Association of Professional Insurance Intermediaries has issued a Code of Conduct for insurance intermediaries.43 Among others, intermediaries should not transfer insurance contracts to another insurance undertaking without the written consent of the policyholder. They ought to provide with accuracy and honesty all information necessary for their clients to reach a decision. Especially for life insurance policies, intermediaries should indicate to policyholders the consequences and risks of premature termination or cancellation of their insurance contracts, recommend that such contracts are maintained and provide extensive information. A serious breach of the Code can bring about the removal of the intermediaries from the Association or their prohibition of membership, entry into a black list as ‘amateur and dangerous’ and notification of these persons to their supervisors, the insurance undertakings and the Superintendent for Insurance. Continuous serious breaches of the Code will additionally lead to notification to the Superintendent for Insurance for removal of professional licence. The disciplinary procedure against intermediaries is initiated upon a written and signed complaint to the Central Committee of the Association. The Association calls the persons involved to submit their views in writing within a specified deadline, whereas failure to respond is considered acceptance of the complaint. The Committee’s disciplinary decisions are subject to review by the General Assembly of the Association.

5 Transparency Duties Under the AML Regime Transparency requirements are also established in the legislation on the prevention of abuse of the financial system for money laundering and terrorism purposes (Antimoney Laundering/Combating of Terrorism Financing—AML/CFT), which follows EU law requirements.44 The risk, albeit moderate, refers mainly to life insurance and annuity products, which allow a customer to place funds into the financial system and potentially disguise their criminal origin or to finance illegal activities.45 Given that Cyprus’ favourable tax system attracts companies worldwide, AML/CFT issues are an important aspect in the operation of insurance companies. The pertinent provisions can be found in Sections 58–71 of the Prevention and Suppression of Money Laundering and Unlawful Activities Laws of 2007 to 2019

43

Available in Greek only at https://bit.ly/327e5zD. On EU legal framework regarding AML/CFT see the pertinent website of the Commission https:// bit.ly/2CxKMiu. 45 See European Commission (2019b), pp. 116–117. 44

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(188(I)/2007, as amended—hereinafter AML Laws46), which transpose Directive (EU) 2015/849,47 as amended. The Superintendent has issued extensive implementing orders for life insurance undertakings and intermediaries.48 In addition, compliance with such provisions forms part of the undertakings’ regular supervisory reporting.49

5.1

Scope

The AML Laws require all financial institutions to have in place adequate and appropriate policies, controls and procedures to prevent and mitigate risks of their business being abused for money laundering or terrorism financing (section 58, first sentence AML Laws). The term ‘financial institution’ includes insurance and reinsurance undertakings, as well as insurance and reinsurance intermediaries when they act with respect to life insurance and other investment-related services (section 2 AML Laws). Financial institutions have to ensure, among others, customer identification and customer due diligence, internal reporting and reporting to the Cyprus Unit for Combating Money Laundering, risk management procedures for the purpose of forestalling and preventing money laundering and financing of terrorism, thorough examination of every transaction that is considered to be of high risk due to its nature and especially complicated or unusually large transactions, and all transactions that are being executed with no profound economic reason.50 From a transparency perspective, the most important provisions regard customer due diligence and beneficial ownership of undertakings.

46

An English translation of the AML Law is available under https://bit.ly/2Z4wGLj. Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, OJ L 141, 5.6.2015, pp. 73–117. It is known as 4th AML Directive, and has been amended by Directive (EU) 2018/843 known as 5th AML Directive. 48 Orders for life insurance undertakings and life insurance intermediaries in accordance with Article 59(4) of the Prevention and Suppression of Money Laundering Activities Law of 2007–2019, 5th edition, Dec. 2019. https://bit.ly/3a8VDf8. 49 Section 38(6) LIRB. 50 See section 58 AML Law and the website of the Cyprus Unit for Combating Money Laundering, ibid. 47

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Customer Due Diligence

Customer due diligence refers to the proper and accurate identification of a customer. Financial institutions have to apply customer due diligence measures whenever they, among others, establish a business relationship; carry out an occasional transaction that amounts to € 15,000 or more, whether that transaction is carried out in a single operation or in several operations that appear to be linked; there is a suspicion of money laundering or terrorist financing; there are doubts about the veracity or adequacy of previously obtained customer identification data (section 60 AML Laws). Financial institutions incur special additional duties regarding beneficiaries of life insurance or other investment-related insurance business. If such beneficiaries are identified as specifically named persons or legal arrangements, financial institutions have to take the name of the person. In the case of beneficiaries that are designated by characteristics or by class or by other means, financial institutions have to obtain sufficient information to ensure that the identity of the beneficiary can be established at the time of the payout (section 61(4) AML Laws).

5.3

Beneficial Ownership

Beneficial ownership refers to the identification of the physical persons behind a legal entity that are the ultimate beneficiaries of the entity’s activities. All legal entities incorporated in Cyprus have to obtain and hold adequate, accurate and current information on their beneficial owners in a special central register (section 61A(1) and (4) AML Laws). Article 2 AML Laws defines a ‘beneficial owner’ as any natural person who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted. In the case of corporate entities, this includes at least the natural person who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means; nonetheless, this does not include a company listed on a regulated market that is subject to disclosure requirements consistent with EU law or subject to equivalent international standards that ensure adequate transparency of ownership information. Access to the register of beneficial owners is granted to financial institutions when these apply customer due diligence measures in accordance with the AML Laws. Nevertheless, financial institutions may not rely exclusively on such register when conducting customer due diligence, but should also adopt a risk-based approach (section 61A (2), (6)(b) and (7)(b) AML Laws). Section 61A(6)(a) AML Laws grants unrestricted access to the register to specified public authorities, i.e. the competent Supervisory Authority, the Cyprus Unit

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for Combating Money Laundering, the Customs and Excise Department, and the Inland Revenue and the Police. Such authorities may have access without prior notification of the entity concerned (section 61A(7)(a) AML Laws). Moreover, a person or entity that can demonstrate a ‘legitimate interest’ may access the name, the month and year of birth, the nationality and the country of residence of the beneficial owner, as well as the nature and extent of the beneficial interest, without prejudice to the applicable rules on personal data protection. However, a ‘legitimate interest’ can only refer to the combating of money laundering, terrorist financing and associated predicate offences (section 61A (6) (c) AML Laws).

6 Transparency of Enforcement Transparency of enforcement relates to the investigatory powers and the sanctions for possible violations of the applicable provisions. Both administrative and criminal sanctions are foreseen, the interplay of which creates issues of protection of fundamental rights.

6.1

Investigatory Powers

Sections 395–401 LIRB and 59(9) AML/CFT Laws provide for extensive investigatory powers of the Superintendent. The Superintendent for Insurance has the authority to collect any information he/she deems necessary in the exercise of his/her responsibilities and powers. To this end, the Superintendent has to request the information in writing from the supervised person or entity. The request should indicate the provisions on which it is based, the reasoning behind the request, the reasonable time limit within which to provide information and the possible sanctions in case of non-compliance. The latter include an administrative fine of up to € 100.000 for non-compliance and up to € 200 per day for continued failure to comply. Moreover, the Superintendent may conduct on-site controls necessary for the investigation of possible violations of the LIRB. In principle, such controls are conducted upon previous notice of the person or entity investigated. However, such notice is not required in urgent and duly justified cases. The order of the Superintendent for conducting the investigation must be in writing and determine the purpose of the supervisory control, the date on which the control commences, the legislative provision on which this power of the Superintendent is based and the possible sanctions for refusal to comply. The provisions on the powers of the Superintendent regarding information collection and searches enable the effective exercise of supervision. They form the necessary legal basis upon which cooperation of the supervised persons and entities

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can be demanded. According to the principle of lawfulness, a public authority has only the powers vested to it by law.51 Intransparent enforcement provisions may lead to practical problems and extensive litigation. As a result, there have been instances in practice, concerning other pieces of legislation, in which the investigative powers of the supervisory authority were not clearly delineated and the supervised entities refused to produce the required documents.

6.2

Administrative Sanctions

Both the LIRB (section 399) and the AML/CFT Laws (section 59) contain general rules on administrative sanctions.

6.2.1

Violations and Procedure

Administrative sanctions may be imposed either for failure to comply with the applicable provisions or for failure to cooperate in the investigation process. They include administrative fines, suspension or revocation of the authorisation to pursue insurance activities, and sanctions on the board members. In principle, the fines imposed cannot exceed € 100.000 and € 200.000 in case of repetition of the breach, yet there are special provisions that foresee heavier fines for certain violations. The decision of the Superintendent to impose a sanction must be rendered after the persons concerned have been heard and it has been notified in writing to every interested person and duly justified.52 Under the new regulatory framework, the entity responsible for imposing sanctions will the three-member Executive Committee of the independent Authority. The heaviest administrative sanction is the revocation of the authorisation to pursue (re)insurance business, in case of severe non-compliance with the applicable provisions. This has happened with Olympic Insurance Cyprus Ltd, a Cypriot insurance undertaking whose licence has been revoked because of failure to meet the minimum capital requirements and that has entered compulsory resolution and winding up.53 Olympic Insurance had a very small market share in Cyprus but was also active in Bulgaria through the freedom of establishment, possessing a 10%

51

Article 8(1) of the 1999 Law on the general principles of administrative law provides that the activities of the Administration are determined and limited by the law in force. 52 Sections 28–29 of Law 158(I)/1999 clarify that an administrative act must refer to specific facts and be clearly justified so that it leaves no doubt as to the real reason that led the administrative organ to issue it. 53 See the official announcement of the Superintendent of Insurance dated 17 July 2018, https://bit. ly/38du3vR.

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market share. The revocation of the licence to operate in Cyprus impacted significantly the Bulgarian market and caused a political crisis.54 Political and legal turbulence connected with the revocation of the authorisation to operate is not unfamiliar in the Cypriot financial sector. In 2015, the Central Bank of Cyprus (CBC) revoked the authorisation of the Cypriot branch of the FBME Bank Tanzania Ltd55 shortly after the US Treasury’s Financial Crime Enforcement Network (FinCEN) had identified FBME Bank as facilitating money-laundering activities and CBC had imposed a fine for failure to comply with the AML/FCT legislation. This sparked extensive litigation in Cyprus and an international arbitration between the Lebanese owners of the Bank and the Republic of Cyprus,56 in which the latter prevailed.57

6.2.2

Remedies Against the Superintendent’s Decision

Sections 347 and 400 LIRB provide that the decision of the Superintendent to impose a fine and/or other administrative sanctions is subject to a hierarchical recourse before the Permanent Secretary of the Ministry of Finance or to appeal before the Administrative Court under Article 175 of the Constitution. The Superintendent’s decision must clearly indicate the legal remedies available against the decision and the deadlines applicable. In case of hierarchical recourse, the Permanent Secretary examines whether the Superintendent’s decision was taken in compliance with all the procedures and provisions established in the LIRB, which means that he/she controls only the lawfulness of the Superintendent’s decision. If the Permanent Secretary upholds the Superintendent’s decision, then the decision of the Permanent Secretary can be appealed before the Administrative Court, which must be indicated in the decision. Pending the decision of the Permanent Secretary, no appeal may be filed before the Administrative Court. The power of the Permanent Secretary to control only the lawfulness of the Superintendent’s decision is rather unusual. In most cases, the hierarchical superior administrative organ has the same powers as the organ that issued the administrative act, which means that it can control also the merits.58 Nevertheless, the exact powers of the superior organ depend on the applicable piece of legislation. Under the new supervisory regime, without prejudice to the above-mentioned provisions, the decisions of the Executive Committee will be subject to administrative recourse before a special committee, which will be composed of the four non-executive members of the Council. The committee will have the power to

54

See Gotev (2018) and Kathimerini Cyprus (2018). See the official announcement, dated 22 Dec. 2015, at https://bit.ly/2QSVLbn. 56 See Alexandrou and Orphanides (2019). 57 See Hadjioannou (2019). 58 Nikolaou and Michaelides (2019), p. 114; Paraskeva (2017), pp. 401–402. 55

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control also the merits of the decision in question. This is a rather peculiar provision. It seems to entail that the decision on sanctions will be potentially subject to two different recourses, apart from an appeal before the administrative court.

6.2.3

Concurrent Competence and Interaction with Potential Violations of Other Instruments

Actions or omissions of supervised persons or entities that constitute violations of the LIRB may also constitute violations of other legislative instruments, for which competence belongs to a different supervisory authority. Regarding transparency, that would be especially the case where insurers or intermediaries violate their information duties towards customers who are natural persons acting outside their professional capacity (consumers). Such violation may be covered also by the Law on unfair business-to-consumers commercial practices (Law 103(I)/2007), which transposes the Directive on Unfair Commercial Practices (UCPD).59 Intransparent behaviour of (re)insurance entities or intermediaries in their relation to consumers may constitute a misleading act or omission under Articles 5 and 6 of the Law (Articles 6 and 7 of the Directive). Particularly important is Article 6(5) of the Law (Article 7(5) of the Directive), which has the effect that any violation of mandatory information requirements is likely to constitute a violation of the Law.60 The administrative competency to examine such violations belongs to the Consumer Protection Service, which can initiate administrative proceedings and impose administrative fines. Thus, a single set of facts may bring about the application of both insurance-specific legislation and consumer protection instruments. In such cases, the administrative competency belongs to the Superintendent for Insurance. Article 3(4) of the UCPD provides that should a conflict between the provisions of that Directive and other Community rules regulating specific aspects of unfair commercial practices arise, the latter shall prevail and apply to those specific aspects. The UCPD preamble clarifies that the Directive applies only in so far as there are no specific Community law provisions regulating specific aspects of unfair commercial practices, such as information requirements and rules on the way the information is presented to the consumer.61 In other words, in cases of conflicting provisions, the sector-specific provisions prevail as lex specialis.62 At the same time, subsidiarity of application entails subsidiarity of enforcement of the related administrative power. Therefore, the administrative competence of the Superintendent for 59

Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council, OJ L 149, 11.6.2005, pp. 22–39. 60 See also in this regard Marano (2019), pp. 94–95. 61 Recital (10). 62 European Commission (2016), para. 1.4.1.

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Insurance will prevail over the respective competence of the Consumer Protection Service.

6.3

Criminal Sanctions

The LIRB establish as a criminal offence a series of violations of the provisions of the Law. Such offences are punishable by a fine of up to € 200.000 and imprisonment of up to five years. Criminally liable can be both legal entities and their directors, the latter only if they have knowingly violated the Laws.63 More severe sentences are established for violations of the AML/CFT Laws.64 The Attorney General decides on the initiation of criminal proceedings, after the Superintendent has submitted a report with his/her findings and the related evidence, upon suspicion that the supervised persons or entities have committed a criminal offence.65 This provision serves also the simplification of the proceedings by avoiding parallel inquiries.

6.4

Interaction Between Administrative and Criminal Sanctions

A series of issues has been raised as to administrative enforcement regarding the protection of fundamental rights, namely the right to a fair trial and avoidance of double jeopardy (ne bis in idem). In transparency terms, violation of the right to a fiar trial could be seen as an issue of inadequate transparency, while double jeopardy could be regarded as excessive transparency.

6.4.1

Right to a Fair Trial

The potential violation of the right to a fair trial is connected to the system of judicial control of administrative decisions in Cyprus. Under Article 146 of the Constitution, the Administrative Court (on first instance) and the Supreme Court (on appeal) control mainly the legality of an administrative act, not its substance.66 Therefore,

63

Sections 402–410 and 394KΓ–394KΘ LIRB. See Articles 2–4 AML/CFT Laws. 65 Section 398 LIRB. 66 However, the Administrative Court may control also the substance of administrative acts in taxation cases and procedures of international protection. The Administrative Court was established in 2015 as a court of first instance. Until then, that function was fulfilled by single-member chambers of the Supreme Court. 64

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courts do not have the power to modify or replace an administrative act through their judgment.67 We note that although Cyprus is mostly a common-law country, its administrative law has been largely shaped by the doctrine and practice of the civil law tradition, especially Greece and France68 and the judgments of the Conseil d’ Etat in these States.69 Nonetheless, judicial judgments on administrative issues tend to apply the common-law method of judicial precedents.70

6.4.1.1

Doctrinal Submissions and Case Law

It has been submitted that the power of a supervisory administrative authority to both investigate and adjudicate upon eventual violations of the applicable regulations, while its decision is subject only to legality review by the courts, violates the right to a fair trial under Article 6(1) European Convention of Human Rights (ECHR)71 and Article 30(2) of the Constitution.72 Although these arguments do not refer to the Superintendent for Insurance, they have been raised with reference to the decisions of various supervisory authorities.73 The starting point is that supervisory authorities may impose actually criminal sanctions, as the term has been interpreted by the European Court of Huma Rights (ECtHR). Such authorities are neither ‘impartial’ nor ‘independent’ because their role combines investigatory and adjudicatory functions. Therefore, their decisions should be subject to control by a court with full jurisdiction, i.e. competent to review also the merits. Since administrative decisions in Cyprus are subject only to legality control, there is a violation of the right to a fair trial of the supervised person/entity upon whom/which sanctions are imposed.74 The full bench of the Supreme Court had the opportunity to rule on the above points in the case Sigma Radio TV Ltd v Cyprus Radio and Television Authority (CRTA),75 which regarded administrative fines imposed for violations of provisions of the Cypriot law on TV programmes. The Supreme Court found that these sanctions were not criminal. Moreover, the administrative procedure had been fair 67

Paraskeva (2017), p. 45. See Hatzimihail (2013), pp. 67–68 (2013); Hatzimihail (2015), p. 77; Symeonides (2003), p. (2003). 69 Paraskeva (2017), p. 39. 70 Polyviou (2017a), pp. 261–263. 71 ‘In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.’ 72 See in detail Polyviou (2017b), pp. 302–331. 73 For example, the Cyprus Commission for Protection of Competition, the Securities and Exchange Commission, the Central Bank of Cyprus and the Consumer Protection Service—see supra note 72 and infra notes 83 and 84. 74 See in detail Polyviou (2017b), pp. 306–330. 75 (2004) 3 Α.Α.Δ. 134, 24 Febr. 2004. 68

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and impartial, as there was sufficient separation among the different stages of the administrative procedure and the CRTA had given the investigated entity sufficient opportunities to present its views. As to the necessary extent of judicial control, the Court referred to case law analysis of the ECtHR and ruled that, where policy considerations are involved, the final decision on the merits should rest with the executive. This was also the case at hand; therefore, there was no violation of the right to a fair trial. The case was referred to the ECtHR, which found it unnecessary to adjudicate on the alleged criminal nature of the sanctions, since Article 6(1) ECHR applies to both criminal and civil procedures.76 Although the ECtHR expressed concerns as to the structural impartiality of the CRTA, it reiterated that even where an adjudicatory body, including an administrative one, that determines disputes over ‘civil rights and obligations’ does not comply fully with Article 6(1), there is no violation if the proceedings are subject to subsequent control by a judicial body that has exercised ‘sufficient jurisdiction’ or provided ‘sufficient review’ in the proceedings before it.77 It is not necessary that the reviewing court may substitute its opinion for that of the administrative authorities. In assessing the sufficiency of a judicial review, the ECtHR will consider the powers of the judicial body in question, including factors like (a) the subject matter of the decision appealed against, in particular whether or not it concerned a specialised issue requiring professional knowledge or experience and whether it involved the exercise of administrative discretion and if, so, to what extent; (b) the manner in which that decision was arrived at, in particular the procedural guarantees available in the proceedings before the adjudicatory body; and (c) the content of the dispute, including the desired and actual grounds of appeal.78 However, whether the review carried out is sufficient will very much depend on the circumstances of a given case.79 Applying these principles in the case of CRTA, the ECtHR noted that the Supreme Court had jurisdiction to annul the decisions of CRTA on a number of grounds, including misconception of fact or law, no proper enquiry, lack of due reasoning or procedural grounds. Such approach is justified, taking into account the respect that must be given to decisions taken by administrative authorities on grounds of ‘expediency’. Besides, the subject matter was ‘a classic exercise of administrative discretion in the specialised area of law’ [sic] concerning broadcasting taken in the context of ensuring standard setting and compliance with the relevant legislation and regulations pursuant to public interest aims.80 Thus, the ECtHR found no violation of Article 6(1). It has been submitted that the ECtHR judgment regarded a special case and cannot be generalised to include all cases brought before Cypriot administrative

76

Paragraphs 126–127 of the judgment. Idem, paras 151–152. 78 Idem, paras 153–154. 79 Idem, para. 155. 80 Idem, paras 159–161. 77

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courts.81 In such cases, the most appropriate solution for the Cypriot legal system would be to confer full jurisdictional powers to the Administrative Court.82 Nonetheless, Cypriot courts have rejected arguments of violation of Article 6(1) regarding also other supervisory authorities, including the Central Bank of Cyprus83 and the Cyprus Consumer Protection Service.84

6.4.1.2

Discussion

The decisions of the Superintendent for Insurance are similar in nature with the ones of the CRTA. They concern regulation in a specialised legal area, in which protection of the persons and interests involved requires expedient action. The Superintendent’s control focuses on compliance with the technical standards set mainly at EU level, which pertains to legal interpretation and exercise of administrational discretion in the framework of proportionality. The applicable legislation provides for exact procedural guarantees before the Superintendent by stating specific deadlines in which the Superintendent has to complete his/her actions and lays particular emphasis on the right to be heard.85 Factual findings as such of the Superintendent are not often disputed, and when they do, they are covered mostly by grounds of abuse of power and improper enquiry of the case, which are valid reasons for annulment.86 Furthermore, administrative discretion is examined on proportionality grounds. Although, formally, the administrative courts cannot reform an administrative decision or remand the case for re-examination of the facts, they may annul the whole or part of the decision for improper enquiry of the facts, which provides similar, if not more extensive, protection to the supervised persons and entities. Thus, the judicial control of the Superintendent’s decisions under the current system does not violate the right to a fair trial.

6.4.2

Ne bis in Idem

The existence of both administrative and criminal sanctions may entail impermissible duplication of proceedings and/or sanctions against the supervised persons or 81

Polyviou (2017b), pp. 305–306. Idem, at 315–319. 83 Supreme Court of Cyprus, Jupiwind Ltd & Anor v Governor of Central Bank, Review Appeal 91/2012, 18 Jan 2018. 84 Administrative Court, Alpha Bank Cyprus Ltd v The Republic, Case 1293/2016, 15 Nov 2019. 85 Articles 400 and 394Λ(3) LIRB. 86 For example, Administrative Court, Arcadiou v Republic, Case 1228/2016, 30 Aug. 2019, which annulled a decision of the Superintendent regarding the removal of an insurance intermediary from the register for alleged debts to an undertaking. The Court found that the Superintendent had no power to examine such issue, which belonged to the jurisdiction of civil courts. The vast majority of litigated cases on insurance regulation concern such issues. 82

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entities in violation of the right not to be tried or sentenced twice for the same criminal offence (ne bis in idem), protected as a fundamental right in a series of instruments, including Article 4 of the 7th Protocol to the ECHR, Article 50 of the Charter of Fundamental Rights of the European Union (CFREU) and Article 12 (2) of the Cypriot Constitution.87 This is due to the fact that for the application of the ECHR and the CFREU, the national legal characterisation of a sanction as criminal or not is not decisive.88

6.4.2.1

Requirements of the Principle

For the principle of ne bis in idem to be applicable, there are three requirements: (a) ‘criminal’ proceedings, (b) identity of the offence (idem), and (c) duplication of proceedings (bis). According to the ECtHR, three criteria determine the criminal nature of the sanction: (a) the legal classification of the offence under national law, (b) the intrinsic nature of the offence and (c) the nature and degree of severity of the penalty that the person concerned is liable to incur.89 The ECtHR has observed that the second and third criteria are alternative and not necessarily cumulative; however, this does not exclude a cumulative approach where separate analysis of each criterion does not make it possible to reach a clear conclusion as to the existence of a criminal charge.90 The CJEU has adopted these criteria in the interpretation of Article 50 of the Charter of Fundamental Rights in the EU.91 The identity of the offence under the ECHR requires a set of concrete factual circumstances involving the same defendant and inextricably linked together in time and space.92 According to the Court of Justice of the EU (CJEU), the core question is whether the material acts in the two proceedings constitute a set of facts that are inextricably linked together in time, in space and by their subject matter.93 The ECtHR interprets a ‘final’ decision as an irrevocable one, which concludes one set of enforcement proceedings and has acquired the force of res judicata.94 The CJEU has ruled that the requirement of ‘finality’ is fulfilled where, following 87

Polyviou (2017b), pp. 358–360. CJEU judgment of 20.3.2018, C-537/16 Garlsson Real Estate, ECLI:EU:C:2018:193, para. 38; ECtHR judgment of 8 June 1976, Engel and Others v. Netherlands, (Application no. 5100/71; 5101/71; 5102/71; 5354/72; 5370/72), para 81. 89 ECtHR Engel and Others v. Netherlands, supra note 88, para 82. 90 See ECtHR judgment of 10.2.2009, Sergey Zolotukhin v. Russia, (Application No. 14939/03), para. 53. 91 CJEU judgment of 5.6.2012, case C-489/10 Bonda, ECLI:EU:C:2012:319 para. 37; judgment of 26.2.2013, Case C-617/10 Åkerberg Fransson, ECLI:EU:C:2013:105, para. 35. 92 Zolotukhin v. Russia, supra note 90, para. 84. 93 Judgment of 9.3.2006, case C-436/04 van Esbroeck, ECLI:EU:C:2006:165, para. 38; judgment of 20.3.2018, C-537/16 Garlsson Real Estate, supra note 88, para. 37. 94 ECtHR Zolotukhin v. Russia, supra note 90, para. 107. 88

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criminal proceedings, further prosecution is definitively barred or where the judicial authorities of a MS have adopted a decision by which the accused is finally acquitted in respect of the alleged acts.95

6.4.2.2

Exceptions

After a final judgment has been issued, duplication of proceedings is not always precluded. According to the ECtHR, subsequent proceedings do not breach Article 4 Prot. No. 7 ECHR if they are intrinsically linked together with the previous ones, in substance and in time, to comprise a single set of proceedings with two tiers,96 provided that they not represent an excessive burden for the person concerned.97 Material factors for determining whether there is a sufficiently close connection in substance include the following: – Whether the different proceedings pursue complementary purposes and thus address different aspects of the social misconduct involved. – Whether the duality of proceedings concerned is a foreseeable consequence, both in law and in practice, of the same impugned conduct. – Whether the relevant sets of proceedings are conducted in such manner as to avoid, to the extent possible, any duplication in the collection and assessment of evidence, notably through adequate interaction between the various competent authorities to ensure that the establishment of facts in one set of proceedings is also used in the other. – Whether the sanction imposed in the proceedings that first became final is considered in the subsequent proceedings, to prevent the person concerned from bearing an excessive burden; such risk is least likely to materialise where there is an offsetting mechanism in place designed to ensure that the overall amount of any penalties imposed is proportionate.98 A close connection in time means that there must be a sufficient temporal proximity between them, to protect the individual from being subjected to uncertainty and prevent protracted proceedings.99 The CFREU contains special provisions on the limitations of the fundamental rights. Pursuant to Article 51(1), limitations of ne bis in idem are allowed if they 95

See judgment of 16.11.2010, case C-261/09, Gaetano Mantello, ECLI:EU:C:2010:683, para. 45. ECtHR judgment of 17.2.2015 Boman v Finland (Application No 41604/11), para. 43. 97 ECtHR judgment of 15.11.2016, A and B v Norway (Applications Nos. 24130/11 and 29758/11), para. 121. 98 Idem, para.132. 99 Idem, para. 134. See also ECtHR judgment of 30.4.2015, Kapetanios and Others v. Greece (Application Nos 3453/12, 42941/12 and 9028/13), para. 67, in which the Court held that there was no temporal connection between criminal proceedings completed in 1992, 1998 and 2000 and administrative proceedings for annulations of fines, which were completed in 2011 and 2012. 96

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(1) are provided by law, (b) safeguard general interest or the rights of others and (c) respect the principle of proportionality. The third condition requires that the duplication of proceedings and penalties foreseen by national legislation does not exceed what is appropriate and necessary to attain the legislative objectives, it being understood that when there is a choice between several appropriate measures, recourse must be had to the least onerous and the disadvantages caused must not be disproportionate to the aims pursued.100 Such requirements are unlikely to be fulfilled if administrative proceedings follow a criminal conviction.101

6.4.2.3

Discussion

The violations of insurance regulations entail heavy administrative fines, which are very likely to be criminal in nature due their severity. The same behaviour may also bring about criminal liability. Thus, the first two conditions are very likely to be fulfilled. Important in practice will be the third requirement, i.e. impermissible duplication of proceedings. In this respect, crucial will be the way that subsequent procedure is conducted. Given that the Superintendent investigates eventual violations and notifies the Attorney General of potential criminal liability,102 the most probable scenario under Cypriot law is that criminal proceedings will be initiated following an administrative decision, while the evidence gathered in the administrative procedure will form the basis for criminal procedure. Nevertheless, an offsetting mechanism between administrative and criminal sanctions is not explicitly foreseen under Cypriot law. On the other hand, Cypriot courts lay particular emphasis on the case law of the ECtHR,103 while EU law, thus also the case law of the CJEU, supersedes any national legal rules under Article 1A of the Constitution. Therefore, it is not unlikely that the criminal court, when sentencing, will take into consideration the administrative sanctions already imposed. However, proceedings before both Cypriot courts, whether administrative or criminal, are quite lengthy, which means that the requirement of ‘finality’ of a decision will not be fulfilled in many cases. In such cases, there will be parallel proceedings, although it is not unlikely that the administrative proceedings are stayed, until the criminal trial has been completed. The situation will be much more complicated in case of proceedings in two or more different EU Member States. In such cases, solely Article 50 CFREU will be applicable, given that the ECHR does not cover proceedings in different States.104

100

CJEU Garlsson, supra note 88, para. 48. Idem, paras 57–59. See also in this regard Luchtman (2018), pp. 1735–1736. 102 Article 398 LIRB. 103 See Paraskeva (2015), pp. 13–15. 104 ECtHR judgment of 22 May 2007, Böheim v. Italy (Application No 35666/05), (judgment on admissibility); judgment of 4 Sept. 2014, Trabelsi v. Belgium (Application No 140/10), para. 164. 101

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However, the absence of concrete cooperation mechanisms makes its implementation challenging.105 In any case, as in purely domestic cases, a ‘final’ decision is necessary, which means that, until then, parallel proceedings will be permissible and likely to occur.106

7 Transparency in Alternative Dispute Resolution Alternative resolution of disputes between (re)insurance undertakings or intermediaries on the one hand and policyholders on the other hand can have two main forms: (a) direct negotiations between the parties through complaint-handling procedures of the undertakings or the intermediaries and (b) mediation through the Financial Ombudsman. Transparency rules are in force for both forms.

7.1

Complaint Handling by Undertakings and Intermediaries

Section 394IH LIRB obliges (re)insurance undertakings and intermediaries to have in place a fair and transparent customer-complaint-handling system. Specifics thereon are provided by the Superintendent’s Guidelines on complaint handling by insurance companies107 and insurance intermediaries,108 which are based on relevant Guidelines and Best Practices issued by EIOPA. Insurance companies and intermediaries should have in place a written complaint-handling policy, which is made available to all of their relevant staff. They have to register complaints within three working days of their receipt in a central internal register and in a corresponding separate file, acknowledge receipt of the complaint in writing to each complainant within two (2) working days and provide information to complainants regarding their complaint when the complainants request so. Moreover, if an intermediary receives a complaint for which an undertaking is responsible and the intermediary does not handle complaints on its behalf, the intermediary should inform the complainant accordingly and forward the complaint to the undertaking. Annual reports should be provided to the Superintendent for Insurance on (a) the total number of complaints received; (b) the number of complaints received per type 105

See the analysis of Luchtman (2018), pp. 1741–1747. Specifically regarding the context of capital markets, see the analysis of Pascua Mateo (2018), pp. 321–348. 106 See Supreme Court of Cyprus, judgment of 20 Sept. 2019, Bobolas v AG, regarding the European Arrest Warrant and parallel criminal proceedings in Greece and in Cyprus. 107 Decision of the Superintendent of Insurance dated 21st June 2013, available in Greek only at https://bit.ly/2qciGU1. 108 Decision of the Superintendent of Insurance dated 30th January, 2015, English translation available at https://bit.ly/2N8tZ8G.

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of complaint, per cause and per class of insurance; and (c) the number of complaints resolved, the number of unresolved complaints and the reasons for failing to be resolved, as well as the number of complaints brought to courts and the reasons for it. In addition, if and when requested, insurance undertakings and intermediaries should submit the following to the Superintendent: (a) the number of complaints occurring from a gap in the internal processes of the insurance intermediary or a lack thereof and the corrective actions taken and (b) the number of complaints occurring from an incorrect use of the internal procedures and the corrective actions taken. Undertakings and intermediaries should provide to their customers, in writing, clear and accurate information regarding their complaint-handling procedures and keep them informed of the course of handling of complaints. They should provide a written response to the complaint within a period of 15 working days, in principle, which can be extended for another 30 days upon a written notification to the complainant and an explanation of the reasons for delay. If the undertakings or intermediaries find that they cannot satisfy the complainant’s request, they have to explain in writing the reasons therefor and indicate explicitly that the complainant may have recourse to other mechanisms of extrajudicial settlements or to the courts.

7.2

Mediation by the Financial Ombudsman

Section 394IΘ LIRB provides that disputes between (re)insurance undertakings or intermediaries and their customers may be settled by the Financial Ombudsman. The Financial Ombudsman is regulated by Law 84(I)/2010, as amended,109 and by the implementing regulations. Its purpose is the extrajudicial settlement of ‘consumer’ complaints against financial undertakings, including insurance undertakings and intermediaries. The value of a complaint cannot exceed € 250.000. ‘Consumers’ under Law 84(I)/2010 can be either natural persons or legal entities whose annual turnover the year before the complaint was submitted does not exceed € 350.000. In principle, financial undertakings and intermediaries are not ‘consumers’. The Financial Ombudsman and the Deputy Financial Ombudsman are appointed by the Council of Ministers for a full five-year term, which can be renewed only once. These persons serve full time and may not exercise any other profession during their term. The Financial Ombudsman has to act impartially under prompt and transparent procedures. Sections 12–14 of Law 84(I)/2010 and the pertinent Ombudsman’s directive on complaint handling110 lay down in detail the relevant 109

Laws Relating to the Establishment and Operation of a Single Agency for the Out of Court Settlement of Disputes of Financial Nature (Financial Ombudsman) of 2010 to (No 2) 2018. An English translation of the original version of that Law, which does not include subsequent amendments, can be found at https://bit.ly/2NcoBl9 (9 Jan. 2020). 110 Directive regarding the Procedure for Submission and Examination of Complaints by the Financial Ombudsman of 2015, available in English at https://bit.ly/2vpQmMP.

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procedure, which is also described on the Ombudman’s website111 and is written on the standardised complaint forms. The Ombudsman’s decision is not binding unless both parties agree thereon, after they have received pertinent information from the Ombudsman. If the Ombudsman decides in favour of the complainant, then Law 84(I)/2010 provides that he/she may charge the financial undertaking with a fee of up to € 300 for the services of any expert used by the Ombudsman in the examination of the complaint and with a fee of up to € 350 for the examination of the complaint. These are payable to the Ombudsman irrespective of the binding nature of his/her decision. It is noteworthy that neither the Law nor the implementing Ombundsman’s directive oblige the Ombudsman to inform the undertaking beforehand of the possibility to be charged with such amounts. Furthermore, the Ombudsman can adjudicate compensation of up to € 100.000 in favour of the complainant and make appropriate suggestions to the undertaking. Such compensation remains a mere suggestion if the financial undertaking does not accept to be bound by the Ombudsman’s decision—which is usually the case in practice. The Ombudsman has to submit yearly reports on the number of complaints received, the number of complaints that have been examined, the results of the examination, the number of decisions whose binding nature has been accepted by the financial undertakings and the number of decisions whose binding nature has not been accepted by the financial undertakings’ sector. The financial results of the Ombudsman are reviewed by the General Auditor of the Republic, are notified to the Council of Ministers and the House of Representatives and are published on the Ombudsman’s website.

8 Conclusion The current Cypriot rules on insurance regulation and the related transparency issues have been largely shaped and influenced by EU law. There are very few particularities of the Cypriot legislation in this regard, which are explained by the extensive and detailed EU legal framework, as well as by the relatively small size of the Cypriot insurance market at the EU level. The main country-specific issues that have arisen regard the supervision authority and enforcement procedures. An imminent reform of the supervisory system will integrate insurance supervision with supervision of pension funds under a single independent authority. As a result, the Cypriot system of financial supervision will obtain a tripartite form, modelled after the system followed by the EU financial supervision authorities. There is a clear division of responsibilities among the financial supervision authorities. In the insurance sector, the Superintendent for Insurance handles all issues

111

http://www.financialombudsman.gov.cy.

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involving (re)insurance undertakings or intermediaries, even if they relate to domains normally under the competence of other supervisory authorities, such as consumer protection, investment products and money laundering. Nonetheless, the political sensitivity of the pension funds has led to compromises in the composition of the new Authority, which might affect in practice its independence and the flexibility of its decision-making procedures. In any case, the creation of the integrated supervision is a step in the right direction, and its function remain to be seen. The administrative enforcement procedures in the financial sector have attracted the greatest attention. The system of judicial control of administrative enforcement decisions has been criticised in doctrinal writings and has been the subject of extensive litigation. The criticism focuses on the fact that administrative courts may not, in principle, control the merits of administrative decisions, which could violate the fundamental right to a fair trial. Following a series of judgments of the Supreme Court and a judgment of the ECtHR, Cypriot courts regard the current system as adequate and the issue as settled. The judicial control of the decisions of the Superintendent for Insurance does not raise concerns as to the right to a fair trial. Sanctions for violations of the applicable rules can be both administrative and criminal, which raises issues of double jeopardy. The case law of the ECtHR and the CJEU are of primary importance, and decisions can only be reached ad hoc. Especially challenging in practice will be cases that involve more than one EU MS. Transparency in ADR procedures of (re)insurance undertakings and intermediaries has been greatly improved, thanks to rules of EU origin. Policyholders may also benefit from a mediation by the Financial Ombudsman, although its inherent voluntary nature limits its efficiency. The procedure before the Ombudsman could be more transparent regarding the notification to the financial undertakings of their eventual charge, with handling fees, as there is no duty for such notification. Overall, insurance regulation in Cyprus has been greatly influenced at all levels by EU rules. The Cypriot legislation follows mostly by word the EU legal instruments, and deviations are very limited. At the same time, protection of fundamental rights plays a key role in enforcement issues. Therefore, there are no special transparency issues other than generic human rights issues raised in the context of administrative enforcement.

References Alexandrou F, Orphanides S (2019) Sources: Cypriot Police Raid Bank in Money Laundering Probe. https://bit.ly/30m28XQ Birds J (2019) Bird’s modern insurance law, 11th edn. Sweet and Maxwell, London Christofi D (2017) The Cypriot Banking Sector during the financial crisis and its reforms: an examination in light of the case of the UK. Cyprus Rev 29:43–66

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European Commission (2016) Commission Staff Working Document, Guidance on the Implementation/Application of Directive 2005/29/EC on Unfair Commercial Practices, SWD (2016) 163 final, 25.5.2016 European Commission (2019a) Commission Staff Working Document, Country report Cyprus 2019, SWD (2019) 1012 final, 27.2.2019 European Commission (2019b) Staff Working Document Accompanying the Document Report from the Commission to the European Parliament and the Council on the assessment of the risk of money laundering and terrorist financing affecting the internal market and relating to crossborder activities, SWD (2019) 650 final, 24.7.2019 Glykis A (2020) Chapter 15. Cyprus. In: Campbell D (ed) International insurance law and regulation. Thomson Reuters, London Gotev G (2018) Cyprus insurer’s bankruptcy sends shockwaves across Bulgaria. https://bit.ly/ 2NqcYqu Hadjioannou B (2019) International Court of Arbitration rules in favour of Cyprus in FBME case. https://bit.ly/2QROhW6 Hatzimihail N (2013) Cyprus as a mixed legal system. J Civ Law Stud 6:37–96 Hatzimihail N (2015) Reconstructing mixity: sources of law and legal method in Cyprus. In: Palmer V et al (eds) Mixed legal systems east and west. Routledge, London, pp 75–100 Kathimerini Cyprus (2018) Bulgaria scrambling over Olympic bankruptcy. https://bit.ly/3afYfbs Luchtman M (2018) The ECJ’s recent case law on ne bis in idem: implication for law enforcement in a shared legal order. CMLR 55:1717–1750 Marano P (2017) The “Mifidization”: the sunset of life insurance in the EU regulation on insurance? In: Kotsiris L, Noussia K (eds) Liber amicorum in honour of Ioannis K. Rokas. Nomiki Vivliothiki, Athens, pp 219–234 Marano P (2019) The product oversight and governance: standards and liabilities. In: Marano P, Rokas I (eds) Distribution of insurance-based investment products. Springer, Cham, pp 59–96 Nikolaou I, Michaelides P (2019) Cyprus administrative law. Nomiki Vivliothiki, Athens. [in Greek] Noussia K (2018) The legal framework regarding the distribution of insurance-based investment products: the EU and UK approach. JIBLR 33:119–136 Paraskeva C (2015) Cyprus constitutional law: fundamental rights and liberties. Nomiki Vivliothiki, Athens. [in Greek] Paraskeva C (2017) Cypriot administrative law, general part. Nomiki Vivliothiki, Athens. [in Greek] Pascua Mateo F (2018) Harmonising national sanctioning administrative law: an alternative to a single capital-markets supervisor. ELJ 24:321–348 Polyviou P (2017a) Cyprus A study in the theory, structure and method of the legal system of the Republic of Cyprus. Chrysaffinis and Polyviou, Nicosia Polyviou P (2017b) Administration and justice, the commission for the protection of competition and the securities and exchange commission under Cypriot law. Chrysaffinis and Polyviou, Nicosia. [in Greek] Symeonides S (2003) The mixed legal system of the Republic of Cyprus. Tul Law Rev 78:441–455 Wandt M (2012) Transparency as a general principle of insurance law. In: Wandt M, Ünan S (eds) Transparency in insurance law, AIDA Seminar, 4 May 2012, Istanbul. Sigorta Hukuku Türk Derneği - Deutscher Verein für Versicherungswissenschaft, Istanbul, pp 9–22

Transparency in Insurance Regulation and Supervisory Law of England Kyriaki Noussia

1 Introduction 1.1

The Notion of Transparency in Insurance Regulation

The fact that insurance is a legal product entails that until the occurrence of an insured event, we are dealing not with an exchange of physical goods for money but with the exchange of a promise of performance for money. Indeed, the absence of any physical manifestation of the mere promise to perform hinders a visual inspection as it is possible under contracts for the exchange of goods.1 This does not mean that transparency rules should not be abided with and exist for the market. Notwithstanding the above remarks, it is admitted that insurance may not be described as a completely ‘invisible good’ simply due to the fact that the contract is usually fixed in writing. In addition, the fact that insurance may only be perceived as a rather complex and complicated legal product means that there is a certain difficulty in comprehension for the average policyholder, also due to the fact that it regards a promise that spans for extended periods of time. Hence, the policyholder is in a need to fully understand all of the properties and details of the terms of the contract before actually concluding it, and he also needs extra and specific expert advice from the insurer in order to be able to do so effectively.2 Notwithstanding also the need for transparency of the insurance contract terms and the need for transparency of the rights and duties of the contractual parties, cost transparency is also paramount, and it is usually a challenge for the legislator to 1 2

Wandt (2012). Wandt (2012).

K. Noussia (*) School of Law, University of Exeter, Exeter, UK e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Marano, K. Noussia (eds.), Transparency in Insurance Regulation and Supervisory Law, AIDA Europe Research Series on Insurance Law and Regulation 4, https://doi.org/10.1007/978-3-030-63621-0_4

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decide and assess what information needs to be transparent and available to the policyholder and, even more importantly, if and to what extent such information or advice is suitable to increase the policyholder’s comprehension of the product. In assessing the appropriateness of such means and of the need for such a transparency regime and level, one needs to take into consideration whether the average policyholder is typically willing to make use of and/or demand such information and advice. One needs to, furthermore, consider the cost expenditure caused by the preparation of additional information material and advice and the overall benefit for the policyholder as such additional costs may also affect the viability of any specific insurance product in the market. Hence, it follows that the policyholder’s clear comprehension of his insurance cover is an important objective and an essential contractual element of the conditions of insurance, and it is also perceived as a necessary objective and element in terms of the need for market transparency, which is often also seen as a supervisory objective able to allow the policyholder to compare products.3 While there is no generally accepted definition of the transparency rule in insurance, it is admitted that transparency helps to enforce market discipline. In other words, the greater is the section of policyholders who form an active margin and who can gain a proper understanding of the terms of an insurance contract and their implications, the greater is the pressure on insurers to offer policies the terms of which are more substantively balanced between the parties and/or that there is improved choice. In European Union law, Art. 5 of the Unfair Contract Terms Directive 93/13/EEC4 requires the Member States to afford rules that force insurers and other users of standard terms to draft documents that are provided to consumer customers in ‘plain, intelligible language’ in order to promote transparency of documents.5 Hence, it follows from the above that transparency is not only a contractual but also a supervisory obligation and subject, and this realisation and acceptance has been largely supported by the notion of the Single European Market for insurance products, and, more specifically, by the third-generation insurance directives6, which increased and broadened the minimal requirements for the transparency of individual contractual contents, in line with the EU’s general approach of consumer protection, by implementing a model of information.7 The public supervisory law regulates the relationship between the state and the insurance undertakings as professional operators of the insurance business and calls for transparency due to the fact that the insurance supervisor is charged with

3

Wandt (2012). Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, O.J. L 095, 21.4.1993, p. 29. 5 Brand (2012). 6 Directive 92/49/ECC of 18.06.1992 (Third Indemnity Insurance Directive) OJ no L-228 of 11.08.1992, p. 1; Directive 92/96/ECC of 10.11.1992 (Third Life Assurance Directive) OJ no L360 of 09.12.1992, p. 1. 7 Wandt (2012). 4

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supervising, and in the case where the insurers meet the transparency requirements to which they are subject towards the policyholders, as the provisions of insurance supervisory law should be transparent for its addressee, as well as because the organisation and business operation of the supervised insurance undertakings needs to be transparent towards the supervisor to enable it to identify breaches of law and impose the appropriate sanctions so as to protect the policyholder and, in this way, also maintain a fair play at market level. The Solvency II Directive8 transformed transparency into a subject of direct importance for insurance supervisory law9 as it imposed the need not only for procedural transparency but also for material transparency, for it triggered a fundamental readjustment of the insurance supervisory law by introducing an economic risk-based method for the assessment of capital requirements, whereby all risks of an undertaking are to be backed by own funds while the Solvency Capital Requirement is calculated, for pillar 1, by taking into account the individual risk profile of the undertaking; for pillar 2, via the rearrangement of the business organisation and the supervisory instruments; and, for pillar 3, via the readjustment of reporting duties towards the supervisor and towards the public. The Solvency II Directive also aimed to create market transparency (Art. 53) as all insurance undertakings need to generally publish an annual report on their solvency and financial condition. This report is to contain the amount of non-compliance with the Minimum Capital Requirement or of a significant non-compliance with the Solvency Capital Requirements, including an explanation of their origin and consequences and any remedial measures taken (Art. 53 para. 1 lit. v). Notwithstanding the above remarks, transparency is a notion that plays a vital role in insurance supervision at European level and which transcends all pillars. Article 31 obligates the Member States to ensure the disclosure of all supervisory legislation and regulation and certain data on key aspects of the supervision. The supervisory authorities are explicitly ordered to conduct their tasks in a transparent manner (Art. 31 para. 1). Pursuant to Art. 52, the national supervisory authorities are, on the one hand, obligated to send European Insurance and Occupational Pensions Authority (EIOPA) an annual report so that then EIOPA can report publicly on an annual basis to the European Parliament, the Council and the Commission on the progress of the supervisory convergence in the European Union.10

8

Directive 2009/138/EC of 25.11.2009, OJ no L-335/1 of 17.12.2009. Transparency in insurance supervision was already demanded by the Insurance Core Principles, Standards, Guidance and Assessment Methodology of the International Association of Insurance Supervisors (IAIS), available in the version of 04.10.2011 under www.iaisweb.org. 10 Wandt (2012). 9

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The Need for Transparency The Legal Framework

The statutory provisions underpinning the Financial Services Authority (FSA) rules on remuneration disclosure in the commercial insurance market are to be found in both civil and criminal law. Under the law of agency, an agent owes certain duties of loyalty, i.e. fiduciary duties, to those he acts for, including his customers. In particular, an agent must avoid conflicts of interest. He must not put himself in a position where his own interests conflict in any way with his duty to those he acts for, including his customer. Nor must he put himself in a position where the interests of one person for whom he acts conflict with the interests of another person for whom he also acts, and an agent must not take a secret profit; i.e., he may not use his position to acquire a benefit from a customer or a third party. An agent can avoid breaching these duties if he obtains the fully informed consent of the person(s) for whom he acts before he does so. In addition to the general civil law duty requiring the agent to account to their principal, criminal sanctions may follow where an agent is guilty of corruption. An agent commits a criminal offence if, in relation to the affairs of his principal, he accepts a bribe for doing, or failing to do, something or favouring, or not favouring, a person. The person offering the bribe also commits a criminal offence. Generally speaking, if the principal leaves the agent to look for remuneration from the third party (i.e. he does not pay a fee for the agent’s services) or knows that the agent will receive something from the third party, then the agent may safely take commission from third parties for his services. However, if the principal pays a fee to the agent, any undisclosed commission paid to the agent by a third party could be taken as evidence of corruption. The FSA Handbook built on this statutory framework (FSA principles 1, 6, 7 and 8 supported by rules and guidance in the Insurance Conduct of Business Sourcebook (ICOBS) on fee and commission disclosure).11

1.2.2

The FSA/FCA Rules

The UK insurance industry is the third largest in the world and the largest in Europe. It is a vital part of the UK economy, managing investments amounting to 26% of the UK’s total net worth and contributing £10.4 billion in taxes to the government. Employing over 290,000 people in the UK alone, the insurance industry is also one of this country’s major exporters, with 28% of its net premium income coming from overseas business.12 The Financial Conduct Authority (FCA) remuneration rules set out the standards that certain firms are required to meet when setting pay and bonuses for staff. 11 12

Insurance Times (2016). FOS (2011).

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Remuneration is an important area of focus for the FCA in order to ensure that risk and reward are in conjunction with each other in firms that the FCA regulates through its Remuneration Codes, which ensure greater alignment between risk and individual reward, discourage excessive risk taking and short termism, encourage more effective risk management and support positive behaviours and a strong and appropriate conduct culture within firms. This ensures that the FCA’s supervision of remuneration is in line with their mission by identifying harm (actual or potential) that firms’ remuneration policies and practices may cause and by acting in the public interest. Firms should be able to demonstrate how they satisfy themselves that their remuneration practices lead to appropriate outcomes and show the effectiveness of their governance arrangements in identifying, managing and mitigating the risk of harm that inappropriate incentives may cause. All firms subject to the Codes must make sure that their remuneration policies and practices are consistent with and promote sound and effective risk management. All firms must ensure that their remuneration policies and practices do not remunerate or assess the performance of staff in a way that conflicts with their duty to act in the best interests of the firm’s clients and ascertain that client interests and the right to be treated fairly are not impaired by the remuneration practices adopted by the firm in the short, medium or long term. This in its turn promotes transparency and a fair and standardised market practice.13 The need for transparency in regulation was already identified by the FSA. Policyholders are engaged when they first purchase a product, which puts pressure on firms to keep prices down and increase value. However, once the policy is in place and firms offer to renew it, for a number of reasons consumers can be significantly less engaged and therefore may not make an informed decision about the new policy terms. This can mean that policyholders repeatedly accept price increases rather than negotiate or switch provider. If policyholders do not consider the renewal information or engage with it, then they cannot make an informed decision. Firms know that they can charge higher premiums for renewal policies if customers are unlikely to pay attention to the size of the increase. Policyholders may also fail to reassess their insurance cover to check whether their policy still meets their needs. Where policyholders engage and are given the information to help them make an informed decision and then choose to remain with the same provider, we are less concerned. However, where policyholders are not encouraged to engage, they often do not have the opportunity to make an informed decision. The Financial Conduct Authority (FCA) and the Financial Ombudsman Service (FOS) have trialled four different disclosure options with customers in our testing, including last year’s premium next to this year’s premium on renewal notices, sending a leaflet with renewal notices, simplifying renewal notices by using bullet points and simpler language and sending reminders two weeks after renewal notices. The trial results revealed that disclosing last year’s premium was the most effective way to prompt policyholders to shop around, cancel or negotiate their insurance policy. Hence, it is

13

FCA (2019).

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proposed that firms are required to disclose last year’s premium in a prominent position in relation to the new premium. This will be the premium the customer paid at the start of the previous year. Including this information in renewal notices increases transparency and highlights price changes to encourage consumers to give more attention to the proposed renewal premium. Disclosing last year’s premium involves firms providing a simple figure that policyholders will find easy to compare.14 In relation to the transparency of intermediaries, commercial customers should have clear information about the services an intermediary provides, including the breadth of search he undertakes, and they should also have clear information about the capacity in which an intermediary is acting—i.e. whether he is acting for them, for the insurer or, in some cases, for both. Conflicts of interest arising from remuneration arrangements/business models should be properly disclosed and managed. Commercial customers should also have sufficiently standardised/comparable information to enable them to gauge the value of intermediary costs and services and compare these across the market as well as over time and should be made aware of their right to commission information and also be helped to appreciate the value of using it.15 To achieve the above, it has been recommended that more rigorous supervision and enforcement of the existing rules and principles be applied, as well as that an enhanced ‘on-request’ regime be introduced via measures designed to improve the transparency and comparability of disclosure requirements relating to remuneration, services and status within the existing framework (both for ‘on request’ and voluntary disclosures), and that also mandatory commission disclosures be introduced, so long as all these are being supported by improved conflict management processes. In addition, concerns were raised about the clarity and completeness of the information that commercial customers receive about their intermediary, which compromises significantly their ability to understand what they are paying for and to judge the value for money they are getting by making meaningful comparisons across the market and, in turn, can adversely affect their ability to make informed decisions and, thus, their ability to inject greater competitive discipline into the intermediary market. There has also been some concern that where intermediaries are being paid both fees and commission, they are not automatically disclosing commission, as they are required to do. Again, it is essential that customers are given a clear picture of what they are paying and that conflicts are properly managed. Solutions to the above concerns include adopting approaches such as improving the current regime through a more rigorous supervision and enforcement of the existing rules and principles through guidance and via a customer education initiative; adopting an enhanced ‘on-request’ regime via adopting a mandatory commission disclosure and making the information easier to compare through the establishment of a common set of definitions or principles for describing certain types of remuneration arrangements or services, which are currently

14 15

FCA (2019). Insurance Times (2016).

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described in a number of different ways; and, finally, improving the way firms mitigate conflicts of interest. ICOBS Chapter 4 requires an insurance intermediary to make disclosure about the firm, its services and remuneration. ICOBS also contains wider information disclosure requirements, which require that customers are provided with details about the product they are purchasing and a demands and needs statement. These disclosures must be made to commercial customers prior to the conclusion of an initial insurance contract and, if necessary, on its amendment or renewal so that the customer can make an informed decision. Such further disclosure will be necessary if there has been any change in the status of, or services provided by, the insurance intermediary since the previous disclosure. Insurance intermediaries will usually meet the disclosure requirements in ICOBS via the introduction of Terms of Business Agreements (TOBAs). It is recommended that intermediaries, at regular intervals and in writing, make a plain and clear statement to the commercial customer about remuneration so that the commercial customer readily understands that they are entitled to request information regarding any commission that the intermediary may have received as a result of placing the commercial customer’s insurances. There may be circumstances where using a written statement to communicate the right to ask would not be possible before the contract was concluded, e.g. telesales. In such circumstances, firms should make an oral disclosure and then repeat the disclosure in writing in its post-sale communication with the commercial customer. Where an oral disclosure is made, the firm should ensure that an appropriate file note of the conversation is made and kept.16

2 Transparency of Intermediaries/Undertakings Financial products such as insurance have traditionally often been delivered through the use of intermediaries. The relationship of intermediary and both the service provider and the customer is prima facie governed by the rules of agency developed at common law. Representation at common law is the subject matter of the law of agency. The ability of one legal person to represent another depends upon the doctrine of ‘authority’, be it actual authority or apparent/ostensible authority.17 The important question of whether an adviser is under a duty to provide information or has a duty to advise has been said to be one of the scope of duty of care.18 The traditional starting point for a consideration of the standard of care at common law is the famous direction to the jury in Bolam v Friern Hospital Management Committee,19 whereby McNair J provided guidance by stating that the test is the standard of the ordinary skilled man exercising and professing to have that special skill. If you

16

Insurance Times (2016). McMeel and Virgo (2014), para 9.01. 18 McMeel and Virgo (2014), para 11.06. 19 Bolam v Friern Hospital Management Committee [1957] 1 WLR 583. 17

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apply this to the employment of a professional man, the law does not expect or imply a warranty that he will achieve the desired result but only a term that he will use reasonable care and skill.20 The mostly well-developed body of law in the financial services context is that on the liability of general insurance brokers. Long before Henderson v Merrett Syndicates,21 it was well established that an insurance broker owed concurrent duties in contract and tort to his clients. On first principles, the standard required, whether in contract or tort, is that the insurance broker should exercise reasonable skill and care. Where the duty is simply to provide information, and does not extend to a duty to advise or provide recommendations, there is still a duty to take care about the accuracy of the information proffered.22 Where an independent common law cause of action is established, or a common law duty is held to coexist with a statutory duty, any applicable FCA rules or guidance should be highly influential, or arguably determinative, in shaping the common law standard of care. The standard of liability at common law should mirror precisely the statutory regime.23 The information to be disclosed in each sale will depend upon whether it is a general insurance contract, a pure protection contract or a payment protection contract. However, ICOBS introduced an overriding requirement for all firms, in relation to all policies and all customers, to take reasonable steps to ensure that a customer is given appropriate information about a policy in good time and in a comprehensible form so that the customer can make an informed decision about the arrangements proposed.24 This rule, referred to as the ‘appropriate information rule’ in ICOBS, applies pre-contract and post-contract, including mid-term changes, renewal and in relation to price.25 The information to be provided will need to be adapted according to various factors, such as customer knowledge and the nature of the policy.26

3 The Insurance Supervision Regime in England and Its Approach Towards Transparency in Insurance Regulation In 2007, the FSA published a report that considered whether there was a lack of transparency in the commercial general insurance market that gave rise to consumer detriment and, if so, whether commission disclosure was justified. The report concluded that introducing mandatory commission disclosure was not justified as 20

McMeel and Virgo (2014), para 11.07. Henderson v Merrett Syndicates Limited, [1994] 3 All ER 506, 597. 22 McMeel and Virgo (2014), para 11.15. 23 McMeel and Virgo (2014), para 11.20. 24 ICOBS 6.1.5R. 25 ICOBS 6.1.6G; McMeel and Virgo (2014), para 14.189. 26 McMeel and Virgo (2014), para 14.190. 21

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the costs of doing so were greater than the benefits. However, it highlighted wider concerns giving rise to market inefficiencies, such as the lack of transparency in commissions paid to intermediaries in this market. In the same year, the European Commission published a report following its competition inquiry into business insurance. The Commission also found evidence of a lack of transparency in the commercial insurance market relating to intermediary remuneration and services, which it considered could give rise to customer detriment and impair market efficiency. As a result of these reports, the FSA concluded that mandating commission disclosure was not justified. However, it decided to keep this issue, and the wider market issues identified, under review. The FSA’s work in this area continued until 2011 due to its continued concerns. In March 2008, the FSA published a discussion paper on transparency, disclosure and conflicts of interest in the commercial insurance market (DP08/2). In this paper, the FSA outlined its thoughts on commission disclosure and the wider conflicts of interest and transparency issues identified in the commercial insurance market, together with proposed solutions to make this market more competitive and efficient, and explained that it considered that transparency issues had got worse as a result of the impact of the trend in insurers acquiring brokers. The FSA believed that commercial customers needed full transparency of information on: • • • •

Remuneration Services The status of insurance intermediaries Conflicts of interest It proposed solutions such as:

• More rigorous supervision and enforcement of existing rules and principles, including more guidance and targeted supervision • An enhanced regime to improve the quality of disclosure of commission, services and status • Mandatory automatic commission disclosure More specifically it asked that: • Customers should have clear and comparable information about the commissions intermediaries receive. • Customers should have clear and comparable information about the services intermediaries provide. • Customers should have clear information about the capacity in which an intermediary is acting. • Customers should be alerted to their right to request commission information. • Customers should be made aware where there is a chain of intermediaries. The FSA considered that if these outcomes were achieved, the insurance mediation process would be transparent to customers, and this may encourage more competitive and efficient commercial insurance distribution.

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The Old Regime (FSA) and the Move to the New Regime (FCA, PRA)

The new regulatory regime for the insurance sector, which came into force in early 2013, replaced the regime for the regulation of insurance in the UK, which was created on 30 November 2001, when the Financial Services and Markets Act 2000 (FSMA) came into force.27 FSMA granted to the Financial Services Authority (FSA) the power to act, among other things, as prudential supervisor for all firms authorised to effect and carry out contracts of (re)insurance. The responsibilities that it took over at this time also included the supervision of the conduct of investment business, which in turn includes long-term insurance products with an investment element, such as unit-linked and with-profit policies. The FSA started to supervise sales of non-investment insurance business in January 2005, when the UK transposed into UK law Directive 2002/92/EC on insurance mediation (the Insurance Mediation Directive). Unlike many of its continental counterparts, the FSA was an insurance regulator as well as a supervisor since it possessed extensive rule-making powers. These usually allowed it to change the regulatory rules in accordance with a statutory procedure, without having to resort to the powers of Parliament. Apart from insurance, the FSA also supervised and regulated other financial sectors, such as banking and investment. One of the purposes of FSMA was to create an integrated supervisor. This followed an adverse decision against it in the courts in Equitable Life Assurance Society v Hyman.28 The FSA has been criticised for serious failings in relation to the regulation of the banking sector. The government therefore proposed a radical reform of the regulatory regime. A key feature of the reforms is the splitting of the functions of the FSA between two proposed new supervisors: • The Financial Conduct Authority (FCA) • The Prudential Regulation Authority (PRA) The PRA prudentially supervises banks, (re)insurers and larger, more complex investment firms in a way that goes beyond the monitoring of compliance with requirements. The FCA responsibilities include the regulation of retail and wholesale conduct of business, covering the insurance sector among others, as well as prudential regulation of firms not regulated by the PRA, including insurance intermediaries. The FCA needs to act in a way that is compatible with its strategic objective of ensuring that the relevant markets function well. It must also act in a way that advances one or more of its operational objectives. These objectives are: • Securing an appropriate degree of protection for consumers • Protecting and enhancing the integrity of the UK financial system 27 28

Freshfields Bruckhaus Deringer (2012). Equitable Life Assurance Society v Hyman [2000] UKHL 39).

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• Promoting effective competition in the interests of consumers in the markets for regulated financial services The FCA has regard to the responsibilities of senior management in relation to a firm’s compliance with requirements under the legislation, including requirements that affect consumers. The PRA’s general objective is to promote the safety and soundness of PRA-authorised persons by avoiding adverse effects on financial stability and minimising adverse effects from the failure of such persons. The FCA takes a fundamentally different approach to the FSA in the way that it intervenes to mitigate risk via a forward-looking and preventative approach to regulation.

3.2

Progress and Market Response

The FCA has warned that it will take action against general insurance firms who are failing to properly implement rules introduced to increase transparency and encourage shopping around at renewal time. The FCA outlined in October 2017 how firms were failing to meet the rules, highlighting four particular areas where it found that firms were failing. These were: • Failing to implement the new rules for all products and customers • Misstating the previous years’ premium • Leaving out the shopping around message or not presenting it in a way that draws the reader’s attention; and • Firms failing to properly identify all customers who needed renewal information either because of system error or a mistaken interpretation of the type of customer that is captured by the rules The FCA expected firms and senior management in those firms to take immediate action to ensure they are compliant, and at the same time it also prompted customers, who felt that they did not receive the correct information from their insurance firm, to contact them in the first instance.29 In October 2019, the FCA expressed its concerns stating that competition is not working well for all consumers in home and motor insurance and considered various remedies to alter the situation. Amidst the remedies considered, the FCA stated that in order to promote transparency, it was considering remedies that would direct firms to be clear and transparent in their dealings with consumers, including improvement in the way firms communicate with their customers. The FCA was also considering whether firms should publish information about price differentials between their customers.30

29 30

FCA (2018). FCA (2019).

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4 Conclusions Transparency is a guiding principle of insurance supervisory law whereby it serves as a catalyser for the development of uniform and openly accessible convergent supervisory practices throughout the European Union. Transparency is also a necessary prerequisite for a supervisory regulation that wishes to assess solvency requirements by applying a fair value method based on the individual risk profile of the undertaking in question. The increased importance of legal transparency requirements alters the whole system of insurance. In other jurisdictions, such as Germany, in the academic literature, insurance has rightfully been described as a very particular credence good (Vertrauensgut).31 Although the legal relationship between the insurer and policyholder is notably characterised by the application of the principle of good faith, it is anticipated that in the legal function, the principle of good faith will in many instances be replaced by a wide application of the principle of transparency. Even if the decision for what areas and to what extent transparency should be legally required is a political one, such a decision should always be taken by paying heed to the function and protective purpose of the insurance system and the potential impact of a considered measure on this system.32 The financial consequences of such a decision should be carefully considered as well since it is the policyholder who will finally have to bear the costs. It is so far a crucial duty of the legislator to achieve a balance between an equitable amount of transparency and a cost-efficient conduction of business in order to increase the welfare gain created by insurance.33 The move in England from the FSA to the FCA and PRA promoted transparency as the roles of the new supervisory sub-bodies are split, and hence in this way much better and to a greater extent distinguished and clear. The major burden and thrust for the function of the market and for transparency remains with the FCA, which bears the task to ensure that the relevant markets function well and that the overall function operates with integrity, hence promoting transparency.

References Brand O (2012) Requirements regarding the transparency of standard terms. In: “Transparency in insurance law”, AIDA Seminar, 4 May 2012, Istanbul, pp 53–65 FCA, Insurance firms still failing to meet FCA general insurance renewal rules, 3/4/2018., https:// www.fca.org.uk/news/press-releases/insurance-firms-still-failing-meet-fca-general-insurancerenewal-rules

31

Taupitz (1995). Regarding the danger of creating an information overkill See p. 17 at 24; pp. 619 et seq. 33 Wandt (2012). 32

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FCA, FCA sets out potential remedies to tackle concerns about general insurance pricing, 4/10/ 2019., https://www.fca.org.uk/news/press-releases/fca-sets-out-potential-remedies-tackle-con cerns-about-general-insurance-pricing FCA, Remuneration, 7/2/2019., https://www.fca.org.uk/firms/remuneration FOS, Transparency and the Financial Ombudsman Service (FOS): Publishing Ombudsman’s Decisions: The next steps, Sept. 2011., https://www.financial-ombudsman.org.uk/files/17772/ publishing-decisions-sep11.pdf Freshfields Bruckhaus Deringer (2012) The new UK regulatory landscape: what does it mean for the insurance sector?, http://uk.practicallaw.com/topic2-103-1132?source¼relatedcontent Insurance Times, Transparency, disclosure and conflicts of interest in the commercial insurance market, 2016., https://www.insurancetimes.co.uk/download?ac¼6144 McMeel G, Virgo J (2014) McMeel and Virgo on financial advice and financial products. OUP Taupitz J (1995) “Macht und Ohnmacht der Verbraucher auf dem dekontrollierten europaeischen Versicherungsmarkt”, [1995] VersR 1125 Wandt M (2012) Transparency as a general principle of insurance law. In: “Transparency in insurance law”, AIDA Seminar, 4 May 2012, Istanbul, pp 9–23

Transparency in Insurance Regulation and Supervisory Law of France Louise Bouvery

1 Introduction Since 1989, the European Union has started approaching and tackling issues relating to the transparency of markets and prohibiting or at least limiting insider dealings. The Insider Dealing Directive of 1989 was a first step in the European construction on transparency to protect the investors and increase their confidence in the market.1 The 1989 IDD was the first directive aimed at regulating capital markets through the creation of obligations on the part of their actors.2 However, initiatives to regulate the supervisory law, i.e. the law applicable in state and state entities to professional operators of the market, did not appear needed before the year 2000. In the (re)insurance sector in France, transparency in the content of the insurance contract and in the relationships between the insurer and the policyholder already existed. Undertakings, agents, distributors and intermediaries were already subject to specific transparency rules, but these were mostly focused on the contract and its content. For instance, article L.132-1 of the Code de la consommation protected consumers, including policyholders, against abusive clauses in insurance contracts. Similarly, the Code des Assurances imposed on insurance professionals an obligation to inform clients and policyholders of the nature of the contract and its terms before the conclusion of the said contract.3 In life insurance contracts, this obligation bore large consequences. The Code des Assurances provides for the possibility to renounce the policy and to be reimbursed for the sums paid, and the Cour de 1 Council Directive 89/592/EEC of 13 November 1989 coordinating regulations on insider dealing OJ L 334. 2 Baudenbacher (2017), pp. 219–220. 3 Code des Assurances, Article L112-2.

L. Bouvery (*) University of Exeter, Exeter, UK © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Marano, K. Noussia (eds.), Transparency in Insurance Regulation and Supervisory Law, AIDA Europe Research Series on Insurance Law and Regulation 4, https://doi.org/10.1007/978-3-030-63621-0_5

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cassation added the right to damages in case of breach of this duty.4 Insurance professionals were also bound by a duty to advise the client, as illustrated in a judgment of the aforementioned Cour, which considered that an insurance broker should have been “a reliable guide and an experimented advisor”.5 Nonetheless, the first provisions regarding the control of the supervisory law at a European level arose from Directive Solvency II introduced in 2009, which became applicable in its most part on 1 January 2016.6 Solvency II takes its structure from the Markets in Financial Instruments Directive (MiFID), a directive issued in 2004 and regulating financial markets and actors at core and supervisory levels.7 Solvency II is based on three pillars for a prudential regulation.8 The first pillar covers quantitative requirements. (Re)insurers must demonstrate the adequacy of their assets and technical provisions by complying with the Solvency Capital Requirements (SCR) and Minimum Capital Requirements (MCR).9 MCR is the minimum amount of capital required for an insurer to properly function, whereas SCR is the most ruin-mitigating capital, in other words the capital estimated by insurers to avoid ruin.10 Besides quantitative requirements, Solvency II introduces another pillar of regulation on qualitative requirements. Solvency II has implemented and harmonised governance obligations for (re)insurers, and their structure is at least partly mandatory. Solvency II has increased governance obligations, which now go beyond reporting at management level and encompasses all levels of the company.11 It made mandatory for undertakings to create an Administrative, Management or Supervisory Body (AMSB) (organe d’administration, de gestion ou de contrôle) with four separate key functions and two effective directors based on the four-eye principle.12 The third pillar of Solvency II will constitute the main focus of this chapter as it provides for reporting, disclosure and market discipline: i.e. transparency. Solvency II establishes a supervisory framework for all (re)insurance undertakings in the European Union based on reporting to their National Supervisory Authority and disclosure to the public.13 These provisions would, however, not be complete without similar requirements for National Supervisory

4

L.132-5-1 Code des Assurances; Cass. Civ 2e, 23 November 2017, No. 16-21671. Cass, Civ. 1re, 10 November 1964, no. 62-13411. 6 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ L 335/1. 7 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/ EEC OJ L 145. 8 Marly et al. (2015), p. 24. 9 Maddock and Matthews (2020) 4:6. 10 Marly et al. (2015), p. 24. 11 Marly (2015), p. 10. 12 Marly et al. (2015), p. 24. 13 Maddock and Matthews (2018), p. 3. 5

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Authorities. They have to act transparently towards the public, on the lines of the main aim of Solvency II: the protection of the policyholder.

2 Legal Framework of French Insurance Supervisory Law Solvency II was properly introduced and applicable in French law on 1 October 2018. The provisions were incorporated in different codes: the Insurance Code (Code des Assurances (CDA)), the Mutual Insurance Code (Code de la mutualité (CDM)), the Code of Social Security (Code de la sécurité sociale (CSS)) and the Monetary Financial Code (Code Monétaire et Financier (CMF)). For the purposes of this chapter, only the provisions contained in the CDA (with regard to the obligations of (re)insurance actors) will be tackled as they include and refer to the ones provided in the CDM and the CSS, if generally applicable to the whole sector. Due to its large impact on insurance supervision, Solvency II required changes in the powers, structure and attribution of the Supervisory Authority, which are found in the CMF.14 In France, the Supervisory Authority for insurance regulation is the Autorité de contrôle prudentiel et de résolution (ACPR), as per L.612-1 CMF. First created in 2010, the ACPR is the result of the fusion between the bank and insurance regulation authorities in 2013. The Supervisory Authority has been given powers and attributions consistent with its missions of preservation of the financial market and protection of policyholders (L.612-1, I CMF). As the Supervisory Authority for the insurance sector, the ACPR is the main recipient of the reporting and disclosure obligations of (re)insurance undertakings. The ACPR is part of the EIOPA, the European Insurance and Occupational Pensions Authority, the supervisory authority at the European level, which the ACPR has to report to and communicate with (L.355-8 CDA). It appears therefore that the legal framework of French Insurance Supervisory Law is twofold. The supervision of the insurance market is first exercised by the French Supervisory Authority on the (re)insurance actors on its territory, in application of the transposed provisions of Solvency II and the residual national requirements. Transparency of insurers is hence undertaken and guaranteed. Furthermore, the ACPR must itself report on its activities, both to EIOPA and to the public, which are the reason for regulating the insurance supervision in the first place.

3 Transparency of the Insurers The transparency of insurers, as determined by Solvency II, is realised through the implementation of two duties. Insurers have a duty to report and a duty to disclose. These duties are distinguished as they are not directed towards the same recipient.

14

Marly (2015), p. 10.

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(Re)insurance undertakings must report to the Supervisory Authority, but their obligation to disclose is owed to the public, in that sense the professional public and policyholders.

3.1 3.1.1

Duties to Report to the Supervisory Authority General Provisions on Duties to Report

The general obligation to report to the Supervisory Authority stems from dispositions in both the Code des Assurances (CDA) and the Code Monétaire et Financier (CMF). Article L.612-24 of the CMF leaves all latitude to the Supervisory Authority to determine the list, model, frequency and delays of transmission of documents and information that must be reported. The CDA, in Article R.355-2, has decided to make direct reference to the dispositions of Delegated Regulation No. 2015/35 on these matters. The Supervisory Authority is entitled to request additional information and documents on any support, as well as any necessary justifications from insurers and reinsurers (L.612-24, para 2). The list of documents required by the Supervisory Authority is given in Art. L.355-1 of the CDA. In order for the Supervisory Authority to fulfil its control mission, insurers and reinsurers must report, either quarterly or annually, four documents: the Solvency and Financial Condition Report (SFCR), the Regular Supervisory Report (RSR), annual and quarterly quantitative states as well as the Report on Own-Risk and Solvency Assessment (ORSA). The SFCR will be further detailed in the next section as a mandatory disclosure duty to the public. The relevance, reliability and comprehensibility characters of the information to be transmitted, as stated in Art. 35 of the Directive, have not been implemented as its own provision in the codes but can be found in specific dispositions. In application of these principles, the Supervisory Authority imposes on undertakings an obligation to obtain a Legal Entity Identifier (Identifiant d’entité juridique) to be used for all quantitative reports to the Supervisory Authority15 and to follow the XBLR format in order to guarantee uniformisation of the transmitted data. All documents to be transmitted to the Supervisory Authority must be approved beforehand by the governance bodies of undertakings, for reliability purposes (R.355-1 of CDA). On the other hand, the comprehensibility aspect of the information is enforced through the attachment of account balances of the company if the documents transmitted are based on accountancy data (R.355-1-1 CDA). Furthermore, as R.355-2 CDA directly incorporates the provisions of Delegated Regulation No. 2015/35, the principles of relevance, reliability and comprehensibility of the Delegated Regulation are considered embodied as well.16 15

ACPR (2015) Instruction 2015-I-12. For instance, Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) Text with EEA relevance OJ L 12, Articles 291 and 292.1. 16

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Additional Reporting Obligations

The Supervisory Authority has defined, in collaboration with professional unions, additional reporting obligations adapted to the specificities of the French insurance regulation and market. These additional reporting obligations (états nationaux spécifiques (ENS)) include prudential, statistical and accounting considerations. As a result, (re)insurance companies subject to Solvency II provisions must provide additional quantitative and qualitative data. Regarding quantitative reporting, the Supervisory Authority has issued uniformed models as well as explanatory notes for the companies in order to ensure coherency.17 Quantitative reporting includes, among others, reports on technical and non-technical loss and profit accounts and variation of capital and reserves.18 As part of the qualitative reporting, (re)insurance companies must transmit annually detailed general information on the company, whose content has been determined by the Supervisory Authority.19 They must also transmit their annual accounts (comptes annuels), their management report (rapport de gestion), the auditors’ report on annual accounts (rapport des commissaires aux comptes sur les comptes annuels) and auditors’ reports on regulated conventions (rapport des commissaires aux comptes sur les conventions règlementées). The Supervisory Authority must receive a report on financing and accountancy methods as well as a report on money laundering and terrorism financing.20

3.1.3

Exceptions to the Duty to Report to the Supervisory Authority

The ACPR, regarding quarterly reporting of information, can extend the periodicity of the reporting if providing information on such basis would create a disproportionate duty for the undertaking, with regard to the nature, extent and complexity of the risks of its activity (R.355-3, para 1 CDA). The global amount of undertakings exempted from quarterly reporting shall not exceed 20% of the market, and the Supervisory Authority must prioritise smaller (re)insurers (R.355-3, paras 4 and 5). In addition, the Supervisory Authority has established admissibility levels based on the undertakings’ balances.21 Bars are set at eight billion for life insurers, half a billion for non-life insurance and four billion for reinsurance. Individual entities, i.e. non-group undertakings, are automatically exempted from quarterly reporting, except for MCR. Undertakings belonging to a group must request the exemption to the ACPR and justify in their application that their own balance and the group’s correspond to the established levels.

17

ACPR (2016b) Annex A. ACPR (2016b) Article 2. 19 ACPR (2016b) Annex B. 20 ACPR (2016b), Article 3, I, II, III. 21 ACPR (2016a, c). 18

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The Reporting Obligation of the Statutory Auditor

Statutory auditors have a special relationship with the Supervisory Authority. Statutory auditors have a communication and reporting obligation to the Supervisory Authority when they supervise and control accounts of entities and companies subject to the control of the Supervisory Authority, i.e. insurers subject to Solvency II provisions. (Re)insurance companies have an obligation to designate at least one statutory auditor, and two when they are required to publish consolidated accounts (L.823-2 Code de Commerce or C.Com). Exceptions to this designation exist but do not concern (re)insurers (L.511-38 CMF). The function of a statutory auditor in a same public interest entity (entités d'intérêt public (EIP)) is limited by law (L. 823-3 C. Com). The Supervisory Authority must be provided with several information regarding statutory auditors, either from the company nominating them or from the statutory auditor itself. (Re)insurance companies must inform the Supervisory Authority of the nomination or renewal of the statutory auditor within 15 days of such nomination or renewal (Instruction No. 2018-I-03, Art. 2). In order for (re)insurers to always have a statutory auditor, L.823-1, I al. 2, of the C.Com imposes on the nomination of a supplementary statutory auditor if the primary one is an individual or exercises its functions as a single-member company. Regarding nomination, the Supervisory Authority can designate an additional statutory auditor (L.612-43 and R.612-59 CMF). Statutory auditors and the Supervisory Authority must communicate in an open, constructive manner in order to foster and facilitate the sharing of information. Statutory auditors are normally imposed confidentiality, but this duty is lifted with regard to communication to the Supervisory Authority (L.822-15 C.Com, L.612-44 CMF, L.311-56 CDA). The Supervisory Authority is entitled to request any information on the activity and financial situation of the (re)insurer for which the statutory auditor controls the accounts. However, in order to protect the information communicated, it is advised that the exchange of documents and information is left to the highest level of management of both the Supervisory Authority and the statutory auditor.22 The Supervisory Authority can also transmit written observations to statutory auditors, who must then answer them using the same form (L.612-44 CMF, al. 4). In that respect, the statutory auditor should provide details as to offer an answer that is as complete as possible.23 Requests and observations of the Supervisory Authority can relate to the situation of the controlled company or information on the nature and extent of the processes undertaken by the statutory auditor. The Supervisory Authority may also ask all information given by the statutory auditor to the Administrative, Management or Supervisory Body (AMSB) (organe d’administration, de gestion ou

22 23

ACPR (2018), p. 19. ACPR (2018), p. 21.

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de contrôle).24 The statutory auditor may be required to communicate the complementary report destined to the AMSB if asked to by the Supervisory Authority (R.823-21-1 C.Com). Statutory auditors and the Supervisory Authority can exchange views on an informal and periodical basis by organising meetings. These meetings should be held at least once a year for high-risk insurance and reinsurance companies whose failure and bankruptcy may have a major impact on the market.25 Furthermore, the communication between statutory auditors and the Supervisory Authority is not always on the Authority’s initiative. Statutory auditors may request a meeting with the Supervisory Authority if they consider that certain situations may have an impact on their mission or the accounts of the company. The Statutory Authority can communicate information it obtained through its supervisory mission if they appear relevant for the efficient control of the accounts. This communication towards the statutory auditor can concern legal provisions with regard to restructuration or a new applicable legal framework. In addition to the exchange of information with the Supervisory Authority, either on its demand or through informal communication and meeting with it, statutory auditors are subject to a duty to report. Article L.612-44, II, of the CMF imposes on statutory auditors an obligation to disclose facts or decisions that came to their knowledge, directly or indirectly, during the performance of their function of certifying accounts, at the company or group level. L.612-44 CMF is a transposition of Art. 72 of Solvency II and aims to ensure both the transparency of insurance actors and the protection of their clients.26 The statutory auditor must report any fact or decision of the company constituting a violation of the applicable laws and regulations that may significantly affect its financial situation, its solvency or its assets. Furthermore, the statutory auditor must report any information that may result in the (re)insurer not complying with the SCR or MCR, as imposed by Solvency II. Reporting to the Supervisory Authority must be done as soon as possible (L.612-44, II CMF). It stems from the foregoing that statutory auditors have a specific and crucial function with regard to transparency and reporting to the Supervisory Authority, participating in a better transparency of the market and, as a result, providing for a more efficient supervision.

3.1.5

Report on Own-Risk and Solvency Assessment (ORSA)

Resulting from Art. 45 of Solvency II, the Own-Risk and Solvency Assessment (ORSA) is an important element of an undertaking’s risk management process. Although it seems to have stronger ties with pillar II of Solvency II, ORSA has a

24

L.823-16 Code de Commerce; CNCC (2017). EIOPA (2016a). 26 ACPR (2018). 25

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fundamental role in assessing transparency duties as per the third pillar of Solvency II.27 ORSA is supposed to help companies understand and manage as efficiently as possible their risk profiles, in line with their strategic choices (R.354-3-4 CDA).28 Article 45 of Solvency II has been transposed in R.354-3 CDA. ORSA must include at least three evaluations. Firstly, the (re)insurer must evaluate its global need for solvency. Secondly, ORSA must feature an evaluation of the constant compliance of the company with the requirements relating to SCR, MCR and the calculation methods of technical provisions. Finally, ORSA must present the gap between the risk profile of the company and the assumptions for the required solvency capital (SCR). The level of solvency needed must be proportionate to the nature, extent and complexity of the activities of the (re)insurer. Such assessment and the methods used to calculate the minimum solvency level must be communicated to the Supervisory Authority (L.355-1 and R.354-3-1 CDA). As aforementioned, ORSA is more than just a reporting on qualitative and quantitative elements pertaining to the risks and solvency needs of (re)insurers. The risk management system described in R.354-2 CDA involves all levels of the company as it requires administrative, actuarial and accounting methods, as well as an internal control mechanism (R.354-4 CDA). ORSA offers therefore a complete and detailed report on the functioning of (re)insurers, on a quantitative as well as qualitative basis. ORSA allows the Supervisory Authority to have a critical point of view on the whole structure of undertakings, whether on their risk profile or on their compliance with AMSB requirements. The extensive obligation to report implemented in ORSA has made the supervisory role of the ACPR evolve from a mostly quantitative-based supervision, as evidenced by the MCR and SCR, to a qualitative approach based on the transparency of the company, its structure and its activities as a whole. ORSA must be communicated to the Supervisory Authority on an annual basis and more often if the risk profile of the company is evolving (R.354-3-4, al. 2 CDA). For instance, an ORSA should be undertaken in the event of a merger or an absorption, as to demonstrate to the Supervisory Authority the capacity of the absorbing company in maintaining solvency.29

3.2

Duty to Disclose to the Public

In addition to the duty to report to the Supervisory Authority, (re)insurers have a duty to present some documents of their activities to the public as well, including the SFCR. Disclosure to the public is aimed at increasing the transparency of the market towards policyholders and the professional public. The reporting obligation of (re)insurers is hence twofold and covers reporting both to the Supervisory Authority and

27

Gründl and Gal (2013), pp. 1 and 4. Vedani and Devineau (2012), p. 2. 29 Marly (2020) para 225–226. 28

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to the public. Nonetheless and despite this step forward in promoting transparency, disclosure to the public is still limited for practical reasons due to the accessibility of the information disclosed to the policyholder, as well as the existence of exceptions to this publication.

3.2.1

Solvency and Financial Condition Report (SFCR)

The SFCR is mentioned in L.355-1 CDA as one of the mandatory reports to be communicated annually to the Supervisory Authority. Notwithstanding this obligation, (re)insurers must also make this report available to the public (L.355-5 CDA). The SFCR must feature specific elements, including a description of the activity and results of the insurer, a description of the governance system, a description and assessment of each risk category, the structure of their equity capital and the SCR and MCR amounts (R.355-7). The information to be published in the SFCR is highly technical and may not be accessible to the public in a larger meaning, as the title of the relevant section of the CDA may lead to believe (Informations à destination du public—Information Directed to the Public). Consequently, the function of the SFCR as a tool for transparency is restricted. Some concerns were indeed raised regarding the adequacy of the SFCR to protect the needs of policyholders, especially regarding the understandability of the report.30 EIOPA proposals as part of the 2020 Review of Solvency II, include changes in the legal and regulatory framework of SFCR, as to differentiate the disclosure duty owed to policyholders and to other users, i.e. the professional public. The system of publication should be more accessible to policyholders, for example through posting on the company’s website, and information should remain clear, simple and concise and be in a language understandable by the policyholder.31

3.2.2

Exceptions to the Disclosure of SFCR

Undertakings may obtain exceptions to the publication of the SFCR. Relief from the publication of some elements of the SFCR will be granted by the Supervisory Authority in two cases. Disclosure is waived if the publication of the information would confer an important undue advantage on other undertakings over the company (R.355-9 (a) CDA). (Re)insurers can also be exempted from publishing some information if these are subject to secrecy or confidentiality. However, regarding the latter, confidentiality cannot be used as a means to avoid the disclosure of the content of the SFCR in general. In other words, undertakings cannot invoke confidentiality to exempt themselves from their duty to disclose. The request for non-disclosure must be submitted to the Supervisory Authority at least five months 30 31

EIOPA (2019), pp. 2–3. EIOPA (2019), pp. 3–4.

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prior to the expected publication date (R.355-9, para 4 CDA). An exceptional procedure exists that allows undertakings to apply for non-disclosure up to two months before the publication date (R.355-9, para 5 CDA). As for the motive of confidentiality, request for non-disclosure must not be invoked by undertakings in order for them to escape their duty to disclose in time their SFCR (R.355-9, para 6 CDA). Furthermore, if the exemption is granted, (re)insurers must mention in their SFCR that the information has been exempted from disclosure and the basis on which non-publication was authorised (R.355-9 para 7 CDA).

3.2.3

Additional Voluntary Disclosure and Updates

According to Art. R.355-11 CDA, undertakings are free to disclose in their SFCR additional information that are not part of their legal duty to disclose. This additional voluntary disclosure covers information or explications regarding their solvency or financial situation. Besides voluntary disclosure of further elements, undertakings must update their SFCR if a major event arises and significantly affects the relevance of the information disclosed in the report (L.355-6 CDA). Events considered as major are, for instance, non-compliance with MCR or SCR and when the Supervisory Authority does not consider that the undertaking will be able to provide, respectively, an adequate financing scheme or an adequate recovery plan (R.355-10, (a) and (b)). With regard to non-compliance with MCR, the undertaking must publish without delay the amount corresponding to the non-compliance, alongside an explanation as to its origin and consequences, and any measures that have been taken to correct it (R.355-10, para 4). Another update on non-compliance with MCR is due after three months, on the same terms, if such non-compliance has not been solved. Similar provisions apply to non-compliance with SCR, save for re-updating delay, which is increased to six months (R.355-10, para 5).

4 Transparency of the Supervisory Authority The obligation of transparency of the ACPR is somewhat similar to the insurers. The Supervisory Authority must communicate and transmit or make available information to the public on its missions. Compliance with this duty takes several forms, such as the publication of undertakings’ registration and the publication of decisions involving undertakings or their functioning. The Supervisory Authority’s obligation to inform is in line with the policyholder protection principle of Solvency II. Furthermore, the ACPR, like insurers, has an obligation to report to its own Supervisory Authority (EIOPA) and other National Supervisory Authorities in order to ensure a harmonised application of the law and regulations.

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Transparency Towards the Public

The Supervisory Authority is given by law a general right to disclose to the public any information it considers necessary and relevant to the accomplishment of its missions. This right to disclose is unlimited as secrecy cannot be opposed to the Supervisory Authority in this context (L.612-1, IV CMF).

4.1.1

Publication of Insurers’ Registration

Undertakings, in order to operate on the national market, must register with and obtain accreditation from the Supervisory Authority (L.321-1 CDA and L.612-1, II 1, CMF). The accreditation is granted upon a demonstration by the (re)insurers that their technical and financial means correspond to their activities, that their directors and the members of the AMSB are “fit and proper” and that the structure of their capital and shareholding evidences healthy and careful management (L.321-10, para 1 to 4 CDA). Moreover, insurers must, at the registration stage, comply with MCR, SCR and the governance requirements of Solvency II (L.321-10, paras 5 to 9 CDA). The same criteria apply to reinsurers (L.321-10-1). The list of the undertakings authorised to operate on the national market is published and regularly updated by the Supervisory Authority and is accessible to the public (L.612-21, 1, and R.612-20 CMF). The Supervisory Authority also publishes on a monthly basis the accreditations withdrawn and revoked. Mandatory registration of undertakings and the publication of the accreditation allow transparency of the market in favour of the public. Policyholders can verify that their (re)insurer is registered and therefore complies with the solvency and transparency legal requirements. Registration of insurance professionals acts as a filter too and, to some extent, guarantees honesty and compliance.32

4.1.2

Publication of Decisions

The Supervisory Authority has a duty to ensure the application by undertakings of the solvency and stability requirements provided under Solvency II (L.612-1, II, 2 CMF), as well as their compliance therewith. It must also verify and control the proper application of European and national laws by undertakings with regard to the protection of the policyholders and good practices (L.612-1, II, 3 CMF). More generally, the Supervisory Authority is entrusted with monitoring compliance by undertakings with all legal requirements. To this end, the Supervisory Authority has the power to issue injunctions and decisions against undertakings that do not comply with their legal obligations (L.612-25 and L.612-1, IV, CMF). Decisions are issued by a special commission, the Commission of Sanctions (Commission des sanctions) 32

Langé (2018), p. 12.

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(L.612-4 CMF). The hearings before the Commission of Sanctions are normally public, but the president of the commission can order it to be held privately on grounds of morality, public order, and national security or if it is necessary to protect business secrecy or involves any legal obligation of secrecy (R.612-47 CMF). But more importantly, with regard to transparency towards the public, decisions are published on the day they are issued. The extent of the publication is to be decided by the Commission and can be ordered in any media of its choice. It has to be proportionate to the violation committed and the sanction pronounced, and the costs will be borne by the (re)insurer (L.612-39 CMF). The decision is at the very least published on the Supervisory Authority website, in an official registry (registre officiel de l’Autorité), with the person namely identifiable. Furthermore, the decision can be directed towards the management body of the undertakings. The commission can indeed order the temporary suspension of any member of the AMSB or even their immediate resignation (L.612-39, 4 and 5 CMF). Regarding effective directors, they may be personally fined up to five million euros if they have a personal and direct responsibility in the violation of the legal requirements (L.612-39 CMF). As for (re)insurers, the publication of the name of the members of the AMSB will depend on the fault committed and the fine pronounced. It is fair to assume that the higher the fine and violation are, the larger the publication will be. The principle is therefore the application of the naming and shaming doctrine when it comes to undertakings and non-compliance with legal requirements. CMF provides for two exceptions: if the publication of the decision would seriously affect financial markets or would cause a disproportionate prejudice to the undertaking or the person (L.61239 CMF). Named decisions and publications are thought to have a larger impact on the market as the (re)insurers’ reputation would necessarily be affected by a public and identifiable decision.33

4.1.3

Other Publications on the Functioning of the Supervisory Authority and the Market

Article 31 of Solvency II creates a duty to disclose to the public information relating to the functioning of the Supervisory Authority and the market, implemented in national law in R.612-10 CMF. The Supervisory Authority, relating to its function, must make available to the public the laws and regulations applicable to the insurance sector (Art. 31 Solvency II, 2(a)). The disclosure of the organisation and composition of the Supervisory Authority has been implemented in L.612-1, IV, CMF, regarding its powers, and in L.612-4 CMF, with regard to its composition and the different commissions. The composition of the commissions is also established by law (L.612-5 to L.612-9 CMF). The Supervisory Authority must publish statistical data on its website, pertaining to its prudential role (L.612-24, para 5, and R.612-10, 4, CMF). The ACPR, every year, reports its results on the works and

33

Henri (2019), p. 131.

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missions undertaken, as well as a description of the decisions and sanctions taken for non-compliance with the law (R.612-10, 5 (b) CMF). Regarding the insurance market, the Supervisory Authority has an obligation to publish nationally aggregated data (R.612-10, 6 (c) and 7 (c) CMF).

4.1.4

Disclosure and Confidentiality

Article 31 Solvency II provides for the transparency of supervisory authorities whilst imposing a duty to protect confidentiality. As a result, L.612-17, I, CMF imposes secrecy on any person who participates or participated in the missions of the Supervisory Authority. The same article in Solvency II gives some exceptions but are limited to interactions with other national and administrative bodies. Breach of this obligation is criminally reprehensible (L.641-1 CMF). Nonetheless, the wording of L.612-17 and L.612-1, IV, both in the CMF, seems difficult. L.612-1, IV, CMF indeed states that the ACPR is free to disclose to the public any information it deems necessary to accomplish its missions without being subject to the secrecy principle of L.612-17 CMF. Hence, it appears that there is a distinction between the Supervisory Authority and its members with regard to secrecy and confidentiality. Whereas members and employees of the Supervisory Authority must respect the provisions of L.612-17 CMF, the ACPR itself can supersede these obligations under the condition that disclosure is necessary to the proper realisation of its missions.

4.2 4.2.1

Report to European Bodies and Other Authorities Reporting to and Communication with EIOPA, European Bodies and National Supervisory Authorities

L.612-1, III, CMF creates for the Supervisory Authority a general duty to cooperate with other European Supervisory Authorities. Firstly, the ACPR has a duty to report to the EIOPA. The EIOPA is the successor of the Committee of European Insurance and Pensions Supervisors. Independent and part of the European System for Financial Supervision, EIOPA is the European body responsible for maintaining the financial stability of the market, as well as ensuring its transparency and the protection of policyholders. As part of its mission, EIOPA issues Guidelines and Reports that must be endorsed by National Supervisory Authorities of Members States of the European Union, save for the application of the principle of comply or explain.34 34 Regulation (EU) no. 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision no. 716/2009/EC and repealing Commission Decision 2009/ 79/EC, OJ L 331/48.

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The Supervisory Authority has a duty to annually report to EIOPA information regarding undertakings under its authority. The information to be transmitted include, for instance, the average amount of additional capital requirements, by company, and the number of companies that were granted exemptions from the quarterly reporting requirement under L.355-1 CDA (L.355-8 CDA). The Supervisory Authority must report to the EIOPA any disciplinary decision it has taken regarding violation of or non-compliance with insurance distribution regulations (L.612-38 CMF and L.515-4, IV, CDA). In order to guarantee a general transparency of the market and the application of the Solvency II requirements on the European Union territory, the ACPR must, at least once a year, transmit to EIOPA the list of all (re)insurers authorised and registered to operate in France (LR.612-201, VII). The Supervisory Authority shall also communicate any element pertaining to the good accomplishment of its missions to EIOPA and, to this end, is not bound by confidentiality or secrecy (L.632-6-1 CMF). The ACPR may require EIOPA to intervene in its relations with the other National Supervisory Authorities, especially in case of disagreements between the ACPR and another National Supervisory Authority with regard to the revocation of undertakings’ authorisation to operate on the national market (L.321-11-1 CDA). The intervention of EIOPA can be requested on the same matter when the authorisation of insurance intermediaries is concerned (L.515-4, II CDA). As a general principle, the Supervisory Authority has to report to EIOPA any authorisation it has granted or refused (R.321-4-1 and R.3215-4 CDA). The obligation to report made on the ACPR and the other National Supervisory Authorities of the European Union is paramount for an efficient and proper application of the transparency rules as set out by Solvency II. The filter role of the National Supervisory Authorities, including the ACPR, allows the channelling of relevant information and guarantees both consistency and transparency in communication. Moreover, the duty to report to EIOPA supports the general principle of transparency in insurance regulation by imposing rules on the Supervisory Authorities themselves. Last but not least, albeit independent, EIOPA is under the supervision of and is accountable to the European Parliament and the Council of the European Union. With regard to its relations with other National Supervisory Authorities and European bodies, the ACPR does not truly has a “duty to report”, but rather it has a “duty to inform”. The duty to inform arises mainly with regard to transnational insurers and reinsurers and groups when the parent company is established in another European country or in order to easily collect fines pronounced by other National Supervisory Authorities (L.632-1, para 5, CMF). Before granting an authorisation to operate on the national market, for instance, the ACPR must consult National Supervisory Authorities if this insurance company is a subsidiary of a company already established and authorised in another Member State (L.321-1 and L.321-1-1 CDA). As per L.632-1 CMF, the ACPR shall cooperate with European bodies, such as the European Central Bank and its counterparts in the other Member States. The same article allows National Supervisory Authorities to exchange any information during a crisis or emergency situation that is susceptible of affecting the stability of

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the financial market. National Supervisory Authorities must cooperate, even if the facts on which the control of another Supervisory Authority are based are not legally reprehensible on their own territories (L.632-1, para 3). National Supervisory Authorities can require the help of the ACPR in relation to a control on-site or an investigation on companies under the control and supervision of the ACPR. The ACPR must either proceed with the control or allow the National Supervisory Authority itself to undertake control or be associated with it (L.632-2 CMF). Alternatively, the ACPR is entitled to ask the competent National Supervisory Authority to control an undertaking or be associated with the control thereof if the ACPR is not allowed to undertake it itself (L.632-12 CMF). A residual obligation to report to other National Supervisory Authorities exists regarding the financial instability of insurers. In the event that a (re)insurer is under procedures of redress (redressement judiciaire) or court-ordered liquidation (liquidation judiciaire), the ACPR must inform without delay the other National Supervisory Authorities of the European Union (L.310-25 CDA). If redress and liquidation are ongoing in another Member State, the ACPR can ask for information regarding such procedures (L.31025-2 CDA). The ACPR must communicate all relevant information regarding an undertaking when asked to do so by another Supervisory Authority. The ACPR can either proceed to the verification of the information by itself or allow the requesting Authorities to conduct the verification or to include them in the process (L.63212 CMF).

4.2.2

Communication with and Duty to Report to Other National Administrative Bodies

In pursuing its missions of regulation and control of the insurance sector, the Supervisory Authority may have to communicate and collaborate with and report to other national entities. As aforementioned, the ACPR is owed a specific information and reporting duty from statutory auditors of undertakings. Similarly, the Supervisory Authority for the regulation of statutory auditors (Haut Conseil du commissariat aux comptes or H3C) and the ACPR share information that may be relevant for their missions (L.631-1 CMF for ACPR and L.821-12-5 C.Com for H3C). The H3C and the ACPR have concluded an agreement on the exchange of information and cooperation (hereinafter Agreement between ACPR and H3C), which gives the right to H3C to request support of the ACPR during audits realised on statutory auditors (R.821-75 C.Com).35 The ACPR has to report to the H3C when it designates an additional statutory auditor (L.612-43 CMF) and when the ACPR is made aware of a violation of legal provisions by a statutory auditor (L.612-45 CMF and Art.12 Agreement between ACPR and H3C). The H3C must also comply with a duty to report to the ACPR in the event that a statutory auditor has communicated to the H3C significant defaults in its report on the undertaking and also when a statutory

35

ACPR (2011), Art 3.

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auditor of an undertaking is being investigated by the H3C (Arts. 8 and 11 of the Agreement between ACPR and H3C). The ACPR has a duty to report to the competent public prosecutor if it comes to its knowledge that practices of an undertaking witnessed during a control on-site are legally and criminally reprehensible (L.612-29 CMF). Likewise, the Statutory Authority must inform the National Competition Authority (Autorité de la Concurrence) of any facts that may be in violation of the rules and regulations applicable to competition (L.612-29 CMF). The Supervisory Authority reports also to French Tax Services and communicates to them any information it recovered during its missions of supervision and control and through the reporting made by undertakings (L.612-1, II, 7). Finally, with regard to commercial practices and consumer rights, the ACPR and the General Directorate for Fair Trading, Consumer Affairs and Fraud Control (Direction générale de la concurrence, de la consommation et de la répression des fraudes) shall meet at least once a year in order to exchange information on the supervision operated by the ACPR on undertakings, on the basis of the provisions of the Consumer Code (D.612-23 CMF).

5 Transparency of Insurance Distributors 5.1

Overview

The Solvency II Directive was aimed at insurers and reinsurers as a means to regulate, stabilise and enhance transparency of the market. Insurance distributors and intermediaries were excluded from the scope of the Directive, and a better harmonisation of transparency requirements across the sector was needed. The transposition of the Insurance Distribution Directive (IDD) on 1 October 2018 has levelled the playing field with undertakings.36 Book V (Livre V) of the CDA, already dedicated to insurance distributors, has been reshaped and completed by the provisions of the IDD. L.511-1 CDA provides a definition of (re)insurance distributors, as well as a list of activities excluded from its scope. As a result, a (re)insurance distribution is defined as providing recommendations on insurance and reinsurance contracts to present, propose and help to conclude these contracts or preliminary works towards their conclusion or to contribute to their management and performance in case of a claim (L.511-1, I, CDA). The IDD has led to the implementation of transparency and general conduct rules for insurance distributors, which include (re)insurance intermediaries and undertakings. With regard to intermediaries, European harmonisation and regulation were required as at the time of the IDD, the number of insurance brokers was increasing everywhere in Europe, increasing at the same time the risks of collusion and conflicts of interests. Furthermore, the IDD puts at the forefront the rights, which should be offered the same level

36

Ordonnance n 2018-361 du 16 mai 2018 relative à la distribution d’assurances JORF n 0112.

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of protection regardless of the channel through which the consumer purchases an insurance product.37 The IDD, in this aim to offer better protection to the consumer and ensure harmonisation of the rules applicable to (re)insurance distributors, has organised its rules around the principle of transparency and information (L.521-1 CDA).38 From this principle emerges four major categories in which transparency is at the core: product oversight and governance, remuneration, conflicts of interest and duty to inform. Transparency is also noticeable in the supervision of the competent Supervisory Authorities.

5.2

Product Oversight and Governance

The IDD, transposed in the CDA, imposes on (re)insurance undertakings the duty to have their insurance products validated before its distribution to policyholders and clients. Products that have been significantly adapted (L.516-1, I, para 1, CDA) must also be validated. This means that the product must be designed for a target market: the risks relating to the target must be evaluated (L.516-1, I, para 2, CDA). Also, the distribution system and mechanism must be adapted to this particular market (L.5161, I, para 2, CDA). As a result, (re)insurance undertakings and insurance product designers must ensure that distributors are provided with all the necessary information with regard to the validation process and the target demographic of the product (L.516-1, I, para 4, and II CDA). Insurance product manufacturers must test their products before introducing them in the market and should not introduce them if they do not correspond to the target market previously established.39 The introduction of rules on Product Oversight and Governance is aimed to mitigate mis-selling and implement the fundamental objective of insurance supervision, i.e. consumer and policyholder protection.40

5.3

Duty to Disclose Remuneration

IDD has introduced a principle of disclosure of the remuneration of (re)insurance distributors. As for the disclosure of conflicts of interests, the subject had already 37 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) Text with EEA relevance OJ L 26, (7). 38 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) Text with EEA relevance OJ L 26, Art.17, 18, 19, 20, 29. 39 Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors (Text with EEA relevance) C/2017/6218 OJ L 341, Art. 7. 40 EIOPA (2016b) 1.2 and 1.8.

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been approached in the CDA but in a superficial manner and not on a mandatory basis. Article R.511-3, II, CDA, which is still applicable, provides for one category only in the case of brokers: the disclosure of their remuneration upon the request of a professional client subscribing for professional insurance, including a premium of more than €20,000. The IDD has broadened the remuneration disclosure obligation.41 As a general requirement, applicable to all actors of insurance distribution and all insurance products, the remuneration must not affect the principle of loyalty towards the client. As such, insurance distributors shall guarantee that the remuneration attached to the insurance product does not influence its recommendation to the client (L521-1, III, CDA).42 Intermediaries must disclose their system of remuneration under the insurance contract (L.521-2 CDA). L.521-2, II (2), lists four methods of remuneration on the basis of fees, commission of any kind, any other type of remuneration or a combination of the aforementioned remuneration types. Moreover, the intermediary, if payed on the basis of fees, must disclose the amount of such fees or their calculation method if impossible. The remuneration disclosure is also extended to ancillary insurance intermediaries (L.521-2, IV, CDA). With regard to the other categories of (re)insurance distributors, they shall disclose the nature of the remuneration received by their employees under the insurance contract to be concluded (L.521-3 CDA). The disclosure obligation is not as large as for intermediaries as they do not have to communicate the remuneration methods. With regard to insurance-based investment products (IBIPs), disclosure of remuneration is closely linked to the disclosure of conflicts of interests. Although subject to the same remuneration disclosure obligation, distributors must ensure that the remuneration will not have a negative impact on the advice provided to the prospect and does not go against their duty of honesty, impartiality and professionality.43 More than disclosing the nature of remuneration, distributors of these contracts have to guarantee that the remuneration will not affect their activity and duty of care towards their clients. This extended obligation hence compels distributors of these products to reflect on the nature of the remuneration and to evaluate it globally using specific criteria. It is worth noting that the MiFID 2 Directive,44 relating to investment products, has completely banned inducements for these products.45 With regard to all insurance products, the obligation to disclose the remuneration is continuous in time and does not stop once the insurance contract has been signed. The policyholder is owed information if there are changes in the system of remuneration, on the condition that the policyholder is making additional payments other than premium and instalments.

41

Mariani (2017), p. 673. Marly (2018b), p. 1. 43 L.522-4 Code des Assurances. 44 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Text with EEA relevance OJ L 173. 45 Marly (2018a) 10, para 18. 42

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Having to disclose the type of remuneration, its calculation or its amount is coherent with the wish for transparency of the IDD and the overriding principle of protection of the consumer’s interests. The requirement of a remuneration without influence on the advice given or a negative effect on the consumer will lead to a shift towards remuneration based on quality and not on quantity, as well as an abandonment of some payment practices.46 The first could be manifestly disproportionate fees and commissions compared to the premium paid.47 Indeed, because the remuneration and the calculation methods will be available, the prospect may refuse to subscribe to the policy if it has any knowledge of the extent of remuneration. High remuneration could have the prospect doubt the honesty of the insurer. Second, the principles of challenges, under which the employee or intermediary who had sold the largest number of the same product would be given a bonus, have little chances to survive the new regulation.48 Finally, remuneration by deduction in advance in the case of intermediaries may disappear as well. This system of remuneration consists, for the intermediary, of obtaining during the first year of the contract a higher percentage of the premium as remuneration and a lower one afterwards. The remuneration is based not on a fully perceived premium but on expected future payments. The intermediary is contractually bound to keep the client for several years so that the insurance company is totally paid. If the client decides to exit from the insurance contract, the intermediary must reimburse the insurance company of the unjustified commissions. Although this system of remuneration is common in insurance markets, the implementation of the IDD may prevent intermediaries from being paid on this basis. The IDD, as previously stated, imposes on all actors of the insurance market an obligation of fairness and loyalty when it comes to remuneration. As such, the quality of the advice and the products offered should not be affected by the remuneration perceived by the intermediary. However, remuneration by deduction in advance appears problematic on two grounds. Firstly, intermediaries use this system of remuneration as a means to generate constant cash flow in order to finance the purchase price of clients. Following this logic, an intermediary may soon be forced to advise clients on products having a higher premium and therefore a higher commission in order for the intermediary to maintain this cash flow. Secondly, the reimbursement obligation borne by the intermediary may alter his independence and loyalty towards the clients in proposing adapted insurance products if these new products lead to the withdrawal of the client from the previous contract.

46

Ducros and Lombard (2019), p. 4. Bendelac (2018), p. 3. 48 Marly (2018a) 9 para 26. 47

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Conflicts of Interests

The avoidance of conflicts of interests is tackled in L.521-2 of the CDA but is not completely new in French insurance law, although the requirement is limited to two instances. R.521-1 CDA imposes on intermediaries the duty to disclose shareholding ties to a prospect they may have in insurance companies or the participation an insurance company may have in the intermediary’s company when such participations reaches at least 10%. Mandatory disclosure is also due by the intermediary to the prospect when the intermediary is realising 33% of its turnover from contracts with one insurance company. Commercial ties potentially harmful to consumers therefore appear to have been a pre-existing concern to the French legislator. The IDD has nonetheless brought general rules of disclosure in order to protect all consumers. Under the IDD, intermediaries must before the conclusion of the insurance contract disclose to the client their financial links to insurance companies (L.521-2 CDA). If the intermediary is contractually bound to only distribute insurance products from one or more insurance companies, the names of such companies must be disclosed to the client. If the intermediary is not bound by such contractual terms but is unable to base its analysis and advice on a sufficient number of contracts, it must disclose the name of the insurance companies it works or may work with. This information could be realised by a pre-contractual document to be communicated to the prospect, listing all the insurance companies. In addition, to be clear, to constitute acceptable evidence in case of dispute and to fit within the recommendations of the Commission, the document may favour the presence of a certain stability in intermediary/insurance company relationships and, as a result, increase transparency.49 The disclosure obligation only stops when the intermediary provides a personalised recommendation/advice service, that is a service tailored to the needs of the client.50 Regarding IBIPs, the Code des Assurances provides a section dedicated to conflicts of interests.51 For these specific types of contracts, intermediaries and insurance companies must prevent conflicts of interests that may arise between them, with their directors and employees, with any person directly or indirectly controlled by them and with their policyholders.52 To this end, it is the duty of intermediaries and insurance companies to establish efficient structural and administrative procedures in order to avoid those risks. However, if there are reasonable doubts that such procedures will not be sufficient to prevent conflicts of interests and not impact the policyholders’ interests, insurance professionals must disclose the nature or the source of conflicts. These requirements are complementary

49 Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors (Text with EEA relevance) C/2017/6218 OJ L 341, Art 7; Bendelac (2018) 3 para 9. 50 L.521-4, II Code des Assurances. 51 Code des Assurances, Livre V, Titre II, Chapitre II, Section 1. 52 L.522-2 Code des Assurances.

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to the obligation to disclose conflicts of interests stated in L.521-2 CDA, therefore imposing stricter conditions for insurance professionals commercialising IBIPs.53 It is advised to distributors to put their anti-conflict of interest policies in writing and to keep a list of all potential and actual conflicting situations. As aforementioned, these can be used as evidence in case of a dispute, but they may also help distributors to re-evaluate and modify their policies based on tangible facts.54

5.5

Duty to Inform

Transparency for (re)insurance distributors consists in providing understandable, extensive and truthful information to the prospect or policyholder. Insurance distributors must identify themselves to the prospect by indicating their identity, their address, their registration number as well as the existing claim-handling procedures and mediation processes.55 Information on the insurance product must be objective, clearly communicated, exact and non-misleading in order for the prospect to understand it.56 The preferred form of communication is paper, although the law allows under certain circumstances communication on the distributor website. The requirements for the latter are the appropriateness of the choice of communication, the consent of the policyholder, the fact that the website and where the information can be found within it have been communicated to the policyholder, and a guaranteed access to the information on the website for a reasonable time.57 Moreover, as a means to increase understandability, consistency and transparency among insurance distributors, they must provide, for non-life insurance contracts, all necessary information through a normalised document (L.112-2 CDA). This document, entitled Insurance Product Information Document (IPID), has to be designed and elaborated by insurance companies.58 The hope is that a standardised document would provide non-life insurance customers clear and comparable information on the products. However, the IPID is currently a document additional to all the information that the insurer has to transmit to the prospect. The IPID, as it stands now, does not help clarity the accessibility of information and, therefore, does not truly participate in the provision of transparency. There exists a risk that it will become another piece of documentation overlooked by prospects and policyholders, defying its main role as a

53

Bourreau-Guérinière (2018a), p. 7. Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors (Text with EEA relevance) C/2017/6218 OJ L 341, Art 7. 55 L.521-2 and L.521-3 Code des Assurances. 56 L.521-4 Code des Assurances. 57 L.521-6 Code des Assurances. 58 Curtet (2019), p. 3. 54

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unique document allowing them to take an informed decision. The role of the IPID in its actual form resonates with the SFCR and the publication of information by (re)insurance undertakings. Albeit directed towards the public, for the policyholders’ information and in order for them to reach an informed decision, the level of information communicated or its addition to previously communicated information limits and undermines its possible function as a transparency tool. The implementation of IPID follows the creation of the Key Document Information (KID) in the Packaged Retail Investment and Insurance-Based Products (PRIIPs) Directive, which is applicable to IBIPs.59 For IBIPs, distributors, in order to comply with their duty to give advice, must obtain information pertaining to the financial capacity of the prospect, as well as to its experience in financial products.60 The information provided must be adapted to the pre-existing knowledge of the prospect or policyholder. This has been confirmed in a judgment in which a policyholder had subscribed to a life insurance contract denominated in units of accounts and sued its broker for deceit (dol) when realising a loss of value of its investment. The Cour de cassation rejected the claim, arguing that the policyholder had been given all the necessary information in a perfectly clear wording for someone, like the policyholder, who had higher education diplomas as well as competences in economics.61 On the contrary, a policyholder without any knowledge in insurance products will have to be given extensive information.

5.6 5.6.1

Transparency Role of Supervisory Authorities Mandatory Registration of (Re)insurance Distributors

Intermediaries have to register and obtain certification from ORIAS, the Single Register of Insurance, Banking, and Finance Intermediaries. It is the sole body habilitated to register all intermediaries of the insurance, banking and finance sectors. Since 2014, it has been a rule that the following must be registered: banking transactions and payment service intermediaries (IOBSP), financial investment advisors (CIF), investment service providers' tied agents (ALPSI), crowdfunding advisors (CIP), crowdfunding intermediaries (IFP) and all insurance intermediaries. ORIAS’ main role is to receive and process registration requests in order to certify the intermediaries and effectively deliver them a “work permit” for the French insurance market. The certification intervenes only after a careful review of the documentation pertaining to the governance and functioning of the intermediary.62 59

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). 60 L.522-5 Code des Assurances. 61 Cass, Civ.2e, 18 April 2019, n 18-10.377. 62 L.512-3 Code des Assurances.

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Intermediaries must demonstrate honourability (L.512-4 CDA) and professional capacity (L.512-5 CDA), be professionally insured (L.512-6 CDA) and have financial security (L.512-7 CDA). The condition of honourability corresponds to an absence of a criminal record for crime (as defined by the French Criminal Code) and financial infractions, as listed in L322-2 of the Code des Assurances. These infractions are, among others, fraud and breach of trust, corruption, money laundering, drug trafficking and bankruptcy. The condemnation must have included a prison sentence of at least six months, conditional or not.63 The honourability condition applies to the intermediary itself, as well as to directors, administrators, members of a supervisory body and the employees directly responsible for the intermediation.64 The second condition for the registration of an intermediary pertains to its professional capacity, i.e. its competence. The professional capacity expected of an intermediary is not fixed but depends on the nature of the intermediary, i.e. broker, agent and representatives (of insurers or of insurance intermediaries).65 As such, there are three levels of professional capacity, which can to be justified by an internship or by professional experience or by a diploma or certification.66 Agents and brokers must demonstrate a professional capacity of level 1, whereas representatives have to attain a level 2 or 3 if the commercialisation of the insurance product is accessory to the commercialisation of a good or product. The requirement of professional capacity is a guarantee for clients and policyholders that the intermediary is competent and will be able to fulfil their duty to give advice: they must be fit and proper.67 Finally, intermediaries must subscribe to a professional insurance and have a bank guarantee for all sums destined to insurance companies or policyholders. Registration at ORIAS amounts to a certification and an authorisation to access the insurance market in France. Registration has to be renewed every year, under the same conditions. Failure to comply with these requirements will be followed by a de-registration from ORIAS. De-registration is published, and non-compliant companies and individuals are identified by name. In addition, the loss of registration to ORIAS will lead to loss of remuneration as it is directly conditioned by the registration and even for outstanding contracts.68 Mandatory registration at ORIAS acts as a filter to access the insurance market, further strengthened by the interdiction made to insurance distributors to contract and deal with non-registered intermediaries.69 In addition to administrative sanctions, fines and prison sentences can also be given to non-compliant insurance firms and intermediaries.70 ORIAS publishes the list of all registered intermediaries. This publicity

63

L.322-2, 1 and 2 Code des Assurances. L.512-4 Code des Assurances. 65 R.511-2-I, 1,2,3,4 Code des Assurances. 66 R.511-9 to 12 Code des Assurances. 67 Deloitte (2018), p. 5. 68 Cass, Civ. 1re, 24 January 2018, No. 16.16-743; Bourreau-Guérinière (2018b) 69 L.512-2 Code des Assurances. 70 L.514-1 and L.514-2 Code des Assurances. 64

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notifies prospects and policyholders that the intermediary has met the conditions of registration and therefore is structurally transparent. The respect for these requirements completes the personal transparency rules that insurance intermediaries are subject to when they interact with policyholders. Imposing strict conditions on the access to the profession of intermediary benefits the whole sector as it operates as a first filter. People allowed to enter the insurance intermediary market will be scrutinised constantly by both the administration and the public: first at their entering of the market, when requesting registration; then every year for the renewal of the said registration; and, finally, at any moment by policyholders and future policyholders through the public registry.

5.6.2

Naming and Shaming Applied to Insurance Distributors

Naming and shaming is applicable to (re)insurance distributors as much as it is for undertakings. Firstly, de-registration for non-compliance with authorisation requirements is published on the website of the Registration Authority (ORIAS), and non-compliant companies and individuals are identified by name (L.512-3 CDA). These sanctions are pronounced by the competent Registration Authority. Also, and as for (re)insurance undertakings, the ACPR is entitled to issue decisions against (re)insurance distributors for non-compliance with legal requirements, except the ones relating to the authorisation to operate on the national market. In case of violation of the rules on product oversight (L.516-1 CDA), duty to disclose and inform (L.522-1 to 6 CDA) and conflicts of interests (L.522-1 to 6 CDA), the Supervisory Authority can replace the sanctions with or add to them a fine of up to hundred million euros (or five percent of the net turnover or twice the amount of the advantage that the distributor obtained from the violation of the rules) (L.612-39 CMF). As for (re)insurers, the decision issued by the ACPR is by principle public and the distributor namely identified.71

6 Conclusion The regulation of insurance supervision in France is based on two mains axis. Firstly, by the implementation of Solvency II, (re)insurance undertakings must periodically report information on their solvency capacity in order to ensure the stability of the insurance market. This requirement became evident following the sub-prime crisis and enhance transparency regarding insurers’ accounts capital participate to this stability. Secondly, they also have to report their governance structure and their risk-mitigating system through transmission to the Supervisory Authority of a specific report, ORSA. ORSA gives the Supervisory Authority a

71

Bourreau-Guérinière (2019), p. 7.

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crucial understanding of the functioning of each (re)insurance undertaking and provides further scrutiny. Besides reporting obligations to the ACPR, insurers have a duty to inform the public, either the professional public or policyholder, on a regular basis. They are indeed the protected target of the regulatory system. Regulation of the supervisory mechanism introduced by Solvency II did not stop at the actors of the insurance sector: it also applies to the Supervisory Authorities. As a result, the ACPR in France must inform the public of its missions and the works it has undertaken. This information includes a general publication of the insurers allowed to operate on the national market. In assessing that insurers are fit and proper to enter the French insurance market, the ACPR acts as a filter, henceforth limiting the risks of non-compliance. Furthermore, the ACPR publishes the decisions rendered in the application of the Solvency II requirements concerning insurers that violated their obligation to report and disclose. Identifiable by name, undertakings are even more susceptible of complying with their duties if they wish to avoid public shaming and loss of reputation. Moreover, Solvency II falls within an impulse of European harmonisation of insurance regulation in order for European policyholders to benefit from the same scrutiny in every Member State. The ACPR and its European counterparts must report to the European Supervisory Authority, EIOPA, the information passed on by (re)insurers. Harmonisation is also fostered through strengthened collaboration and communication between the different National Supervisory Authorities. At a national level, the ACPR regularly communicates with and reports to other administrative bodies to ensure a proper implementation of the requirements of Solvency II and to globally keep (re)insurance undertakings accountable. The IDD transferred this impetus to all insurance distributors by introducing the transparency principle at the core of insurance distributors’ value, structure and functioning.

References ACPR (2011) Accord conclu entre le H3C et l’ACPR relatif à l’assistance de l’ACPR dans le cadre des contrôles réalisés par le H3C et aux modalités d’échange d’informations utiles à leurs missions respectives accessible at ACPR (2015) Instruction 2015-I-12 en date du 21 avril 2015 relative à la communication à l’ACPR de l’identifiant international “identifiant d’entité juridique” par les organismes d’assurance (version consolidée) accessible at ACPR (2016a) Instruction 2016-I-01 en date du 14 janvier 2016 portant détermination des seuils d’application des remises d’information trimestrielles pour les organismes assujettis modifiée par l’instruction n 2019-I-03 du 15 mars 2019 (version consolidée) accessible at ACPR (2016b) Instruction 2016-I-16 en date du 27 juin 2016 relative aux documents prudentiels annuels à communiquer par les organismes assujettis au contrôle de l’ACPR relevant du régime

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dit “Solvabilité II” accessible at . Annexes A and B available at the same url ACPR (2016c) Instruction n 2016-I-02 en date du 14 janvier 2016 définissant les modalités d’exemption pour les organismes mentionnés à l’article 3 de l’instruction n 2016-I-01 modifiée par l’instruction n 2019-I-03 en 15 mars 2019 (version consolidée), accessible at https://acpr. banque-france.fr/contenu-de-tableau/instruction-ndeg-2016-i-02-en-date-du-14-janvier-2016definissant-les-modalites-dexemption-pour-les ACPR (2018) Guide des relations ACPR – Commissaires aux comptes accessible at Baudenbacher C (2017) The fundamental principles of EEA law: EEA-ities. Springer, Cham Bendelac E (2018) Distribution d’assurances - Les principaux apports de l’ordonnance de transposition du 16 mai 2018 relative à la distribution d’assurances. Responsabilité civile et assurances 9 Bourreau-Guérinière M (2018a) L’EIOPA répond aux interrogations des acteurs du marché des assurances sur l’interprétation de la Directive Distribution d’Assurance. L’Essentiel Droit des Assurances 9 Bourreau-Guérinière M (2018b) Le courtier d’assurance perd tout droit à percevoir des rémunérations d’intermédiation après sa radiation du registre ORIAS. L’Essentiel Droit des Assurances 11 Bourreau-Guérinière M (2019) AMF - ACPR : une approche similaire et rigoureuse des obligations d’information et de bonne conduite des intermédiaires financiers. L’Essentiel Droit des Assurances 3 CNCC (2017) NEP-260. Communications avec les organes mentionnés à l’article L. 823-16 du code de commerce accessible at Curtet A (2019) Directive Distribution Assurance (DDA) : parlez-vous l’IPID ? Petites Affiches 8 Deloitte (2018) La DDA, obligations et enjeux accessible at Ducros N, Lombard B (2019) L’Organisation de la rémunération des intermédiaires en assurances post-DDA. Droit et Patrimoine 219 EIOPA (2016a) Final Report on the proposal for Guidelines on facilitating an effective dialogue between competent authorities supervising insurance undertakings and statutory auditor(s) and the audit firm(s) carrying out the statutory audit of those undertakings accessible at EIOPA (2016b) Final Report on Public Consultation on Preparatory Guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors accessible at EIOPA (2019) Consultation Paper on proposals for Solvency II 2020 Review, Package on Supervisory Reporting and Public Disclosure accessible at Gründl H, Gal J (2013) Own Risk and Solvency Assessment Within the Solvency II Framework and its Interplay with the Quantitative Solvency Capital Requirements, Policy Letter Series accessible at Henri B (2019) La Gouvernance face à la Conformité. Emerit Publishing Langé D (2018) Le nouveau droit de la distribution de l’assurance. Revue générale du droit des assurances 10 Maddock G, Matthews A (2018) Solvency II: where are we now and what happens next? COB 160:1–31 Maddock G, Matthews A (2020) Solvency II: a new decade, a new regime? Or much the same as before? COB 174:1–41

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Mariani P (2017) From market fragmentation to market integration in the EU insurance industry: can EU regulation unify what is separate at birth? Eur Law Rev 42(5):657–676 Marly PG (2015) L’ordonnance n 2015-378 du 2 avril 2015 transposant la directive 2009/138/CE sur l’accès aux activités de l’assurance et de la réassurance et leur exercice (Solvabilité II). La Semaine Juridique Entreprise et Affaires 316:9–10 Marly PG (2018a) De l’intermédiaire à la distribution. La Semaine Juridique Entreprise et Affaires:43–44 Marly PG (2018b) La DDA enfin transposée! L’essentiel Droit des Assurances 7 Marly PG (2020) Entreprises d’Assurances. JurisClasseur Responsabilité civile et Assurances 504-60 Marly PG, Asselin M, Leroy M (2015) Chronique de droit des assurances. La Semaine Juridique Entreprise et Affaires 1328 Vedani J, Devineau L (2012) Solvency assessment within the ORSA framework: issues and quantitative methodologies, accessible at

Transparency in Insurance Regulation and Supervisory Law of Germany Kevin Bork and Manfred Wandt

1 Introduction Public insurance supervisory law regulates the relationship between the state and the insurance undertakings as professional operators of the insurance business. So far, the call for transparency, until recently, seemed—at least prima vista—rather unusual and surprising. However, under the new European Solvency II system1— implemented in Germany by way of revision of the Insurance Supervision Act (Versicherungsaufsichtsgesetz (VAG)), which (in most parts) entered into force on 1 January 20162—transparency has become an important objective of supervisory law. Notwithstanding the aforementioned, transparency has been a subject of insurance supervision and the insurance supervisory law since the first version of the VAG entering into force in 1902.3 Initially, insurance supervisory law contained information duties of the insurer towards the policyholder—from the perspective of the historic legislator—in order to avoid endangering the contractual freedom by

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Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ L 335/1. 2 VAG of 1 April 2015 (BGBl. I, pp. 434 ff.). 3 Rudkowski (2016, p. 135). K. Bork (*) · M. Wandt Goethe-University Frankfurt, Institut für Versicherungsrecht (Institute for Insurance Law), Frankfurt a.M., Germany e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Marano, K. Noussia (eds.), Transparency in Insurance Regulation and Supervisory Law, AIDA Europe Research Series on Insurance Law and Regulation 4, https://doi.org/10.1007/978-3-030-63621-0_6

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way of implementing too many mandatory provisions within contract law.4 Thus, sec. 10 VAG 1902 described the minimum content of the General Conditions of Insurance (GCI) (Allgemeine Versicherungsbedingungen (AVB)), and sec. 10a VAG old version required the insurer to inform the policyholder. Additionally, and in the light of the supervisory authority’s broad mission to crack down on irregularities (Missstand; which is not just limited to a legal control),5 it was the supervisory authority’s task to observe the insurer’s compliance with every transparency requirement—even such requirements stipulated by contract law and the law on unfair contractual terms and conditions. Hence, transparency of the contractual relationship was generally considered an issue of supervisory law and not contract law as the VAG even gave shelter to the mandatory pre-approval of GCI since its first version of 1902. This meant that, in addition to the mandatory components of GCI,6 the insurer was required to submit its business plan (Geschäftsplan), including its GCI, in order to be approved by the supervisory authority.7 From the very beginning of the development of the VAG, the initial purpose of the instrument of pre-approval—and, consequently, of the VAG as such—was to consolidate transparency towards the supervisory authority and yet all the more towards policyholders. This determined direction was emphasised even by the German legislator, when stating on the VAG 1902 that the supervisory authority must assess whether the submitted GCI are sufficiently clear in describing the policyholder’s and the insured’s rights and duties and whether they are comprehensible in order to extinguish exploitative, vexatious, fraudulent and misleading GCI.8 In the following, the pre-approval practice almost led to substantial congruence between all of the GCI on the insurance market—in the opinion of the supervisory authority, thereby, building up necessary transparency.9 Civil courts, in particular the former German Supreme Court (Reichsgericht (RG)) and also its successor, the German Supreme Court (Bundesgerichtshof (BGH)), could solely depend on the principle of good faith (sec. 242 German Civil Code (Bürgerliches Gesetzbuch) (BGB)) when reviewing GCI. Only in 1976 was a genuine control mechanism for GCI was introduced to German private law (Act on GCI,10 which was implemented to secc. 305 ff. BGB later on) and strengthened judicial power in this respect. However, within specific fields such as life insurance, the BGH resigned itself to

4 See with regard to the understanding of the historic German legislator Motive zum VAG, reprint, Berlin 1963, pp. 32 f. 5 See sec. 81 VAG old version; cf. Dreher (2015, pp. 19 ff.). 6 Secc. 9, 10 VAG 1902. 7 Sec. 4 sentence 3 no. 2 VAG 1902. 8 Motive zum VAG, reprint, Berlin 1963, pp. 32 f. 9 Cf. Beschlusskammerentscheidung, Veröffentlichung des Bundesaufsichtsamtes für das Versicherungswesen (VerBAV) 1966:2. 10 Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen (AGBG), suspended on 26 November 2001 (BGBl. I, pp. 3138 ff.) with effect of 1 January 2002.

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the priority of supervisory law referring to the insurer’s pursuit of transparency when aiming to strengthen its competitiveness vis-á-vis other insurers.11 This perception significantly changed as a result of the establishment of the Single European Market for insurance products.12 The implementation of several EU directives in 199413 (often described as deregulation) was intended to offer a variety of insurance products on a broad trans-border market for insurance products to the policyholder. The simultaneous abandonment of any pre-approval of GCI is also one of the best examples for the tendency towards a more open approach and vice versa for turning away from the former preventive approach.14 This instrument was formerly considered to be one of the supervisor’s most important sources of information.15 The abandonment of the pre-approval of GCI made it necessary to install a so-called information model with minimum obligations in order to provide the customer with information allowing him/her to make an informed decision.16 It should be noted that the supervisory authority may still prohibit the use of an invalid standard term even if a court has not yet found the respective standard term invalid.17 However, the supervisory authority is decidedly reluctant in exercising this possibility as it focusses on financial stability and the system of governance of the undertakings as well as on supervisory transparency. During the last decades, the focus on transparency has changed due to the Europeanisation and internationalisation of the insurance market and due to the experiences of the financial crisis. Nowadays, the focus of supervision lies on the insurance undertaking, in particular when it comes to its financial solvability. In order to achieve supervisory goals optimally, European supervisory law (to a large degree fully harmonised) strives for encompassing supervision. In this regard, the new principle-based approach attaches specific gravity to the transparency of internal business operations for the first time. The principle-based approach is characterised by non-exhaustive provisions necessitating interpretation and completion.18 Thereby, a regulatory goal will be stipulated compulsorily, yet in achieving the objective, different ways and means are opened up.19 Key elements in

11

Cf. BGH, Versicherungsrecht (VersR) 1983:746. Called for by the Directive 92/49/EEC of 18 June 1992 (Third Indemnity Insurance Directive), OJ L 228/1; Directive 92/96/EEC of 10 November 1992 (Third Life Assurance Directive), OJ L 360/1. 13 In Germany this was the third implementing legislation to the VAG of 21 July 1994 (BGBl. I, p. 1630). 14 Formerly provided by sec. 5 subsecc. 3 and 5 VAG. 15 Zischka (1997, para. 275). 16 See Loacker (2015) and Wandt (2019b, pp. 63 f.). 17 Cf. BVerwG, Versicherungsrecht (VersR) 1998:1137; BVerwG, Versicherungsrecht (VersR) 1999:743. Nevertheless, such a measure has no legally binding effect on the court deciding on the issue of the very same standard term. Anyway, the civil courts are allowed to interpret a standard term differently compared with the decision of the supervisory authority. 18 Cf. Wandt (2012a, pp. 14 f.), Wandt and Sehrbrock (2011b, pp. 203 ff.), Bürkle (2019, Einl. 26 ff.) and Weber-Rey (2010, pp. 562 f.). 19 Black (2010, p. 3). 12

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individually concretising a principle-based regulation are the principle of materiality and the principle of proportionality.20 With respect to the insurance undertaking as such, abandoned provisions stipulating specific conduct in detail and conclusively are compensated via standards of practice and structure serving as guard rails (Leitplanken)21 for the proper conduct.22 Accordingly, Art. 42 Solvency II provides for a governance system of insurance, comprising a transparent organisational structure with a clear allocation and reasonable separation of competences.23 The so-called Own-Risk and Solvency Assessment (ORSA), as an integral element of the business strategy, shall be taken into account on an ongoing basis in the strategic decisions of the insurance undertaking and is intended to further strengthen transparency, Art. 45 Solvency II.24 Moreover, extended reporting duties of the insurance undertakings are also reasoned by principle-based regulation since the supervisory authority depends on information different from the information essential under a rule-based regime.25 Surprisingly, this effect reveals an interesting parallel to transparency within insurance contract law: with greater autonomy—caused by the abandonment of the regulatory GCI pre-approval—comes a wide range of transparency requirements, in particular information duties.

2 German Insurance Supervisory Law: the Outset As for now, the cards are finally on the table: Solvency II has been enacted by the EU; the German legislator revised the VAG, thereby suspending many enactments that had been based on the VAG old version. Yet, Commission Delegated

20

Cf. Dreher (2015, pp. 301 ff.) and Wandt (2017), pp. 1359 ff.). This vivid term was used by Wehling (2009, p. 31). 22 Korinek (2010 p. 30), correctly points out that Solvency II does not lead to a deregulation but actually to a massively increased regulation due to the variety of indefinite legal terms. 23 The requirements provided by Artt. 41 ff. Solvency II have been implemented in secc. 23 ff. VAG, under the heading of chapter 3 “business organisation” (Geschäftsorganisation). Sec. 23 subsec. 1 sentence 1 VAG stipulates the general demand to enact a valid, proper and reasonable (with respect to the complexity of the insurer’s business) organisational structure. Yet, the German legislator considered the new provisions to refine the old law—and did not give up on all of the old provisions. This is, to an extent, surprising as the legislator explicitly emphasises that the proximity to the wording of Solvency II aims to prevent potential inconsistencies in comparison with delegated legal acts, see RegE BT-Drucks. 18/2956, pp. 238 f. 24 See also the legislator’s recital regarding sec. 64a VAG old version, BT-Drucks. 16/6518, p. 10, stating that this manner of regulation left the supervised insurance companies with greater leeway by giving up on strict statutory stipulations. On the contrary, the decision making processes of the companies had to meet enhanced requirements; Pohlmann (2011, pp. 337 f.) and Dreher and Ballmaier (2012a, pp. 129 ff.); with regard to transparency as a general principle of insurance law, see Wandt (2012b, pp. 9 ff., specifically with respect to insurance supervisory, pp. 18 ff.). 25 Cf. Hasse (2009, p. 70), Dreher and Schaaf (2009, pp. 129 ff.) and Wandt (2012a, pp. 14 f.). 21

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Regulation (EU) 2015/3526 supplementing Solvency II (hereinafter “Solvency II Delegated Regulation”) is directly applicable (i.e. not requiring any implementation). In addition, the supervisory structure with regard to competent authorities is determined. Purposes, tasks and authorisations of the European Insurance and Occupational Pensions Authority (EIOPA) are specified by the EIOPA Regulation.27 Although EIOPA is not entitled to legislate on its own, it plays a very important role within the regulatory field as technical specifications of the second legislative level of the Lamfalussy approach28 are developed by the European Commission with evident participation of EIOPA. In addition, EIOPA is able to exert pressure and significant influence on national supervisors by issuing guidelines on the third Lamfalussy level.29 In total, EIOPA, however, is restricted to its role as supervisors’ supervisor not issuing supervisory measures towards the insurers (except direct actions, in particular in emergency situations).30 Hence, day-to-day-supervision remains the task of the national supervisory authority, which in Germany is the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)).31 Still, both the insurer and the supervisory authority must succumb to the newly implemented system; nevertheless, the described outset allows to take a closer look at the interaction within this system with respect to the goal of achieving transparency—and to dare to glance at where the principle of transparency is heading within the newly implemented system. Solvency II and its implementation create a tendency for an absolute transparency of the insurer towards the supervisory authority.32 However, specifics of the law-making process must guarantee a high degree of transparency due to the special Lamfalussy approach,33 which was followed by the EU when establishing a new insurance supervisory law.34 This approach is divided into two levels: first, passing stipulations on core values, i.e. essential and often principle-based rules, by the

26

Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the Taking-up and Pursuit of the Business of Insurance and Reinsurance (Solvency II), OJ L 12/1. 27 Regulation (EU) no. 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision no. 716/2009/EC and repealing Commission Decision 2009/ 79/EC, OJ L331/48. In greater detail, see Keune (2015, pp. 139 ff.), Gal (2013, pp. 325 ff.) and Montalvo Rebuelta (2014, pp. 1 ff.). 28 With regard to the Lamfalussy process Rötting and Lang (2012, pp. 8 ff.). 29 See Wandt and Gal (2014, pp. 147 ff.). 30 Gal (2013, p. 346). 31 Information available via www.bafin.de. 32 Cf. Rudkowski (2016, p. 141). 33 Cf. Wandt and Sehrbrock (2011a, p. 929) and Wandt and Sehrbrock (2009, p. 5). 34 Transparency in insurance supervision was already a demand of the International Association of Insurance Supervisors (IAIS) when establishing Insurance Core Principles, Standards, Guidance and Assessment Methodology, available via www.iaisweb.org/page/supervisory-material.

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Council and the European Parliament,35 and, second, passing implementing measures by the Commission advised by EIOPA.36 This twofold process was marked by a deeply intense involvement of all groups concerned—including, e.g., all stakeholders. In addition, nearly all debates and decisions were made public and, thus, transparent (apart from an information overload). In principle, the following statements relate directly to German insurance supervisory law extensively harmonised by EU law without expressly and completely addressing the points of reference of EU law.

3 Scope of Research Abstractly, the principle of transparency can be (and often is) divided into three categories by varying addressees: transparency of the insurer’s activities towards the supervisory authority, towards specific policyholders and towards the public. One way or another, this analysis will focus on those supervisory instruments and provisions directed towards the aforementioned addressees. However, transparency can also be considered an issue for the insurer itself. In this scenario, the legislator and supervisory authority must ensure that drafted provisions, recommendations and demands are transparent themselves—otherwise, both must find themselves open to reproach for imposing inconsistent duties on the insurer. Yet, legal transparency shall not be given further attention throughout this analysis. The analysis is also limited to the core areas of insurance supervision, which spares the necessity of including the fundamentals of group supervision, conglomerate supervision and reinsurance supervision and collective consumer protection as a further task of supervision. Whether the European Solvency II Directive has increased system transparency through profound changes of substantial regulation on capital requirements of insurance companies and organisational aspects of companies—actually raising central questions—will not be addressed. According to Solvency II, capital adequacy (solvency) of the insurance company is determined by its individual risk profile under a market-based valuation of liabilities and capital resources (risk-based approach). It is a fact that this basic change of approaches

35

Cf. Pohlmann (2011, pp. 329 ff.) and Wandt (2012a, pp. 5 ff.). Cf. for details Artt. 290 f. AEUV; the Solvency II Directive in the version of the Omnibus II Directive (Directive 2014/51/EU of the European Parliament and of the Council of 16 April 2014 amending Directives 2003/71/EC and 2009/138/EC and Regulations [EC] no. 1060/2009, [EU] no. 1094/2010 and [EU] no. 1095/2010 in respect of the powers of the European Supervisory Authority [European Insurance and Occupational Pensions Authority] and the European Supervisory Authority [European Securities and Markets Authority], OJ L 153/1) and the EIOPA Regulation (Regulation [EU] no. 1094/2010 of the European parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority [European Insurance and Occupational Pensions Authority], amending Decision no. 716/2009/EC and repealing Commission Decision 2009/79/EC, OJ L 331/48). 36

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compared to the former implementation of solvency supervision under Solvency I has enabled insights and perspectives of the supervisory authority in regard to the adequacy of an insurance company’s capital resource to be viewed in a different light. However, further details cannot be considered. Transparency has also been created through structural requirements implemented by the revised system of governance, in particular when it comes to the individual company and supervisory authority. Only the mere essentials will be discussed in the following. In German Law, this is realised in compliance with Artt. 41 ff. Solvency II. Sec. 23 subsec. 1 sentence 1 VAG—under the heading of chapter 3 “Business Organisation” (Geschäftsorganisation)—stipulates the general demand to enact a valid, proper and reasonable (with respect to the complexity of the insurer’s business) organisational structure. In detail, this means a reasonable and transparent organisational structure connected with a clear allocation and separation of competences/responsibilities as well as a valid internal communication system. In addition, according to sec. 23 subsec. 3 VAG, the insurers must establish internal guidelines with regard to, e.g., risk management or outsourcing—and in order to enable the controlling of the execution of these guidelines and, hence, to increase (internal and controllable) transparency, these guidelines must be in written form. In accordance with Art. 41 para. 3 sentence 3 Solvency II, sec. 23 subsec. 3 sentence 3 VAG provides for an annual review, at the lowest. However, in contrast to the demands of Solvency II, the German legislator introduced an additional requirement in sec. 23 subsec. 5 VAG stipulating that arrangements on the structure and the procedure as well as the internal control system are to be documented transparently for third persons. These standards ensure the suitability of the organisational structure and the trustworthiness towards the supervisory authority and towards policyholders.

4 Stipulations on Transparency of the Insurers Concerning information, the VAG follows a two-level approach, which is sketched by the conceptual pair “supervisory reporting” and “public disclosure”. Both are aiming at transparency, however, thereby focussing on different addressees: the supervisory authority and the public. In this regard, the supervisory authority serves as a guard of those companies subject to supervision. The addressee “public” is comprised of insurance customers and contracting parties on one side and the “informed public” (informierte Öffentlichkeit) on the other side.37,38 The underlying intention of increasing transparency in business data and strategies—besides keeping the supervisory authority informed—is to augment market discipline and, therefore, maintain a high standard of financial stability. Not only must control be carried out by means of state supervision and sanctioning; it must also be brought

37 38

Heukamp (2016, § 5 para. 2). Grote and Schaaf (2012, p. 23).

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into line with the behaviour of market participants, which will increasingly be destined to realign by converging the consumer’s market decision to published company data and, thus, serve as a further corrective. In comparison with the VAG old version, public disclosure is no longer an exceptional duty of the insurer. Both supervisory reporting and public disclosure entail differentiated facets of reporting duties in general. Stipulations of the Solvency II Delegated Regulation are directly applicable and have priority over the German Insurance Supervisory Law, i.e. the VAG. Solely representing the European perspective, these will not be outlined in further detail. Generally, this chapter will focus not on the evaluation of the transparency benefit reasoned by substantive supervisory provisions but on the description and evaluation of reporting duties and on the instruments making non-compliance transparent (e.g. “naming and shaming”). In particular, regular reporting will be under scrutiny, whereas disclosure duties for specific situations (e.g. critical solvability problems of the insurance undertaking) will not be addressed.39

4.1

Duties to Report to the Supervisory Authority

Under the old law, secc. 55 ff. VAG40 stated key provisions of the insurer’s reporting duties. To begin with, the new law exceeds these provisions, at least in quantity, by establishing reporting and disclosure duties within the chapter on general reporting duties (Allgemeine Berichtspflichten), secc. 35 to 47 VAG. Not all duties to report and those duties connected (within this range of provisions or beyond) will be outlined in the following. The described duties are rather to be understood as a presentation of the necessary overview with regard to the issue of transparency. By law, reporting duties are categorised and divided into three subheadings: “Statutory Audit” (Abschlussprüfung, secc. 35 to 39 VAG), “Solvency and Financial Condition Report” (Bericht über die Solvabilität und Finanzlage, secc. 40 to 42 VAG) and “information to be provided for supervisory purposes” ( für Aufsichtszwecke beizubringende Informationen, secc. 43 to 47 VAG). Secc. 40 to 42 VAG will be dealt with later as these duties are primarily directed towards the public.41 In addition, sec. 27 VAG (dealing with the insurer’s report on own-risk and solvency assessment (ORSA)) and secc. 305 ff. VAG (providing for additional reporting duties) shall be addressed.

39

Cf. chapter VII (Insurance and reinsurance undertakings in difficulty or in an irregular situation; Artt. 136 to 144) of Solvency II; implemented in secc. 132 subsec. 2, 134 subsec. 1, 135 subsec. 1 VAG; in greater detail, see Sehrbrock (2016). 40 Specifically, sec. 55 subsecc. 2 and 3, secc. 55b, 55c, 59 VAG old version. 41 See Sect. 4.2.

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General Duty to Report, Section 43 VAG

Within the third subheading, the revised VAG is stipulating a blanket clause on information mandatorily provided by the insurer, sec. 43 subsec. 1 VAG: it refers to all of the information the supervisory authority is in need of in order to fulfil its responsibilities. In stating so, sec. 43 subsec. 1 VAG directly connects with sec. 294 subsec. 1 VAG, i.e. the blanket clause on the supervisory authority’s responsibilities in protecting policyholders and insureds/beneficiaries of insurance services. This link leads to a broadened duty of the insurer to inform the supervisory authority. Moreover, sec. 43 subsec. 2 VAG specifies this information duty in order to achieve efficiency in broadcasting information and, hence, efficiency in transparency. It requires information to be complete, current and precise (sentence 1) as well as submitted timely and in a comprehensible form (sentence 3). It must be noted that completeness of information should not be interpreted by word, meaning that even unrequired and insubstantial information must be submitted.42 In addition, it remains problematic that these criteria vary compared to Solvency II since Art. 35 para. 4 litt. b and c Solvency II stipulate slightly different requirements (calling for comprehensibility, reliability and relevance of information).43 These considerations are of particular evidence as Solvency II, according to scholars, demands full harmonisation,44 i.e. not implementing a higher or a lower standard but exactly the standard provided by the Directive. However, this grievance should be considered to be solved as sec. 43 subsec. 2 sentence 3 VAG requires the insurance undertakings to submit comprehensible information at least. Although “reliability” and “relevance” are prescribed explicitly, sec. 43 subsec. 2 sentence 1 VAG is to be interpreted to also encompass these qualifications when requiring complete, current and precise information. Furthermore, the principle-based approach45 of Solvency II is shining through these regulations as sentence 2 supplements the broadened duty of the insurer by a materiality test: the type, quantity and complexity of the specific insurer’s business activity are to be weighed, and the assumed risks are to be considered when determining which information must be submitted. Yet, this addition is not necessarily to be understood as a restriction of the information duty in favour of the insurer. From the wording, one could even argue that the insurer must quantitatively and qualitatively inform to a greater extent in order to provide comprehensible

42

Rudkowski (2016, p. 143). Additionally, Solvency II called for information to be accessible, complete in all material respects, comparable and consistent over time (lit. b). The German provisions are, therefore, deviating, see Rudkowski (2016, p. 143); in detail comparing the wording of Solvency II and VAG, Bürkle (2012, pp. 829 f.) and Grote and Schaaf (2012, p. 20). 44 Dreher and Lange (2011, p. 830). 45 RegE BT-Drucks. 18/2956, p. 251. 43

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information. In this regard, the legislator’s recital on the VAG is solely referring46 to Art. 35 para. 4 Solvency II, which does not give further advice.

4.1.2

Statutory Audits, Sections 35 to 39 VAG

Sections 35 to 39 VAG accommodate provisions with regard to statutory audits, whilst sec. 35 VAG functions as a quasi-general determination of the statutory auditor’s duties. The latter provision is mainly based on Art. 72 Solvency II but additionally continues the existence of further rules already set out in sec. 57 subsec. 1 sentence 1 VAG old version. Specifically, the statutory auditor must determine whether the insurer has complied with the listed disclosure duties and demands. This affects, e.g., specific intermediate disclosure duties with regard to intra-year changes of business operations and structure (prescribed in sec. 47 nos. 1 to 5 and 7 to 9). In addition, the statutory auditor must check the Solvency II balance sheet (Solvabilitätsübersicht) and report on the outcome of the latter, sec. 35 subsec. 2 VAG. As the statutory auditor already checks the annual accounts (commercial balance according to the Commercial Code), this allocation of competence reduces additional effort.47 However, Solvency II does not offer a legal basis in this regard.48 In addition to general controlling, the statutory auditor must report to the supervisory authority in case it gains knowledge of specific inconsistencies described by sec. 35 subsec. 4 sentence 1 nos. 1 to 5 VAG.49 Among these inconsistencies are, e.g., the impairment of the continuous functioning of the insurance or reinsurance undertaking, any non-compliance with Minimum Capital Requirements (MCR) and Solvency Capital Requirements (SCR) or even breaches of legal regulations or administrative provisions, which lay down the conditions governing authorisation as well as those which specifically govern the pursuit of the activities of insurance and reinsurance undertakings—given that such a breach is material. In relation to the supervisory authority, the statutory auditor is not allowed to invoke any duty of confidentiality which he owes towards his employer, sec. 35 subsec. 4 sentence 3 VAG. Yet, on the other hand, the auditor is only obliged to report inconsistencies of which he gained knowledge in the course of his work as regards the preparation of his report.50 Hence, the auditor appears to be but cannot be seen as a prolonged arm of the supervisory authority monitoring supervisory compliance of the undertaking.51 By way of, henceforth, providing for an exclusive special provision, sec. 321 Commercial Code (Handelsgesetzbuch (HGB)) is no longer of relevance when

46

RegE BT-Drucks. 18/2956, p. 251. RegE BT-Drucks. 18/2956, p. 247. 48 Dreher and Ballmaier (2012b, p. 84) and Bürkle (2016, pp. 24 f.). 49 The German legislator, thereby, narrowly adhered to the wording of Art. 72 para. 1 litt. a to e Solvency II, RegE BT-Drucks. 18/2956, p. 247. 50 Dreher (2019a, p. 785). 51 Dreher (2019a, pp. 785, 791). 47

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looking at insurance companies. What is more, the statutory auditor’s duties even apply to information on insurers having close links to the audited insurer or reinsurer, sec. 35 subsec. 4 sentence 2 VAG—hence, the provision establishes a broad scale of disclosure towards the supervisory authority. In addition to this stipulation, sec. 35 subsec. 4 sentence 3 VAG determines that such reports to the supervisory authority are not to be considered a breach of any confidentiality agreement. Prima facie, the reference to a confidentiality breach surprises since the wording of Art. 72 para. 2 Solvency II is slightly different and denies “liability of any kind” (or simultaneously in the German version of the Directive: “zieht [. . .] keine Haftung nach sich”).52 Furthermore, sec. 36 subsec. 1 sentence 1 VAG provides that the insurer must indicate the statutory auditor to the supervisory authority immediately. In supplementation, sec. 37 subsec. 1 sentence 1 VAG demands immediate submission of the annual accounts and the status report to the supervisory authority. Both instruments increase transparency and complete the picture the supervisory authority must necessarily look upon in order to draw reasonable consequences. Yet, the implementation, indeed, did not change the VAG in this regard. Content wise, provisions were generally left unaltered.53

4.1.3

Information for Supervisory Purposes, Sections 44 to 47 VAG

In addition to the aforementioned blanket clause, the VAG provides for additional stipulations on information to be provided for supervisory purposes, according to secc. 44 to 47 VAG. At a glance, those shall be outlined in the following. Pursuant to sec. 44 VAG, the supervisory authority is entitled to demand calculations including forecasts (Prognoserechnung) provided that those calculations are necessary for financial supervision. In detail, these forecasts may relate to expected operating results or the risk-bearing capacity of the insurer, sec. 44 sentence 2 VAG. In comparison with the old version of the VAG, expected operating results are no longer limited to the current accounting year.54 Since sentence 5 enables the supervisory authority to oblige the insurer to base its calculations on specific actuarial assumptions, the insurer may be required to conduct certain scenario analyses. In general, sec. 44 VAG does not establish additional solvability and financial reports since these are already stipulated by sec. 40 VAG.55 However, it serves as an instrument to complete the supervisory authority’s picture of the respective insurer.

52

Translations in direct comparison available via www.eur-lex.europa.eu/legal-content/EN-DE/ TXT/?uri¼CELEX:32009L0138&fromTab¼ALL&from¼en; see with regard to the legislator’s reasoning, RegE BT-Drucks. 18/2956, p. 247. 53 RegE BT-Drucks. 18/2956, p. 248. 54 RegE BT-Drucks. 18/2956, p. 252. 55 Which will be dealt with in Sect. 4.2.1.

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As an exceptional rule, sec. 45 VAG provides that, besides national duties (as well as duties based on the implementation of EU directives) and under specific circumstances, BaFin is entitled to release an insurer from its reporting duties if those duties stem from delegated regulations or technical implementation standards in accordance with Art. 35 paras. 9 and 10 Solvency II. In order to keep the supervisory authority up to date on changes within the insurer’s business operation or structure, sec. 47 VAG stipulates an immediate duty of the insurer to inform the supervisory authority about intra-year changes. The provision, thereby, displays the supervisor’s all-time dependence on information and complements the general reporting duty under sec. 43 subsec. 1 VAG. In turn and if needed, it puts the supervisory authority in a position to react instantly to changes or to preventively investigate.

4.1.4

Report on Own-Risk and Solvency Assessment (ORSA), Section 27 VAG

Based on Art. 45 Solvency II, according to sec. 27 VAG, insurers are obliged to have, as an integrated part of their business strategy, a regular practice of assessing their overall solvency needs with a view to their specific risk profile (Own-Risk and Solvency Assessment (ORSA)). The results of each assessment must be reported to the supervisory authority. The statutorily postulated documentation of the ORSA process primarily serves transparency within the company itself. In this regard, the interpretative decision (Auslegungsentscheidung) of BaFin states that internal reporting serves the fixation of essential information of ORSA for both the executive management and the internal communication regarding important implications and conclusions drawn from ORSA.56 On the other hand, the ORSA report is an important source of information for the supervisory authority.57 From the perspective of the supervisory authority, the report does not only display evident deviations from the quantitative capital requirements. The report, additionally, forces the insurance undertaking to give account to the supervisory authority of the consequences (derived from the perceptions of the conducted ORSA) of capital management, business plans and the development and conception of new products (future perspective) and of the effects of these plans on solvability and technical reserves (versicherungstechnische Rückstellungen).

4.1.5

Additional Supervisory Reporting, Sections 305 and 306 VAG

The supervisor has various rights to ask for disclosure exist. Pursuant to sec. 305 VAG, the supervisory authority is entitled to demand specific information in

56 57

BaFin (2015) and EIOPA (2015). Dreher (2015, p. 16).

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addition to the information already provided in compliance with secc. 35 to 47 VAG. This possibility was formerly incorporated in sec. 83 subsec. 1 sentence 1 nos. 1 and 1a as well as sec. 83b VAG old version. Section 305 VAG still emphasises the option of demanding the submission or transmission of GCI, insurance tariffs, blank forms or other means of communication with the policyholders. This right of the supervisory authority to information also affects, e.g., insurance agents and brokers, persons exercising outsourced functions and even members of the company’s supervisory board, sec. 305 subsec. 2 VAG. This expansion of the group of informants shows that the possibilities for the supervisory authority to gather information have been broadened during the implementation of Solvency II. In fact, sec. 306 subsecc. 5 to 7 VAG additionally grants the supervisory authority the right to search the company and to seize evidence. Such amplification was required by the German legislator by Art. 34 paras. 1 and 3 Solvency II. One of the purposes of Solvency II, which is increasing transparency, becomes apparent in the presence of this enlargement of power. Yet, when looking at the wording of Art. 34 para. 3 Solvency II (requiring “all information”), it also becomes apparent that legal transparency suffers with respect to indefinite provisions.58

4.2

Public Disclosure

As an important instrument of increased market transparency, the revised German insurance supervisory law requires insurance undertakings to publish certain information (annually or in the meantime). Van Hulle59 used vivid words to describe this system of public disclosure: “The idea is simple: insurers have to stand naked in front of the supervisors. In front of the public they can wear swimming trunks and we decide how big they ought to be.”60 Reporting requirements have already stirred up massive criticism shortly after the publication of Solvency II. Disclosure requirements particularly towards the general public are regarded as disproportionate and unreasonable. From a purely practical point of view, the overwhelming majority of addressees may not have cognizance of the information or at the very least may not evaluate the given information adequately, but either way, they will blithely disregard. Even if reports are to be rendered “generally intelligible” (sec. 40 subsec. 2 VAG), the “average policyholder” is probably neither able nor willing to be concerned with a report on the solvency situation and financial position of an insurance company and finally deduce fundamental principles and methods.61 Yet, the actual addressee is not the average

58

See Dreher (2015, p. 384). Head of Unit Insurance and Pensions of the European Commission—Internal Market DirectorateGeneral. 60 Cited in Fromme and Krieger (2011). 61 Grote and Schaaf (2012, p. 17). 59

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policyholder but the professional public, functioning as an “information-intermediary”.62 This differentiation is particularly indicated by Art. 292 para. 2 Solvency II, requiring the solvency and financial condition report to include a clear and concise summary that shall be understandable to policyholders and beneficiaries. Furthermore, it is (being) criticised that the effort and objective of the information are disproportionate. Small and medium-sized companies, in particular, may be burdened disproportionately and excessively.63

4.2.1

Solvency and Financial Condition Report (SFCR), Section 40 VAG

In order to promote market transparency, insurance undertakings must report on their solvency and financial condition (at least annually), sec. 40 subsec. 1 sentence 1 VAG. This duty to report is, at first instance, directed to the public. Solely in a second step, the report must be submitted to the supervisory authority as well. Additionally, Art. 300 para. 1 Solvency II Delegated Regulation requires the insurance undertaking to publish the report 14 weeks after the expiry of the undertaking’s financial year (and to submit it to the supervisory authority immediately afterwards, Art. 300 para. 2 Solvency II Delegated Regulation). Details with regard to which information is necessarily incorporated within the report, e.g. MCR and SCR, follow from chapter XII section 1 (Solvency and financial condition report (SFCR): structure and contents) Solvency II Delegated Regulation64 and from secc. 40 ff. VAG (implementing Artt. 51 ff. Solvency II). These details will not be outlined in the following. The aim to promote market transparency—as an addition to transparency towards the supervisory authority— shall be accomplished by a description within the SFCR, e.g., of the business and the performance of the insurance undertaking, the system of governance and an assessment of its adequacy for the risk profile of the undertaking, the risk exposure, concentration, mitigation and sensitivity (separately for each category of risk) etc. It is to be assumed that smaller insurers will probably face difficulties concerning infrastructure and staff capacity.65 Although this requirement was implemented mandatorily, German doctrine had its doubts as to whether this duty of the insurer is suitable and necessary to achieve additional protection of the policyholder.66

62

In further detail, see Dreher (2015, pp. 389 f., 423). Djarayeri (2014, note 1). 64 Artt. 290 ff. Solvency II Delegated Regulation. 65 Armbrüster (2015, p. 429). 66 Grote and Schaaf (2012, p. 23 f.). 63

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Exceptional Non-disclosure, Section 41 VAG

Yet, in certain circumstances, the supervisory authority is entitled to grant exceptions for publishing specific information. The German legislator drafted this possibility as a general measure of the supervisory authority, supplemented by restrictions with regard to information being published in any case. This affects, e.g., capital management (described by sec. 40 subsec. 2 sentence 367 no. 5 VAG), application of internal models (described by sec. 40 subsec. 4 sentence 2 VAG), non-compliance with MCR or significant non-compliance with SCR during the reporting term (sec. 40 subsec. 5 VAG). When granting exceptional non-disclosure, the supervisory authority shall be guided by the principles laid down in sec. 41 subsec. 2 VAG. Accordingly, non-disclosure is granted if otherwise competitors of the insurance undertaking would gain significant undue advantage or if an insurer is bound to secrecy or confidentiality by obligations to policyholders or other counterparty relationships. Furthermore, insurers shall make a statement in their SFCR and shall state the reasons if non-disclosure of information is permitted by the supervisory authority, sec. 41 subsec. 1 sentence 2 VAG (Art. 53 para. 2 Solvency II).

4.2.3

Updates and Additional Voluntary Information, Section 42 VAG

In addition, the report must be updated in case of any major development significantly affecting the relevance of disclosed information, sec. 42 VAG. Illustratively, sec. 42 subsec. 1 sentence 2 lists examples of such major developments. These are, for instance, non-compliance with MCR or significant non-compliance with SCR provided that the supervisory authority considers that the insurer will not be able to submit a realistic short-term finance scheme or, respectively, that the supervisory authority does not obtain a realistic recovery plan in time. In this respect, the German legislator adapted the stipulations of Art. 54 para. 1 Solvency II in total. However, as the examples listed are not exclusive, a duty of disclosure may apply in comparable cases as well. Within the recitals attached to sec. 42 VAG, the German legislator already pinned it down by stating that developments brought to the knowledge of the addressees of the SFCR would also evidently alter the assessment by the latter and, therefore, should be disclosed.68 Section 42 subsec. 1 sentence 3 VAG obliges insurance undertakings not complying with MCR or SCR to immediately publish the extent of non-compliance, along with an explanation of its origin and consequences, including any remedial measure taken.69 This seems even more challenging for insurance undertakings, considering that this duty is nourished with several indefinite legal terms. Moreover,

67 The original version of the VAG of 1 April 2015 (BGBl. I, pp. 434 ff. [p. 457]) referred to sentence 2 no. 5—yet, this was an editorial mistake. 68 RegE BT-Drucks. 18/2956, p. 251. 69 See also Art. 54 para. 1 sentence 3 and 5 Solvency II.

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the VAG as well as Solvency II do not require to use a specific medium for publications. Hence, insurers would be free to choose a medium they consider appropriate. This harboured the danger that an insurer might position these updates in a non-prominent place at their home page, thereby infringing the purpose of informing the public of major developments significantly affecting the relevance of the information disclosed. Consequently, Art. 301 para. 1 Solvency II Delegated Regulation generally requires insurance undertakings to publish its SFCR on its website, as does Art. 302 para. 2 Solvency II Delegated Regulation with respect to updates of said report. Article 54 para. 2 Solvency II explicitly allows an insurance or a reinsurance undertaking to “disclose, on a voluntary basis, any information or explanation related to their solvency and financial condition which is not already required to be disclosed in accordance with Articles 51 and 53 and paragraph 1 of this Article”. Where insurance and reinsurance undertakings publicly disclose, in accordance with Art. 54 para. 2 of Directive 2009/138/EC, any information or explanation related to their solvency and financial condition, whose public disclosure is not legally required, these undertakings shall ensure that such additional information is consistent with any information provided to the supervisory authorities pursuant to Art. 35 of the Directive (Art. 298 Solvency II Delegated Regulation).

4.2.4

Additional Reporting Duties in the German Commercial Code (HGB)

Germany met its legislative European obligations when implementing the Non-Financial Reporting Directive (CSR Directive)70 in the first half of 2017.71 This Directive engages in promoting the distribution of information on non-financial and diverse matters. The Directive has prompted the German legislator to amend and modify parts of the HGB, which has also led to significant changes for insurance companies. The CSR Directive aims to increase relevance, consistency and comparability of the information disclosed by certain large companies throughout the EU.72 With regard to relevant provisions on the non-financial statement, the newly implemented lex specialis addressing insurance companies in sec. 341a subsec. 1a

70

Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, OJ L 330/1. 71 Entering into force on 18 April 2017 by way of release in BGBl. I 2017, pp. 802 ff.; EU member states were actually required to introduce the provisions of the Directive by 6 December 2016. 72 Detailed with regard to the development of CSR and the CSR Standards Spießhofer (2016, § 11 paras. 10 ff.); Art. 1 requires large undertakings to “include in the management report a non-financial statement containing information to the extent necessary for an understanding of the undertaking’s development, performance, position and impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters”.

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sentence 3 HGB refers to general requirements in sec. 289b subsecc. 2 to 4 HGB as well as secc. 289c to 289e HGB.73 In general, those very same provisions clearly went beyond consolidating exclusively formal reporting requirements. They ultimately lead to the substantive establishment of pre-emptive operational and organisational duties of the executive board as well as to extended auditing duties of the supervisory board. Finally, there are numerous overlaps between new requirements and existing requirements of disclosure specific to the insurance market. To provide more detail, the disclosure of required information by the insurance companies can be achieved in three ways, whereby the choice is up to the insurance company: 1) Integration of a non-financial declaration into a separate section of the management report (sec. 341a subsec. 1a sentence 1 HGB) 2) Preparation of a separate non-financial report and disclosure, along with the management report in the Federal Gazette (Bundesanzeiger) (sec. 341a subsec. 1a sentence 3 HGB in connection with sec. 289b subsec. 3 sentence 1 no. 2 lit. a and sec. 325 subsec. 1 sentence 2 HGB) 3) Preparation of a separate non-financial report and publishing on the insurance company’s website (sec. 341a subsec. 1a sentence 3 HGB in connection with sec. 289b subsec. 3 sentence 1 no. 2 lit. b HGB) In the light of an easy access by the public to the report, it is argued that a publication on the home page of the respective insurer is favourable since nearly all information directed towards the public would be generally accessible at one uniform medium.74 Furthermore, according to sec. 341a subsec. 1a HGB, a non-financial statement of insurance companies, including information on certain aspects of corporate social responsibility (CSR aspects), must be disclosed prospectively. The disclosure also includes a characterisation of the business model as well as information on concepts with regard to CSR aspects, their results and the due diligence processes applied.75 Yet, transparency is also considered to have its limits. Consequently, sec. 289e subsec. 1 HGB76 allows insurance companies, in certain well-defined and narrowly limited exceptional situations, to not disclose disadvantageous information on future developments or aspects that are part of current negotiations. However, this omission cumulatively necessitates the objectively evaluated possibility of substantial detriments and the maintenance of the comprehensibility of the picture drawn of the insurance company by the report, sec. 289e subsec. 1 nos. 1 and 2 VAG.

73

See generally and more detailed with regard to the mandatory disclosure of non-financial information in the insurance sector Bürkle (2017, pp. 717 ff.). 74 Bürkle (2017, p. 719). 75 Bürkle (2017, p. 720). 76 Cf. Bürkle (2017, p. 724).

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Naming and Shaming

The instrument of “naming and shaming” focusses on denouncing insurers (or their managing directors) in case of specific infringements rather than providing general information on every insurer’s undertakings and solvability. This is why “naming and shaming” is often equated to stigmatising certain legal (or natural) persons. In general terms, the instrument can be described as publicly announcing infringements and hitherto attached sanctions by public authorities.77

4.3.1

Outline of Section 319 VAG

Section 319 (subsec. 1) VAG entitles the supervisory authority to publish any imposition of fines (Bußgeldverhängungen) and final measures (bestandskräftige Maßnahmen) on its home pages. This instrument is vividly described as “shaming”. It should be clear that “shaming” is not primarily aimed at the sanctioning of respective insurers—though perceived punitively. In fact, it shall have a preventive effect on the insurers, i.e. motivating them to comply with regulatory provisions.78 However, the perception of a punitive character of the provision (and, thereby, the preventive effect) is even enlarged when taking into account the addressees of sec. 319 VAG: this provision does not only affect the insurer (as a legal entity); managing directors (Geschäftsleiter) responsible for the infringement claimed by sec. 319 VAG can also be named when publishing.79 The effect on the respective person is even higher since he/she must comply with personal reliability criteria pursuant to sec. 24 subsec. 1 sentence 1 VAG. In a Guidance Notice for assessing the Professional Qualifications and Reliability of Managers in accordance with the VAG (and other acts), BaFin defines reliability whilst considering the personal and professional conduct of the managing director. Among the latter, the supervisory authority will have a closer look at regulatory aspects, specifically at offences and misdemeanours in connection with operations within insurance companies.80 Hence, a person whose name was published will most likely face difficulties to still comply with these criteria. In addition, the legislator strove to avoid any differentiation between situations described by sec. 319 VAG and comparable situations within the financial market sector, see sec. 60b German Banking Act (Kreditwesengesetz (KWG)). Hence, the German legislator aimed to align the provisions within the financial market sector

77

Cf. Wendt (2016, p. 1277). According to the legislator’s reasoning, infringements shall be prevented by actively applying and enforcing sanctions prescribed by law, RegE BT-Drucks. 18/2956, p. 295 (“gesetzlich vorgesehene Sanktionen aktiv angewandt und vollstreckt werden”). Differently and in substance rejecting Rudkowski (2016, p. 201). 79 See also Wendt (2016, p. 1280). 80 BaFin (2016b, p. 16). 78

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and the insurance sector.81 Unexpectedly, sec. 319 VAG drafted even stricter provisions than, e.g., those of the SSM Framework Regulation.82 With regard to the financial market sector, solely impositions of fines are considered when naming the respective entities—and, in addition, measures against managing directors remain unconsidered.83 The provision is even more remarkable as Solvency II does not call for “naming and shaming”, nor do delegated regulations84 hitherto. Despite requiring full harmonisation,85 the German legislator created these provisions whilst implementing Solvency II86 and stated that this addition would be necessary since any differentiation between the insurance and the banking sector in this regard would not be justifiable.87 In consequence, the question still is whether this is in conformity with EU law.88

4.3.2

Interpretation of Section 319 VAG

Section 319 VAG differentiates between named publishing (subsec. 1) and anonymous publishing (subsec. 2). Pursuant to sec. 319 subsec. 1 VAG, the supervisory authority is not only entitled but also supposed to publish any impositions of fines and final measures naming the insurer or managing directors on its home pages. Therefore, subsec. 1 forms a directory provision89 (Soll-Vorschrift—meaning that the supervisory authority must follow this approach unless it deems it inappropriate for good reasons, resulting in a bounded discretion on the part of the supervisory authority),90 whereas subsec. 2 on anonymous publishing—based on its wording— considers a duty of the supervisory authority to compulsorily operate the way

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RegE BT-Drucks. 18/2956, p. 295. Regulation (EU) no. 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM Framework Regulation), OJ L 141/1. 83 Wendt (2016, p. 1279). 84 Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the Taking-up and Pursuit of the Business of Insurance and Reinsurance (Solvency II), OJ L 12/1; Commission Delegated Regulation (EU) 2016/467 of 30 September 2015 amending Commission Delegated Regulation (EU) 2015/35 concerning the calculation of regulatory capital requirements for several categories of assets held by insurance and reinsurance undertakings, OJ L 85/6. 85 Dreher and Lange (2011, p. 830). 86 Wendt (2016, p. 1279). 87 RegE BT-Drucks. 18/2956, p. 295. 88 Arguing in favour of the conformity Armbrüster and Böffel (2019, pp. 1887 f.). 89 With respect to the term “directory provision” in comparison with “mandatory provisions”, see instructively Tiwari (2015). 90 RegE BT-Drucks. 18/2956, p. 295. 82

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described thereafter.91 Needless to say, the requirements set out in subsec. 2 must still be evaluated by the supervisory authority—thereby, granting discretion with regard to the interpretation of requirements. However, it is argued that the interests of the policyholders and the expert public regularly outweigh the insurer’s interest of not being pilloried.92 According to the legislator‘s reasoning, infringements shall be prevented by actively applying and enforcing sanctions prescribed by law.93 However, its reasoning remains silent with regard to an explanation as to why subsec. 1 is granting discretion to the supervisory authority (albeit minimised). Following the clear stipulation to actively apply and enforce sanctions and the assumption that only an unexceptional “shaming” makes the demanded impact, one would have expected the provision to be drafted mandatorily. One reason may be the tremendous effect on the reputation of an insurer (or its managing director), which can be considered when evaluating whether a measure provided by sec. 319 subsec. 1 VAG shall be taken. The anonymous announcement, provided by subsec. 2, must be understood as a mandatorily required exception to the general principle of subsec. 1 to name the insurer (or the managing director). Hence, subsec. 2 is not enumerating additional situations in which publishing shall or should follow an imposition of a fine or a final measure. It rather is listing circumstances with unreasonable (irreparable) impact on persons, insurers or the financial markets. In detail, subsec. 2 sentence 1 demands anonymous announcement where a natural person’s right of personality would be violated or, for other reasons unreasonable (no. 1), the stability of the financial markets would be endangered (no. 2) or the damage to the involved natural and legal persons would be unreasonably high (no. 3). With regard to no. 2 and no. 3, the supervisory authority is entitled to postpone a named publishing until reasons for an exceptional anonymous announcement no longer exist, sec. 319 subsec. 2 sentence 2 VAG. Lastly, announcements must be erased after 5 years at the latest, sec. 319 subsec. 3 VAG. This subsection simultaneously offers the possibility to erase announcements even earlier. The requirements to exercise this discretion are not stipulated by provision nor by the legislator’s reasoning on sec. 319 VAG. If personal data are affected, the announcement must be erased as soon as possible (sec. 319 subsec. 3 sentence 3 VAG).

4.3.3

Controversies

The concept of “naming and shaming” did not remain uncontested in doctrine. It is even doubted whether there is a specific (private or public) interest in exposing

91

See Sect. 4.2.1. Schöps (2018, § 319 para. 8). 93 RegE BT-Drucks. 18/2956, p. 295. 92

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(shaming) insurers operating contrary to law.94 This is even more problematic when juxtaposing the lack of interest to the tremendous effect on a company’s reputation or the effect on private lives of exposed individuals. Yet, as outlined before,95 the instrument of “naming and shaming” should be evaluated not according to its punitive effect but by virtue of its preventive character as initially intended.96 Subsequently, this dissuasive effect is even greater the more potential reputational damage increases. However, criticism is justified when considering that the effect of exposing an insurer is immeasurable and mainly depends on the perception of the public.97 From the very start, the concrete impact lies outside the sphere of influence of the supervisory authority98 and might lead to a loss of trust towards the insurance companies.99 In the light of this, it does not seem plausible to mandatorily take the supervisory authority to task, as provided by sec. 319 subsec. 1 VAG. However, the implication of this drafting is diminished as the supervisory authority is obliged to anonymously publish under certain circumstances (sec. 319 subsec. 2 VAG) as well as to balance the affected interests in the first place (sec. 319 subsec. 1 last half sentence VAG). It should always be considered that the damage caused by exposing companies (or managing directors) most likely cannot be reversed.100 When evaluating interests, the supervisory authority should take into account the principle-based approach of the revised insurance supervisory law and the difficulties caused thereby on the part of the insurers to properly comply with the stipulations of the insurance supervisory law.101 Finally, it remains unpredictable how this instrument will be applied in practice and particularly how the supervisory authority will deal with the additional qualification to solely “name and shame” if this is necessary to remove or prevent grievances. Other examples show that the discretion of the supervisory authority with regard to the “if” on exposing insurers could be even more restricted than within the VAG: the Regulation on key information documents for Packaged Retail and Insurancebased Investment Products (PRIIP),102 as a directly applicable regulation in Germany, provides in Art. 29 para. 1 that a “decision, against which there is no appeal, imposing an administrative sanction or measure for infringements referred to in Article 24 (1) shall be published [. . .] on their official website without undue delay

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Rudkowski (2016, p. 201). See Sect. 4.3.1. 96 RegE BT-Drucks. 18/2956, p. 295. 97 Wendt (2016, p. 1278). 98 Wendt (2016, p. 1278). 99 Armbrüster and Böffel (2019, p. 1888). 100 Cf. RegE BT-Drucks. 18/2956, p. 295. 101 Cf. Wandt (2007, p. 476). 102 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), OJ L 352/1. 95

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[. . .]”. The German version of PRIIP, additionally, undoubtedly points towards a publication without discretion as to the “if” of the publication (“werden [. . .] bekannt gemacht”).103 This even comprises personal data (Art. 29 para. 1 sentence 4 PRIIP Regulation) but finds its constitutional boundaries where such publication would be disproportionate.104 Contrary to sec. 319 VAG, Art. 29 para. 1 PRIIP Regulation requires that the person on whom the sanction or measure was imposed has been informed of that decision before publishing the decision.

5 Stipulations on Transparency of the Supervisory Authority Towards the Public 5.1

Blanket Clause on Notifications by the Supervisory Authority

As a general transparency-achieving measure, the supervisory authority is requested by sec. 318 subsec. 1 VAG to publish notifications annually, first, on the situation of insurance companies that it is supervising and, second, on its perceptions within the insurance sector. This provision was part of the old law as well, set out in sec. 103 subsec. 1 VAG old version. In order to fulfil these requirements, the supervisory authority depends on the information provided by the insurers—thus, the addressee of sec. 318 VAG is the supervisory authority itself. In particular, this is in line with the stipulation in Art. 31 para. 1 Solvency II. With regard to the wording, it surprises that the supervisory authority is obliged to publish its perceptions (Wahrnehmungen). In addition, the supervisory authority publishes, in principle, every necessary statute or guideline possibly of interest to the policyholders and the supervisory authority’s purposes and functions, sec. 318 subsec. 2 VAG. This amendment to the former provision is due to Art. 31 para. 2 Solvency II and sec. 103 subsec. 2 VAG old version, which merely addressed this issue in an abstract manner. The third subsection of sec. 318 VAG focusses on the medium of publishing: whereas the old provision (sec. 103 subsec. 3 VAG old version) emphasised the possibility of the supervisory authority to publish information by way of electronic media, according to the new provision the publications in sec. 318 subsecc. 1 and 2 VAG must be accessible in one single electronic address. This means that publishing electronically is now mandatory.105

103 Also available via https://eur-lex.europa.eu/legal-content/DE/TXT/HTML/? uri¼CELEX:32014R1286&from¼DE. See also Wendt (2016, p. 1283). 104 In detail Armbrüster and Böffel (2019, p. 1889). 105 RegE BT-Drucks. 18/2956, p. 295.

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Publishing of Complaint Statistics by the Supervisory Authority

The former provision of sec. 103 VAG old version served as the basis of publishing complaint statistics (Beschwerdestatistiken) by the supervisory authority. Already in 1995, the Oberverwaltungsgericht (OVG) Berlin decided that the supervisory authority was obliged not only to publish these statistics annually but also to disaggregate the statistics in a certain manner.106 Ever since, the published data have included the amount of received and processed complaints and are disaggregated according to insurance companies and classes of insurance (Versicherungssparten).107 These figures enable the supervisory authority to assess the conduct of the specific insurer, and they, additionally, enable a potential policyholder to base its decision to buy an insurance policy on the insurer’s complaint rate (calculated by comparing the amount of policies and the amount of complaints).108 In consequence, the complaint statistics serve as a reliable source for evaluating insurers by means of transparency. However, the published statistics also pursue the improvement of the image of the insurance sector as insurers are being numerously accused by the public and media, stating that insurers were insensitive and deliberately stalling coverage.109 With respect to the effectiveness of transparency, it must be borne in mind that the complaint rate alone is not capable of drawing a complete picture of the insurer’s business conduct. For example, the statistics do not contain specific information as to the reasons of the complaints or the success rates—these types of information are solely published in view of the insurance industry in total. In addition, sec. 51 subsec. 4 no. 1 sentence 4 German Regulation on Insurer’s Accounting Principles (Verordnung über die Rechnungslegung von Versicherungsunternehmen (RechVersV)) limits the duty to communicate disaggregated complaint statistics to the supervisory authority: in cases in which the annual gross premium income is not exceeding the amount of 10 million euros (per groups of classes, classes or types of insurance). Hence, the statistics published by BaFin in 2014 exhibited 88 no-disaggregating cases. In summary, the informative value of the statistics published by BaFin must seriously be called into question as the mere comparison of the complaint numbers of fully and limitedly obliged insurers fails.110 As already pointed out, the newly revised body of insurance supervisory law that is enriched (or one may say rendered complex) by acts of the EU and the interaction with EIOPA also affects the supervisory authority’s task to publish complaint 106

OVG Berlin, Versicherungsrecht (VersR) 1995:1217 (p. 1219) based on a media's constitutional right to information. 107 Hohlbein and Coors (2016, p. 694). 108 Hohlbein and Coors (2016, p. 694). 109 Hohlbein and Coors (2016, p. 700). 110 See for an illustrative example, Hohlbein and Coors (2016, p. 694).

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statistics. With regard to the aforementioned, the German supervisory authority was led to demand additional information from the insurers when stating “BaFin requires information on an annual basis concerning the number of complaints, the status of the processing and duration, the causes for complaint and the success rate in order to determine whether the insurance undertakings are able to appropriately handle their complaints broken down by class of insurance”.111 Although with this requirement BaFin aims to identify “irregularities in complaints-handling” and to implement “the necessary supervisory measures”,112 it also increases transparency towards the public—yet, this aspiration can solely be accomplished in case BaFin publishes the additional information collected from the insurers. In turn, policyholders are not entitled to assess particularly this information (which is to be considered confidential) since sec. 3 no. 4 Freedom of Information Act (Informationsfreiheitsgesetz (IFG)) in connection with sec. 309 para. 1 VAG swears BaFin to secrecy as it is entrusted to safeguard information provided by the insurance industry.113 In addition, the stipulations on what sort of and how information must be provided by the insurers are offering a wide discretion to insurers, in particular in terms of definition. Terms like “complaint” (Beschwerde) or “complainant” (Beschwerdeführer) must at least be defined within the insurer’s report.114 On the contrary, other important terms such as “success of a complaint” are neither defined by statute, nor do the insurers need to provide a definition.115 Policyholders might particularly consider the success rate to be of informative value with regard to the insurer’s general conduct towards its policyholders—although the comparability of the numbers is at least limited.116 It comes with no surprise that 170 out of 593 reports from insurers necessitated further inquiries of BaFin—most of them due to the reason that not even the minimum requirements were fulfilled.117 In total, the extensive complaint statistics are to be welcomed in the light of transparency. However, there are several screws—out of which only a few have been outlined—that could be easily adjusted even de lege lata.

5.3

Protection of Confidential Information

Shortly, the other side of the coin shall be looked upon: when publishing information, the supervisory authority is required to protect confidential information. Article

111

BaFin (2013). BaFin (2013). 113 Argued by Hohlbein and Coors (2016, p. 697). 114 BaFin (2013). In addition, the insurers can seek guidance within introductory remark no. 7 of the EIOPA Guidelines on Complaints-Handling by Insurance Undertakings, see EIOPA (2012). 115 Dorsel and Scheer (2015, p. 21) and Hohlbein and Coors (2016, p. 698). 116 Dorsel and Scheer (2015, p. 21). 117 Dorsel and Scheer (2015, pp. 20 f.). 112

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31 para. 1 Solvency II, therefore, requires the protection of confidential information and the accountability of the supervisory authority.118 Both components were known to German insurance supervisory law even before the revision in 2016. For the proper implementation of the Solvency II requirements, the German legislator explicitly stipulated specific requirements as to data protection in sec. 309 VAG. With respect to content, sec. 309 VAG renders “information” confidential (likewise done by its predecessor sec. 84 VAG old version). Consequently and in line with doctrines, “information” must be interpreted in the light of the provision’s purpose, which entails protection against detriments arising from passing on confidential information to the public or third persons.119 Hence, not only facts are confidential but also valuations or conclusions drawn from these facts.120 In conclusion, the German insurance supervisory law is protecting confidential information in a rather broad sense. Although granting the supervisory authority the right to disclose confidential information in specific circumstances, Art. 315 Solvency II Delegated Regulation is in line with this maxim as it solely allows to disclose such information in summary or aggregate form (such that individual undertakings or groups cannot be identified). Accordingly, the extension of information duties of insurance undertakings and the higher level of transparency within the VAG are at least not running into danger of being exposed to the public.121

5.4

Predictability of Measures of the Supervisory Authority

Another aspect of transparency is the predictability of measures of the supervisory authority. Until the revision of the VAG, BaFin was often inquired by specific insurers with regard to the interpretation of a certain provision or the admissibility of the insurer’s investments or business structure. In answering by means of a published decision, the supervisory authority made a decision not with respect to the insurer asking the question but rather with respect to each and every insurer facing the same situation by way of so-called circular letters. This way of concretising legal statutes has developed over a longer period of time. Under Solvency II, the effect on transparency caused by self-binding decisions of the supervisory authority is diminished because of the principle-based approach. In consequence, insurers can no longer draw completely binding conclusions from these decisions with regard to their individual situation.122 Since reasonableness and the interpretation of other indefinite legal terms are now rather individual questions, the insurers, in turn, must provide the supervisory

118

See also Art. 315 Solvency II Delegated Regulation. Dreher (2018, § 309 para. 23). 120 Dreher (2018, § 309 para. 23). 121 Rudkowski (2016, p. 153). 122 Descriptive with regard to BaFin’s perspective, Bork (2018, pp. 62 ff.). 119

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authority with detailed information in order to enable the supervisory authority to evaluate.123 In order to preventively protect themselves, insurers might even feel obliged to substantiate their operational decision to the supervisory authority by providing sufficient conclusive documentations. The method of making the background of internal operational decisions visible to the supervisory authority is to be seen as one component of the revision’s effect of initiating a deeper dialogue between the insurers and the supervisory authority. This depth of communication is to be welcomed—yet, the advantage of this effect stays unilateral as BaFin gains more insight and a better understanding of the decision-making processes of the insurers, but the insurers’ practical need of legal certainty may be satisfied to a lesser extent than before the revision of the VAG.

5.5

Reporting as a Self-reinforcing Tendency

Half a year after the implementation of Solvency II within the VAG, BaFin reported on its perceptions of transparency against the background of the first figures available. The statement regards compliance of all insurers with SCR. Yet, BaFin lately observed an evident decrease of SCR quotas specifically in the field of life insurance due to the unfriendly capital market environment.124 Such reporting of BaFin is another example of transparency and, therefore, highly valuable. When evaluating the benefit of giving insights and facilitating transparency, the self-reinforcing tendencies of such publishing should be taken into account as well. In particular, the statement on decreasing SCR quotas could be a reason for the continuation of this decrease since the public is, specifically in life insurance, in fear of expected returns. Thus, under certain market conditions, the effect could be a shortage of new life insurance contracts or a higher amount of termination of contracts by the policyholders.

6 The Role of EIOPA When Pursuing Transparency At the European level, EIOPA also depends on information in order to ensure a proper insurance single market within the EU. Yet, EIOPA receives its information not directly from insurers but from the national supervisory authorities, e.g. BaFin. This issue is particularly important with regard to sec. 329 VAG, which stipulates that the German supervisory authority shall—as much as possible—take into account the guidelines and recommendations of EIOPA.125 Furthermore, BaFin as

123

See Sect. 4. BaFin (2016a). 125 Such are published in large number at https://www.eiopa.europa.eu/guidelines-and-recommen dations_en. 124

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well as its national equivalents in other EU member states shall confirm whether they comply or intend to comply with a guideline or recommendation within 2 months upon its issuance, Art. 16 para. 3 sentence 2 EIOPA Regulation.126 In case a national supervisory authority does not comply or does not intend to comply, it shall inform EIOPA and state its reasons. This model of inter-regulatory approach, which trades under the name “comply or explain”, is a good approach to create transparency, fostering the convergence of regulatory practice in the EU, to prevent regulatory arbitrage and to promote equal conditions of competition. However, EIOPA has already been criticised for misinterpreting its non-committal role by assuming the role of a legislative authority.127 The result of this development is inestimable supervision leading to anticipatory obedience by undertakings, which promotes a further dilution of the principle-based approach of Solvency II.128 Nonetheless, EIOPA—in accordance with Art. 1 para. 6 sentences 2 and 3 EIOPA Regulation—is equipped with a target definition of consolidating consumer protection as well. Article 9 EIOPA Regulation states that EIOPA shall take a leading role in promoting transparency, simplicity and fairness in the market for consumer financial products or services across the internal market. According to Gabriel Bernardino (Chairman of EIOPA), the need for consumer protection should ultimately be measured according to the supervisory standard of transparency—as a negation of bureaucratic formalism in the EU’s political life—in order to eventually guarantee the prosperity of EU citizens whilst restoring consumer confidence in the market. He summarised (with regard to the European pensions market): “[. . .] [T]he third regulatory objective is full transparency, because if we want to regain trust of citizens we cannot hide anymore behind ‘jargon’; we need to provide full disclosure of all costs, be it investment or transaction costs; we need to give members and beneficiaries a full picture of the returns that they get on their pension products. And we need to do this in a simple and standardised manner, not flooding members and beneficiaries with hundreds of pages. Too much information kills information.”129 However, even though EIOPA shall take a leading role in promoting transparency, simplicity and fairness in the market for consumer financial products or services across the internal market, transparency can only be achieved by an order providing for a specific and comprehensive allocation of powers, that is to say by a more detailed catalogue of tasks within supranational European bodies. Such requirements are laid down in Art. 8 para. 2 lit. i and Art. 9 EIOPA Regulation. Specifically, Art. 8 para. 2 lit. i EIOPA Regulation defines the authority’s scope of 126

Regulation (EU) no. 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision no. 716/2009/EC and repealing Commission Decision 2009/ 79/EC, OJ L 331/48. 127 Dreher (2018, § 23 para. 45). 128 Even rating it as a gradual elimination of the principles-based approach, Dreher (2019b, pp. 14, 16). 129 Bernardino (2015).

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duties and thus leads to a delineation of the confines of EIOPA within which the authority is enabled to “develop common methodologies for assessing the effect of product characteristics and distribution processes on the financial position of institutions and on consumer protection”.130 There is much to suggest that EIOPA should be very restrained in this regard, restricting itself to indirectly support the functioning of consumer protection.

7 Transparency of Insurance Distribution 7.1

Overview

Being part of the distribution network of insurance products, insurance intermediaries must comply with certain requirements in order to be allowed to act on the market. The VAG does not directly oblige the intermediary to fulfil certain requirements in order to act on the market; sec. 48 subsecc. 1 and 2 VAG obliges the insurers to solely collaborate with such intermediaries, particularly complying with sec. 34d Industrial Code (Gewerbeordnung (GewO)). Section 51 VAG additionally requires insurance undertakings to respond to complaints about intermediaries distributing their products and to notify the Chamber of Industry and Commerce (Industrie- und Handelskammer (IHK)) in case of repeated complaints. Via implementation131 of the Insurance Distribution Directive (IDD),132 the legal environment of insurance distribution changed as of 23 February 2018.133 Within chapter V,134 the IDD stipulates information requirements and conduct of business rules applying to all insurance distributors, i.e. any insurance intermediary, ancillary insurance intermediary or insurance undertaking.135 Hence, the IDD applies not only to insurance intermediaries (including both insurance agents and insurance brokers)136 but generally to all insurance distributors. The IDD aims to provide equal protection levels to customers independent of the distribution channel and to heighten transparency in costs and prices. Despite the differences between

130

See also Art. 32 para. 2 sentence 2 lit. c EIOPA Regulation. In further detail, with respect to stress tests, see Gal (2018, paras. 11 ff.). 131 Act implementing Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution and amending other acts of 20 July 2017, (BGBl. I, pp. 2789 ff.). 132 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution, OJ L26/19. 133 However, authors argue that the legislator partly fell short with respect to the implementation of the IDD in the Insurance Contract Act (Versicherungsvertragsgesetz (VVG)), see Beenken (2017, pp. 617 ff.). 134 Artt. 17 ff. IDD. 135 Definition provided by Art. 2 para. 1 sec. 8 IDD. 136 Sec. 59 subsec. 1 VVG.

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distribution channels, there shall be a level playing field between distributors, in particular in the area of disclosure of information.137 Specifically, Art. 19 IDD (titled “Conflicts of interest and transparency”) aims for transparency in the nature of the remuneration following the respective distribution activity. In addition, the IDD aims for easily accessible information on the Internet. Pursuant to Art. 3 para. 3 IDD, in the event that there is more than one register in a Member State, that Member State shall establish a single information point allowing quick and easy access to information from those registers that shall be compiled electronically and kept updated. The information point shall also provide identification details of the competent authorities of the home Member State. Furthermore, EIOPA shall establish, publish on its website and keep up to date a single electronic register containing records of insurance, reinsurance and ancillary insurance intermediaries that have notified their intention to carry out cross-border business. The register shall contain links to, and be accessible from, each of the Member States’ competent authorities’ websites. EIOPA shall establish a website with hyperlinks to each single information point; see Art. 3 para. 3 and 4 IDD. The effects of the IDD on the practice of insurance distribution are not generally predictable. Yet, there are already examples of specifications of the IDD. For example, in October 2017, EIOPA issued specific guidelines under the IDD on insurance-based investment products that incorporate a structure which makes it difficult for the customer to understand the risks involved.138 These guidelines help to evaluate the non-complexity of insurance-based investment products, which is one of the preconditions for an execution-only sale in distribution (see Art. 30 para. 3 IDD), i.e. without any advice or assessment of the customer’s personal situation, which would ordinarily be required by Art. 30 para. 2 IDD. Article 30 para. 3 IDD provides an option for the Member States to loosen the requirements for the assessment of suitability and appropriateness of insurance-based investment products. The German legislator used this option in sec. 7c subsec. 3 VVG—mirroring the requirements of Art. 30 para. 3 IDD. Hence, the aforementioned EIOPA guidelines will also have an effect on the German insurance market. With regard to the communication of the insurer with its customers, the German insurance association (Gesamtverband der Versicherungswirtschaft (GDV)) has drawn up an additional Code of Conduct (Verhaltenskodex). It only applies to those insurers joining the Code; wherefore, it is not a binding law as such, but until May 2018, 230 insurers had already opted in.139 Yet, in the light of transparency and credibility, joining insurers is well advised to ensure that these rules of conduct are complied with.140 One of the key aims of the Code is transparency when

137

Recital 6 to the IDD. See EIOPA (2017). 139 List of insurers having joined available via www.gdv.de/2015/04/verhaltenskodex-fuer-denvertrieb/. 140 In addition, no. 11 Code of Conduct requires to solely collaborate with distributors complying with the code, see in further detail Reusch (2015, p. 1208). 138

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distributing insurance products. For example, no. 7 Code of Conduct obliges every intermediary to disclose its status to customers clearly and comprehensibly on initial conduct of business.141 The Code of Conduct, in its No. 9, addresses agreements between insurers and brokers on additional remunerations or even other direct gratuities.142 Yet, the Code solely demands that these agreements shall not affect the independence of the insurance broker and shall not require the broker to additionally disclose such potentially misguiding advantages. It is worth mentioning that the fact that an ombudsman system exists must be indicated in a suitable form to the customer, No. 11 Code of Conduct. Meanwhile, parallel statutory requirements have come into force; cf. Art. 15 Regulation on Insurance Intermediaries (Versicherungsvermittlerverordnung (VersVermV)).

7.2

Product Oversight and Governance (POG)

Additionally, before its distribution, any insurance product (except for those entailing large risks) must undergo the so-called product oversight and governance (POG); since 23 February 2018, this procedure has been required by sec. 23 subsec. 1a to 1d VAG.143 In particular, it is required that insurance undertakings must ensure, within the framework of an appropriate business organisation, that the insurance products are sold to the specific target market as identified by the product approval process. The identified target market is also decisive for determining the distribution channels that should be selected by insurance undertakings, sec. 23 subsec. 1a sentence 4 VAG.144 The German legislator refrained from connecting these stipulations, which are considered to be part of an undertaking’s business organisation, with specific information duties towards the customers. It expressly reasoned that the provisions on POG would not create such specific duties towards the customers; wherefore, civil law stipulations on advice and information would remain exclusively relevant.145 Yet, this strict localisation of stipulations is split open by Art. 7 para. 3 Commission Delegated Regulation with regard to POG,146 providing that

141

Cf. Reusch (2015, p. 1206). Reusch (2015, p. 1207). 143 See Art. 25 IDD. 144 See in greater detail Art. 8 Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors, OJ 341/1. 145 BR-Drucks. 74/17, p. 41; Wandt (2019a, p. 135). 146 Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors, OJ 341/1. Cf. Wandt (2019a, p. 147). 142

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“Manufacturers that identify during the lifetime of an insurance product any circumstances related to the insurance product that may adversely affect the customer of that product shall take appropriate action to mitigate the situation and prevent further occurrences of the detrimental event. Manufacturers shall promptly inform concerned insurance distributors and customers about the remedial action taken” (emphasis added). Consequently, the effect of POG on transparency is still unpredictable and an issue to be clarified by EIOPA and practice.

7.3

Naming and Shaming Regarding the Distribution

In addition to the provisions on naming and shaming provided for in sec. 319 VAG,147 the implementation of the IDD brought similar provisions regarding insurance distribution as such in sec. 34d subsec. 11 GewO.148 Accordingly, incontestable sanctions must in principle be made public, whereby “information on the nature and character of the infringement and the persons responsible” must also be published.149 Moreover, sec. 34d subsec. 12 GewO implements Art. 35 IDD, which protects the confidentiality of whistle blowers. Thus, the Chamber of Industry and Commerce shall establish procedures regarding (even anonymous) notifications on possible or actual violations of the regulations.

7.4

Prohibition to Pass on Commissions to Policyholders, Section 48b VAG

A German-specific regulation addresses the intermediary-directed prohibition to pass on commissions (Provisionsabgabeverbot) to its prospective clients, i.e. the prospective policyholders. This prohibition ensures contractual cost transparency. It bars insurers and intermediaries of certain insurance products, particularly from passing on commissions received to respective policyholders, and pursues to prevent shifting the (prospective) policyholder’s aspirations from long-term benefit to shortterm monetary incentives. Initially, this prohibition was designed to prevent grievances, in particular in the context of life and health insurances (and later on in indemnity insurance as well) since the intermediaries were expected to claim higher commissions with the effect of increasing premiums to the disadvantage of the policyholders. Firstly, established in 1923 and based on sec. 64 subsec. 2 VAG old version (later on sec. 81 subsecc. 2 and 3 VAG old version, now sec. 298 subsec.

147

See Sect. 4.3. See Art. 32 para. 1 IDD. 149 Reiff depicts this concept of naming and shaming as a modern form of pillory, Reiff (2018, p. 197). 148

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4 VAG), the Federal Ministry of Finance (Bundesministerium der Finanzen) implemented legislative decrees prohibiting the passing on of commissions and enabling the supervisory authority to impose fines in case of breach of this prohibition.150 Substantial criticism arose with regard to the substance of the prohibition,151 and particular court decisions152 questioned its validity. However, the German legislator surprisingly upheld the prohibition on passing on of commissions in a new provision, that is sec. 48b VAG, when implementing the IDD into German law. This provision maintains the former legal view and does already apply where the customer is granted incentives exceeding EUR 15 per contract and year, sec. 48b subsec. 2 sentence 2 VAG. However, the prohibition does not apply where the commission is used to permanently increase contractual performance or reduce the premium, sec. 48b subsec. 4 VAG. Yet, it is the position of BaFin that a permanent reduction of the premium or an increase in the insurance cover may only be granted by the insurer itself as the insurance contract is relative, i.e. based on an agreement between the insurer and policyholder.153 Although the interest in an exception seems legitimate with respect to the purpose of merely inhibiting short-term monetary incentives, the interpretation of this subsection still is controversial.154

8 Conclusion on Transparency in German Insurance Supervisory Law Transparency was and is one of the hot topics of supervisory law in Europe and Germany. From the perspective of the issues dealt with, it seems that transparency has rather been broadened within the new set of rules applicable since 2016. Now, publicly available information enables in-depth comparisons between insurers on the

150

See the respective decrees in life insurance dating from 8 March 1934, in Veröffentlichungen des Reichsaufsichtsamts für Privatversicherung (VerRAfP) 1934:99; in health insurance dating from 5 June 1934, in Veröffentlichungen des Reichsaufsichtsamts für Privatversicherung (VerRAfP) 1934:100 and in indemnity insurance dating from 17 August 1982, in Veröffentlichung des Bundesaufsichtsamtes für das Versicherungswesen (VerBAV) 1982:456. 151 See in summary and with respect to the latest legislative efforts, Heukamp and Stephanek (2017, pp. 193. ff.). 152 Specifically, Verwaltungsgericht (VG) Frankfurt, decision of 24 October 2011, file number: 9 K 105/11 F and Oberlandesgericht (OLG) Köln, Versicherungsrecht (VersR) 2017:227. OLG Köln even concluded that a protection of the consumer’s information interest or his/her freedom of choice by the prohibition was not identifiable. The court even observed that, on the contrary, it would be easier for the consumer to come to an information-controlled decision if the price of the product as such and the costs arising from the consultation of the intermediary are known to him/her (p. 230). 153 BaFin (2018, para. 68). 154 See for an overview Reiff (2018, p. 199).

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basis of the figures describing structure as well as risk exposure of insurance companies.155 Naturally, the question whether more transparency is congruent with enlarged effectiveness of transparency is another one. The insurer is confronted with a multilevel system of regulation and supervision. Whereas in previous times an answer to a legal question had to be found in interpreting the provisions of the VAG old version (maybe in conjunction with the recommendations of BaFin), the new system requires the practitioner to refer to different legal statutes and different legal agencies.156 Besides the Solvency II Delegated Regulation, the main (and most common) legal advice must be drawn from the VAG (now in its new version of 2016)—but when interpreting, circular letters, interpretative decisions and guidance notices of BaFin still need to be considered. Additionally, the practitioner still must, in particular, have an eye on the Solvency II Directive, on which the German insurance supervisory law is based, and check whether the national law is in line with EU law as well as with the guidelines and recommendations of EIOPA. A second aspect is the principle-based approach of the new supervisory law. Contrary to the VAG old version, the VAG is a regime entailing provisions that are mostly phrased widely and openly. In consequence, the VAG often uses indefinite legal terms, most popularly among them is reasonableness (one of the most illustrative examples might be the wording of sec. 23 subsec. 1 sentence 1 VAG). This renders the new supervisory law unpredictable to some extent, and in the light of legal transparency,157 only time will regain legal certainty. It seems fair to conclude that transparency for the supervisory authority and the public was significantly improved with good side effects for the insurer as well (its solvency, governance etc.)—however, at the expense of legal certainty. This might, cum grano salis, also be considered an opportunity rather than a risk for methodically trained lawyers. Acknowledgements The authors thank Steven Schindler for valuable support.

References Armbrüster C (2015) Das VAG – Überblick zu den Neuregelungen. Recht und Schaden (r+s) 2015:425–431 Armbrüster C, Böffel L (2019) “Naming and Shaming” als Instrument zur Ahndung von Rechtsverstößen. Zeitschrift für Wirtschaftsrecht (ZIP) 2019:1885–1895 BaFin (2013) Collective Decree: complaints management function and complaints-handling of insurance undertakings, VA 43 – I 2512 – 2013/0007. Available via www.bafin.de/SharedDocs/

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Veroeffentlichungen/EN/Aufsichtsrecht/Verfuegung/vf_130920_beschwerdebearbeitung_va_ en.html. Accessed 22 Jan 2021 BaFin (2015) Auslegungsentscheidung, 23 December 2015: Own-Risk and Solvency Assessment (ORSA). Available via www.bafin.de/SharedDocs/Downloads/DE/Auslegungsentscheidung/ dl_ae_orsa_va.html. Accessed 22 Jan 2021 BaFin (2016a) Erste Erkenntnisse aus den Sparten unter Solvency II – annex to press release of 9 August 2016. Available via https://www.bafin.de/SharedDocs/Downloads/DE/Anlage/dl_ 160809_solvency_II_branchenzahlen.pdf?__blob¼publicationFile&v¼1. Accessed 22 Jan 2021 BaFin (2016b) Merkblatt zur fachlichen Eignung und Zuverlässigkeit von Geschäftsleitern gemäß VAG. Available via www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Merkblatt/VA/mb_ 161123_gl_va.html. Accessed 22 Jan 2021 BaFin (2018) Rundschreiben 11/2018 zur Zusammenarbeit mit Versicherungsvermittlern sowie zum Risikomanagement im Vertrieb. Available via www.bafin.de/SharedDocs/ Veroeffentlichungen/DE/Rundschreiben/2018/rs_18_11_vertriebsrundschreiben_va.html. Accessed 22 Jan 2021 Beenken M (2017) Beratungspflichten nach der IDD und ihre Umsetzung ins deutsche Recht. Recht und Schaden (r+s) 2017:617–621 Bernardino G (2015) European pensions: regulatory achievements and the way forward, keynote speech at the PensionsEurope conference, Brussels. Available via https://docplayer.net/ 21294918-European-pensions-regulatory-achievements-and-the-way-forward.html. Accessed 22 Jan 2021 Black J (2010) The rise, fall and fate of principle based regulation. In: LSE Working Papers 17/2010. Available via eprints.lse.ac.uk/32892/1/WPS2010-17_Black.pdf. Accessed 22 Jan 2021 Bork K (2018) Diskussionsbericht zu Teil 1: Referate aus Sicht der BaFin, der Unternehmenspraxis und der anwaltlichen Beratung. In: Dreher M, Wandt M (eds) Solvency II in der Rechtsanwendung 2017 – Kapitalanlage und Versicherungsaufsichtsrecht. VVW, Karlsruhe, pp 61–69 Bürkle J (2012) Berliner Sprachverwirrung im Regierungsentwurf des 10. VAG-Änderungsgesetzes. Versicherungsrecht (VersR) 2012:829–830 Bürkle J (2016) Die kleinen Beben aus Brüssel. Versicherungswirtschaft (VW) 2016:24–25, 4th ed Bürkle J (2017) Die Neuregelungen zur obligatorischen Offenlegung nichtfinanzieller Informationen im Versicherungssektor. Versicherungsrecht (VersR) 2017:717–727 Bürkle J (2019) In: Kaulbach D, Bähr G, Pohlmann P (eds) Versicherungsaufsichtsgesetz, 6th edn. C.H. Beck, Munich Djarayeri A (2014) Aktuelle Entwicklungen im Bereich der Finanzaufsicht über Versicherungen – Die Umsetzung von Solvency II in deutsches Recht. JurisPR-BKR 12/2014 note 1 Dorsel L, Scheer J (2015) Umgang mit Beschwerden: EIOPA-Leitlinien – Erste Erfahrungen aus der Praxis. BaFinJournal 11/2015:20–22. Available via www.bafin.de/SharedDocs/ Veroeffentlichungen/DE/Fachartikel/2015/fa_bj_1511_umgang_mit_beschwerden.html. Accessed 22 Jan 2021 Dreher M (2015) Treatises on Solvency II. Springer, Berlin Dreher M (2018) In: Prölss E, Dreher M (eds) Versicherungsaufsichtsgesetz, 13th edn. C.H. Beck, Munich Dreher M (2019a) Anspruch des Abschlussprüfers auf Berichte der Schlüsselfunktionen eines Versicherungsunternehmens? – Zugleich ein Beitrag zur Informations- und Redepflicht des Abschlussprüfers gegenüber der Bafin. Versicherungsrecht (VersR) 2019:781–791 Dreher M (2019b) Versicherungsaufsichtsrechtliche Regelungsdefizite. Versicherungsrecht (VersR) 2019:1–16 Dreher M, Ballmaier C (2012a) Die unternehmenseigene Risiko- und Solvabilitätsbeurteilung (ORSA) nach Solvency II und VAG 2012. Versicherungsrecht (VersR) 2012:129–143

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Dreher M, Ballmaier C (2012b) Das aufsichtsrechtliche Überprüfungsverfahren nach Art. 36 Solvency II-Richtlinie und § 289 VAG-RegE. In: Dreher M, Wandt M (eds) Solvency II in der Rechtsanwendung 2012. VVW, Karlsruhe, pp 73–122 Dreher M, Lange M (2011) Die Vollharmonisierung der Versicherungsaufsicht durch Solvency II. Versicherungsrecht (VersR) 2011:825–834 Dreher M, Schaaf M (2009) Die Veröffentlichungspflichten von Versicherungsunternehmen gegenüber der Allgemeinheit nach Solvency II. In: Dreher M, Wandt M (eds) Solvency II in der Rechtsanwendung. VVW, Karlsruhe, pp 129–187 EIOPA (2012) Guidelines on complaints-handling by insurance undertakings of 14 June 2012. Available via www.eiopa.europa.eu/sites/default/files/publications/eiopa_guidelines/eiopa_ complaints_handling_gl_en.pdf?source¼search. Accessed 22 Jan 2021 EIOPA (2015) Guidelines on own risk and solvency assessment of 28 January 2015. Available via www.eiopa.europa.eu/sites/default/files/publications/consultations/eiopa-bos-14-259_final_ report_orsa.pdf. Accessed 22 Jan 2021 EIOPA (2017) Guidelines under the Insurance Distribution Directive on Insurance-based Investment Products that Incorporate a Structure which Makes it Difficult for the Customer to Understand the Risks Involved of 4 October 2017. Available via www.eiopa.europa.eu/sites/ default/files/publications/eiopa_guidelines/eiopa-17-651-idd_guidelines_execution_only_en. pdf. Accessed 22 Jan 2021 Fromme H, Krieger F (2011) Time for insurers to stand and deliver on Solvency II says its chief architect. In Commercial Risk – Insurance & Risk Management News. Available via www. commercialriskonline.com/time-for-insurers-to-stand-and-deliver-on-solvency-ii-says-itschief-architect. Accessed 22 Jan 2021 Gal J (2013) Legitimationsdefizite und Kompetenzen der EIOPA im Lichte der MeroniRechtsprechung. Zeitschrift für die gesamte Versicherungswissenschaft (ZVersWiss) 2013:325–351 Gal J (2018) In: Prölss E, Dreher M (eds) Versicherungsaufsichtsgesetz, 13th edn. C.H. Beck, Munich Grote J, Schaaf M (2012) Zum Referentenentwurf der 10. VAG-Novelle zur Umsetzung der Solvency-II-Richtlinie in deutsches Recht – eine erste Analyse. Versicherungsrecht (VersR) 2012:17–28 Hasse A (2009) Informations- und Offenlegungspflichten der Versicherungsunternehmen nach Solvency II. In: Dreher M, Wandt M (eds) Solvency II in der Rechtsanwendung. VVW, Karlsruhe, pp 61–97 Heep-Altiner M, Rohlfs T (2018) Solvency-II-Berichtserstattung – Quantitative Berichterstattung für die Öffentlichkeit, 2nd edn. VVW, Karlsruhe Heukamp W (2016) Das neue Versicherungsaufsichtsrecht nach Solvency II – Eine Einführung für die Praxis. C.H.Beck, Munich Heukamp W, Stephanek B (2017) Das Provisionsabgabeverbot soll Gesetz werden – Was bringt die geplante Verankerung der umstrittenen Regelung im VAG? Versicherungsrecht (VersR) 2017:193–198 Hohlbein B, Coors D (2016) Mehr Transparenz wagen. Versicherungsrecht (VersR) 2016:693–700 Keune C (2015) Rechtliche Grundlagen und Grenzen der EIOPA. VVW, Karlsruhe Korinek S (2010) Veränderung der österreichischen Versicherungsaufsicht durch Solvabilität II: Paradigmenwechsel oder Evolution? Versicherungsrundschau (VR) 2010:27–30, 9th ed Loacker L (2015) Informed insurance choice. Edward Elgar Publishing, Cheltenham Montalvo Rebuelta C (2014) Legal protection/Remedies against measures of EIOPA. In: Dreher M, Wandt M (eds) Solvency II in der Rechtsanwendung 2014. VVW, Karlsruhe, pp 107–149 Pohlmann P (2011) Principles-based insurance regulation: lessons to be learned from a comparison of the EU and German law of risk management. In: Burling J, Lazarus K (eds) Research handbook on international insurance law and regulation. Edward Elgar Publishing, Cheltenham, pp 329–355

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Transparency in Insurance Regulation and Supervisory Law of Italy Pierpaolo Marano and Michele Siri

1 Introduction The Italian term “trasparenza”, which corresponds to the English “transparency”, is mentioned 29 times in the Italian Code of Private Insurance (CAP), which regulates insurance undertakings and insurance intermediaries, while the Italian Civil Code provides the rules on the insurance contract. However, the English version of the CAP provided by IVASS (the Italian Institute for the Supervision on Insurance) reports the term “transparency” 17 times only. The term is translated as “disclosure” in the remaining cases, but disclosure is used a total of 35 times in the CAP, i.e. 24 times more than its referring to transparency. The English version of the CAP as provided by IVASS specifies: “Only the Italian version is authentic.” This clarification attenuates the linguistic issue of the possible correspondence between the two terms above in Italian and English. However, the need remains to highlight the meaning that the term “transparency” assumes in the Italian regulatory framework on insurance undertakings and insurance intermediaries. This chapter aims to investigate such meaning. The following paragraph intends to examine transparency as a standard for pursuing the objective of regulation and supervision. The next paragraphs aim to illustrate the transparency of insurance undertakings, respectively, towards the supervisory authority and the market. Then we will analyse the transparency in the distribution of insurance products, and the

P. Marano (*) Catholic University of the Sacred Heart, Department of Legal Studies, Milan, Italy e-mail: [email protected] M. Siri University of Genoa, Genoa, Italy e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Marano, K. Noussia (eds.), Transparency in Insurance Regulation and Supervisory Law, AIDA Europe Research Series on Insurance Law and Regulation 4, https://doi.org/10.1007/978-3-030-63621-0_7

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following one deals with the transparency of the supervisory authority toward supervised entities and stakeholders. A final paragraph outlines the conclusions.

2 The Evolving Meaning of Transparency in Insurance Supervision The implementation of Directive 2009/138/EC of 25 November 2009 (Solvency II) in the Italian legal system has changed the meaning of transparency. Transparency was the purpose of supervision, and it becomes standard, enabling supervision to pursue its new purpose. This standard, however, is twofold. On the one hand, transparency is the standard for ascertaining whether the organisational and behavioural conduct of the supervised entities achieves the objective of protecting the insured. Solvency II identifies the protection of policyholders and beneficiaries as the main objective of supervision.1 The current text of Article 3 CAP mirrors such principle by stating that “The main purpose of supervision is ensuring suitable protection of insured persons and other persons entitled to insurance benefits”. Then Article 3 adds: “To this objective IVASS pursues the sound and prudent management of insurance and reinsurance undertakings as well as, together with CONSOB (the National Commission for Listed Companies and the Stock Exchange), each one in the exercise of its respective competencies, their transparency and fairness to customers.” This means that transparency becomes a standard for supervision rather than the objective, thus reversing the relationship purpose/medium that was established by the previous text of Article 3 CAP. Moreover, transparency to customers also involves the distributors of insurance products, that is, insurance intermediaries and insurance undertakings when providing insurance directly. Article 119-bis CAP implementing the corresponding principle set forth by Article 17 of IDD provides that distributors shall act honestly, fairly, professionally, and with transparency in accordance with the best interests of policyholders.2 Therefore, IVASS must monitor distributors’ transparency to customers,3 which refers both to the direct relationship between

1

See Article 27 Solvency II. See Article 119-bis CAP. 3 See Article 3 of Regulation No. 39 of 2 August 2018 applying administrative sanctions, which provides that “The provisions of this Regulation shall govern the sanctioning procedure for violations assessed by IVASS in the exercise of its functions which are intended to guarantee adequate protection for policyholders and parties entitled to insurance benefits, by ensuring a sound and prudent management by insurance and reinsurance undertakings, transparency and fairness of conduct toward customers by the same undertakings, by insurance and reinsurance intermediaries and ancillary insurance intermediaries as well as by other operators in the sector; stability of the system and the financial markets as well as the prevention of the use of the financial system for money laundering of revenue deriving from criminal activities and the financing of terrorism”. 2

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distributors and customers4 and to advertising that is necessary to establishing this relationship.5 On the other hand, transparency is required of the supervisory authority to ensure the proper performance of his duties towards the supervised entities and stakeholders in the insurance market. In this sense, transparency not only concerns supervision but also permeates the regulatory activity of the authority. Recital No 16 of Solvency II states that “The main objective of insurance and reinsurance regulation and supervision is the adequate protection of policyholders and beneficiaries”. Article 31 of Solvency II sets forth that supervisors must conduct their tasks in a transparent and accountable manner where transparency about the way supervision is carried out in practice reinforces accountability.6 Article 9-bis CAP mirrors the provisions of Article 31 of Solvency II in the Italian law.7 Hence, IVASS must conduct its tasks in a transparent manner, including the regulatory activity that it is entitled to carry out pursuant to Article 191 CAP. The Italian legal framework on insurance considers transparency no longer as the ultimate goal to be pursued but as a functional standard to pursue the protection of policyholders. This means that supervised entities—insurance undertakings and insurance intermediaries—must be transparent to the supervisor and stakeholders in the insurance market. Likewise, the supervisor must be transparent to them when exercising its tasks of overseeing and regulation. The following paragraphs will deepen these conclusions by first highlighting the transparency of supervised entities towards the authority and the market and, then, the transparency of the authority towards both.

3 General Duties to Report to the Supervisory Authority To pursue insurance market stability, IVASS carries out prudential supervision, aimed at verifying the sound and prudent management of individual undertakings and insurance groups, as well as macro-prudential supervision, aimed at analysing

4

See Article 183 CAP. See Article 182 CAP. 6 See Van Hulle (2019), p. 381. 7 Article 9-bis CAP sets forth that “IVASS shall conduct its tasks in a transparent and accountable manner. In pursuing such principles and with respect for the protection of confidential information it shall publish on the web site and periodically update the following information: a) the text of the laws, regulations and administrative provisions, of the recommendations and general guidelines in the field of insurance and reinsurance, and any other relevant general measure pertaining to supervised entities; b) the general criteria and methods of supervision, including the tools in the prudential control process; c) aggregate statistical data on key aspects regarding the application of prudential regulations; d) the arrangements for the exercise of the options envisaged by directive 2009/138/EC; e) the objectives of the supervision and the main functions and activities performed by IVASS”. 5

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the trend of macroeconomic factors and, in general, of the possible external factors or specific issues that can have an impact on undertakings and the insurance market as a whole. IVASS carries out supervisory functions over (a) undertakings, however named and established, that exercise on the Italian territory insurance or reinsurance activity in any class and any form or capital redemption operations and the management of group pension funds that affect payments on death or survival or in the event of discontinuance or curtailment of activity; (b) insurance groups and financial conglomerates, which include insurance and reinsurance undertakings, in compliance with the specific rules applicable to them; (c) subjects, entities and organisations that in any form perform functions partly included in the operational cycle of insurance or reinsurance undertakings, limited to insurance and reinsurance profiles, without prejudice to the powers of insurance and reinsurance undertakings concerning their outsourced activities; and (d) insurance and reinsurance intermediaries and any other insurance market participant. According to Articles 3 and 5 of the Italian Insurance Code, IVASS may require supervised entities, including undertakings and intermediaries, to send, also regularly, data and information, acts and documents, as well as any information about the contracts held by intermediaries or about the contracts that are entered into with third parties in accordance with the terms and procedures established by its regulation.8 The information comprises qualitative or quantitative elements, or any appropriate combination thereof; historical, current or prospective elements, or any appropriate combination thereof; and data from internal or external sources, or any appropriate combination thereof. The information, data and documents sent to IVASS reflect the nature, scale and complexity of the business of the undertaking concerned and in particular, the risks inherent in that business. They have to be accessible, complete in all material respects, comparable and consistent over time and shall be relevant, reliable and comprehensible. The body performing the control function (mainly the “Collegio Sindacale” in the Italian two-tier system) in an insurance or reinsurance undertaking has to notify IVASS, without delay, of any acts or facts that may constitute an irregularity in the undertakings’ administration or a violation of the provisions regulating the carrying out of the insurance or reinsurance business. To this end, the memorandum and articles of association of the undertaking, regardless of the administration and control system adopted, shall vest the body performing the control function with the relevant tasks and powers. The same body shall provide IVASS with any other information or document requested. The same duties shall apply to the persons performing the same tasks within the companies which control or are controlled by insurance or reinsurance undertakings. External experts, such as statutory auditors of insurance and reinsurance undertakings or external actuaries, shall notify IVASS, without delay, of any acts or facts they have found during the performance of their task that may represent a serious violation of the provisions regulating the carrying out of business by audited

8

ISVAP Regulation n. 22 of 4 April 2008 and IVASS Regulation n. 21 of 10 May 2016.

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undertakings or that may undermine the continuity of the undertaking’s activity or involve a negative assessment, an assessment with remarks or a declaration of the impossibility to assess the financial statements or that may determine non-compliance with the Solvency Capital Requirement or non- compliance with the Minimum Capital Requirement. For the sake of the relationship between private parties and the supervisor, a disclosure in good faith to the supervisory authorities, by external experts, of any fact or decision to be communicated to IVASS does not constitute a breach of any restriction on the disclosure of information imposed by the contract or by any legislative, regulatory or administrative provision and shall not involve such persons in liability of any kind. In line with the general duties to report to IVASS, insurance and reinsurance undertakings shall immediately inform IVASS of the following: the appointment and non-appointment of the subject responsible for the statutory audits, along with the causes of delay in appointment; the resignation of the subject responsible for the statutory audit; the consensual termination of the assignment; and the revocation of the appointment regarding the statutory audit, along with the appropriate explanations on the reason for doing so.

4 Information Requirements and Supervisory Review Process The information requirements to be provided to IVASS to verify the conditions for the pursuit of business are instrumental in developing any appropriate decisions resulting from the exercise of supervisory functions and powers. Insurance undertakings are requested to submit to IVASS information that, taking into account the objectives of supervision laid down in Articles 3 and 5 of the Italian Private Insurance Code, is necessary for IVASS to perform the supervisory review process (SRP) referred to in Article 47-quinquies of the Italian Private Insurance Code (infra para. 2). The information flow empowers IVASS to assess the system of governance applied by the supervised undertakings, the business they are pursuing, the valuation principles applied for solvency purposes, the risks faced and the risk management systems, and their capital structure, needs and management. IVASS has determined, by its regulation,9 the nature, scope and the format of information that undertakings are required to submit at pre-defined periods, upon the occurrence of pre-defined events and during enquiries regarding the situation of the undertaking. Where information must be provided at pre-defined intervals, which are shorter than one year, IVASS may limit, at least annually, such reporting where the submission of that information would be overly burdensome concerning the nature, scale, and complexity of the risks inherent in the business of the undertaking. A frequency longer than one year is granted by exception only if the undertaking can demonstrate to IVASS that such a frequency is more appropriate, given the nature, 9

IVASS Regulation n.33 of 6 December 2016.

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scale and complexity of the risks inherent in the business of the group. A further condition to be met refers to the size—representing more than 20% of the domestic life and non-life market respectively—of the undertakings, giving priority to the smallest undertakings. IVASS may limit regular supervisory reporting or exempt undertakings from reporting on an “item-by-item basis” where (a) the submission of that information would be overly burdensome with the nature, scale and complexity of the risks inherent in the business of the undertaking; (b) the submission of that information is not necessary for the effective supervision of the undertaking; (c) the exemption does not undermine the stability of the financial systems concerned in the Union and (d) the undertaking can provide the information on an ad hoc basis. IVASS shall not exempt from reporting on an item-by-item basis undertakings that are part of a group supervised as such, unless the undertaking can demonstrate to the satisfaction of IVASS that reporting on an item-by-item basis is inappropriate, given the nature, scale and complexity of the risks inherent in the business of the group and taking into account the objective of financial stability. The exemption from reporting on an item-by-item basis shall be granted only to undertakings that do not represent more than 20% of the domestic life and non-life market, respectively, where the non-life market share is based on gross written premiums and the life market share is based on gross technical provisions. When determining the eligibility of the undertakings for the exemptions, IVASS shall give priority to the smallest undertakings. For the purposes of exercising the power of limitation of or exemption from the obligation to submit information as part of the supervisory review process, IVASS shall assess whether the submission of information would be overly burdensome in relation to the nature, scale and complexity of the risks inherent in the business of the undertaking, taking into account, at least, (a) the volume of premiums, technical provisions and assets of the undertaking; (b) the volatility of the claims and benefits covered by the undertaking; (c) the market risks that the investments of the undertaking give rise to; (d) the level of risk concentrations; (e) the total number of classes of life and non-life insurance for which authorisation is granted; (f) the possible effects of the management of the assets of the undertaking on financial stability; (g) the systems and structures of the undertaking to provide information for supervisory purposes and the written policy on information provided for supervisory purposes; (h) the appropriateness of the system of governance of the undertaking; (i) the level of own funds covering the Solvency Capital Requirement and the Minimum Capital Requirement; (l) whether the undertaking is a captive undertaking. The Solvency II Pillar 3 regulatory reporting requirements came into force on 1 January 2016. Firms must produce two key reports: (a) the Solvency and Financial Condition Report (SFCR)—firms are required to disclose this report publicly and to report it annually to the local National Competent Authority; the SFCR includes both qualitative and quantitative information – and (b) the Regular Supervisory Report (RSR), a private report to the supervisor and is not disclosed publicly. Firms submit this report to the local National Competent Authority in full at least every three years and in summary every year.

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Italian insurance and reinsurance undertakings are also required to assess the risks to which they are exposed from a current and prospective point of view, at least annually, i.e. whenever circumstances arise that could change their risk profile. The own-risk and solvency assessment (ORSA) examines the overall solvency needs and the ability of the undertaking to meet, on an ongoing basis, the mandatory capital requirements and the requirements of the technical provision of the solvency regime while also examining the deviations from the ORSA in the assumptions underlying the calculation of the Solvency Capital Requirement (SCR). Undertakings must, therefore, define appropriate processes and procedures commensurate with their organisational structure and risk management system which takes into account the nature, scale and complexity of the risks inherent in their business. The administrative body of the undertaking makes an active contribution to the risk and solvency assessment process, approving the ad hoc policy defined; assessing the adequacy of criteria and methodologies used in the assessments, with particular reference to significant risks; and, above all, integrating the results of the ORSA assessments into the development and revision of the undertaking’s strategies. Companies are required to submit to IVASS, at least once a year, the ORSA supervisory report for the supervisor (hereinafter “ORSA supervisory report”)10 under Article 373 of the Delegated Acts and therefore no later than 2 weeks after the conclusion of the assessment. In line with the provisions of Article 373 of the Delegated Acts, the ultimate Italian parent undertaking shall submit to IVASS the group ORSA supervisory report within two weeks after the approval of the group ORSA results by the administrative body. The report sent to IVASS as the group supervisor shall have the contents set out in Annex 3 and shall be prepared in the same language as the group regular report as per Article 372 of the Delegated Acts. If a single ORSA document is prepared, the ultimate Italian parent undertaking shall ensure, when requested by a member (or a new member) of the college of supervisors, that the requesting member is provided with a timely translation in the official language of that Member State of the information about the ORSA concerning the subsidiary.

5 The Supervisory Review Process and Capital Add-on Executing the supervisory review process, IVASS reviews the strategies, processes and reporting procedures that are adopted by undertakings to comply with the provisions of the Code and with directly applicable EU rules. The supervisory review process comprises the assessment of the qualitative requirements relating to the system of governance, the assessment of the risks that undertakings face or may

10

The undertaking, taking into account the matters regulated in article 306 of the Delegated Acts, shall prepare the ORSA Supervisory report, in accordance with the principles of article 30-ter (7) of the Code, following the structure as per Annex 3 of IVASS Regulation no. 32 of November 2016.

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face and the assessment of the ability of those undertakings to assess those risks, taking into account the environment in which the undertakings are operating.11 IVASS assesses that undertakings comply with the provisions relating to (a) the system of governance, including the own-risk and solvency assessment, as set out in Title III, Chapter I, Section II of the Italian Private Insurance Code; (b) the technical provisions as set out in Title II, Chapter II, of the Italian Private Insurance Code; (c) the capital requirements as set out in Title III, Chapter IV-bis, of the Italian Private Insurance Code; (d) the investments as set out in Articles 37-ter, 38 and 41 of the Italian Private Insurance Code; (e) the quality and quantity of own funds as set out in Title III, Chapter IV, of the Italian Private Insurance Code; and (f) the requirements for full or partial internal models set out in Title III, Chapter IV-bis, Section III of the Italian Private Insurance Code. To monitor undertakings, IVASS has to use appropriate tools to identify deteriorating financial conditions and monitor how that deterioration is remedied. In particular, IVASS shall assess (a) the adequacy of the methods and practices of the undertaking designed to identify possible events or future changes in economic conditions that could have adverse effects on the overall financial standing of that undertaking and (b) the ability of the undertaking to face those possible events or future changes in economic conditions. As part of the supervisory review process, in addition to the calculation of the Solvency Capital Requirement and where appropriate, IVASS may use necessary quantitative tools to assess the ability of the undertakings to cope with possible events or future changes in economic conditions that could have unfavourable effects on their overall financial standing. IVASS may require undertakings to perform corresponding tests or analyses. IVASS, in case of weaknesses or deficiencies identified in the supervisory review process, shall take measures as it deems appropriate among those envisaged in Titles XIV (Supervision over Undertakings and Intermediaries), XVI (Group Supervision) and XVIII (Safeguards, Reorganisation, and Winding-up Measures) of the Italian Private Insurance Code. Since the supervisory review process is conducted regularly, IVASS establishes, by way of regulation, the minimum frequency and the scope of the supervisory review process, having regard to the nature, scale and complexity of the activities of the undertaking. Following the supervisory review process, in exceptional circumstances outlined in Article 47-sexies of the Italian Insurance Code, IVASS may set a capital add-on for an undertaking by a decision stating the reasons when the specific conditions are met. As a first one, in the judgment of IVASS, the risk profile of the undertaking deviates significantly from the assumptions underlying the Solvency Capital Requirement, as calculated using the standard formula and: (1) the use of an internal model is inappropriate or has been ineffective or (2) while a partial or full internal model is being developed. As a second condition, in the judgment of the supervisor, the risk profile of the undertaking deviates significantly from the assumptions underlying the Solvency Capital Requirement, as calculated using an internal

11

Article 47-quinquies, Italian Private Insurance Code.

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model or partial internal model, because certain quantifiable risks are captured insufficiently, and the undertaking has not been able to adapt the model to reflect better its own risk profile within the time frame set by IVASS. As a third condition, the system of governance of an undertaking deviates significantly from the standards laid down in Title III, Chapter I, Section II of the Italian Private Insurance Code and those deviations prevent it from being able to properly identify, measure, monitor, manage and report the risks that it is or could be exposed to and the other measures that could be adopted by IVASS would not be appropriate to improve the deficiencies sufficiently within an appropriate time frame. As a fourth condition, the undertaking applies the matching adjustment, the volatility adjustment or the transitional measures, and IVASS concludes that the risk profile of that undertaking deviates significantly from the assumptions underlying those adjustments and transitional measures. IVASS reviews, at least once a year, the imposition of the capital add-on and shall remove it when the undertaking has remedied the deficiencies found. The Solvency Capital Requirement, including the capital add-on imposed, replaces the inadequate Solvency Capital Requirement.

6 Report on Solvency and Financial Condition (SFCR) The report on solvency and financial condition is based on Article 290 of Delegated Regulation (EU) No. 2015/35 (the Delegated Regulation), which supplements and amends “Solvency II” Directive No. 2009/138/EC.12 Under the Private Italian Insurance Code, the report also contains the joint information, concerning the requirements of EU legislation, required based on IVASS Regulation No. 33/2016. The solvency and financial condition report shall be subject to approval by the board of directors and be published only after that approval.13 With an implementing regulation,14 IVASS determined the elements of the report, which shall be accompanied by the report of the statutory auditor or of the statutory auditing firm. In particular are subject to audit Section D “Information on valuation for solvency purposes” and paragraphs E.1 “Own funds” and E.2 “Solvency capital requirement and mini capital requirement” of section E “Capital management”.15 IVASS establishes the arrangements, terms and contents of the report on solvency and financial condition through its regulation.16 The Italian Private Insurance Code17 requires undertakings to disclose publicly, on an annual basis, a report on their solvency and financial condition and submit it to 12

Floreani (2017), pp. 261–278. Article 47-decies, Italian Private Insurance Code. 14 IVASS Regulation no. 42 of 2 August 2018. 15 Art. 47-septies, paragraph 7, Italian Private Insurance Code. 16 IVASS Regulation IVASS no. 33 of 6 December 2016. 17 Article 47-septies, Italian Private Insurance Code. 13

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IVASS, together with the information to be provided to verify the conditions for the pursuit of business.18 The report contains information, either in full or by way of references to other equivalent information, both in nature and scope, disclosed publicly under other legal or regulatory requirements, concerning (a) a description of the business and the performance of the undertaking;19 (b) a description of the system of governance and an assessment of the adequacy of this system for the risk profile of the undertaking;20 (c) a description, made separately for each category of risk, of the risk exposure, concentration, mitigation and sensitivity;21 (d) a description,22 made separately for assets,23 technical provisions24 and other liabilities,25 of the bases and methods used for their valuation, together with an explanation of any major differences in the bases and methods used for their valuation in financial statements; and (e) a description of the capital management, including at least (1) the structure and amount of own funds26 and their quality, (2) the amounts of the Solvency Capital Requirement and the Minimum Capital Requirement, (3) the exercise of the option set out in Article 45-novies used for the calculation of the Solvency Capital Requirement, (4) information allowing a proper understanding of the main differences between the underlying assumptions of the standard formula and those of each internal model used by the undertaking for the calculation of its Solvency Capital Requirement,27 and (5) the amount of non-compliance with the Minimum Capital Requirement or any significant non- compliance with the Solvency Capital Requirement during the reporting period, even if subsequently resolved, together with an explanation of its causes, consequences and any remedial measures taken. As regards the solvency requirements, where the matching adjustment is applied, the description referred to in the report shall include a description of the matching adjustment and the portfolio of obligations and assigned assets to which the matching adjustment is applied, as well as a quantification of the impact of a change to zero of the matching adjustment on the undertaking’s financial position. The report also includes a statement on whether the volatility adjustment is used by the undertaking and a quantification of the impact—of a reduction to zero of the volatility adjustment—on the undertaking’s financial position. The description referring to the amounts of the Solvency Capital Requirement and the Minimum Capital Requirement shall include an analysis of any significant changes as

18

Article 47-quarter, Italian Private Insurance Code. Art. 7, IVASS Regulation no. 33 of 6 December 2016. 20 Art. 8, IVASS Regulation no. 33 of 6 December 2016. 21 Art. 9, IVASS Regulation no. 33 of 6 December 2016. 22 Art. 10, IVASS Regulation no. 33 of 6 December 2016. 23 Art. 11, IVASS Regulation no. 33 of 6 December 2016. 24 Art. 12, IVASS Regulation no. 33 of 6 December 2016. 25 Art. 13, IVASS Regulation no. 33 of 6 December 2016. 26 Art. 14 and 15, IVASS Regulation no. 33 of 6 December 2016. 27 Art. 16, IVASS Regulation no. 33 of 6 December 2016. 19

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compared to the previous reporting period and an explanation of any major differences to the value of such elements in financial statements and a brief description of the capital transferability. The disclosure of the Solvency Capital Requirement shall also show the relevant amounts and any capital add-on separately as required by IVASS or the impact of the specific parameters that the undertaking has been required by IVASS to use, together with concise information on its justification. It is worth noting that the disclosure referring to the Solvency Capital Requirement and the Minimum Capital Requirement shall be accompanied, where applicable, by an indication that the Solvency Capital Requirement is still subject to an assessment by IVASS.

7 External Audit on the SFCR The importance of the Statutory Auditor’s review of the Solvency II information disclosed to the market has also been reaffirmed at the international level by the European Insurance and Occupational Pensions Authority (EIOPA), which issued a “public statement” following a wide-ranging debate in Europe.28 IVASS intervened on this issue with a Statement dated 7 December 2016, which was extended for the following year. Following a step-by-step approach, this letter, regarding the financial years 2016 and 2017, limited the scope of the external auditor’s activity to the Balance Sheet and Own Funds, also asking companies to conduct additional verifications on the data quality of the Solvency Capital Requirement, calculated with the use of the standard formula. IVASS Regulation No. 4229 implements the soft law intervention of EIOPA and extends the scope of the external audit also to the Solvency Capital Requirement, regardless of the calculation method used (standard formula or internal model), to increase the quality and reliability of the information on the solvency of the company and the group made public in the SFCR. The administrative body of the undertaking, upon obtaining the favorable opinion from the control body, assigns the performance of external audit activities to one of the following subjects: the same statutory auditor who carries out the statutory audit of accounts under Legislative Decree No. 39 of 2010 and Regulation (EU) 537/2014 or a statutory auditor other than the auditor who carries out the statutory audit of accounts. The administrative body also determines the fee to be paid for the entire duration of the assignment and any criteria applicable to an adjustment of this fee during the assignment. When the assignment is conferred on the same statutory auditor who carries out the statutory audit of accounts, the undertaking prepares a report, to be submitted to IVASS upon its request, that describes in detail the assessment and weighting principles adopted for the designation of the statutory

EIOPA-BoS-15/154 del 29/06/2015 “Need for high-quality public disclosure: Solvency II’s report on solvency and financial condition and the potential role of external audit”. 29 IVASS Regulation n.42 of 2 August 2018. 28

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auditors, the reasons underlying the choice made by the administrative body and the determination of the fee. The statutory auditor in charge of the external audit meets at least the requirements of professional expertise, ethics and independence in compliance with the international codes adopted by the professional bodies and associations and provides appropriate support documentation and communicates to the control body any situation that may reasonably affect the fulfilment of the independence requirement and all related safeguard measures. The external audit assignment has a three-year duration, is renewable no more than twice and may not be conferred again, after the allowed renewals, unless at least three years have passed from the end date of the previous assignment. In the case that the administrative body of the undertaking assigns the performance of external audit activities to the same statutory auditor who carries out the statutory audit of accounts, the duration may be reduced to one year only if this makes it possible to align the expiry dates of the external audit assignment with those of the statutory audit. The administrative body, consulting with the control body, may revoke the external audit assignment for a just cause while concurrently assigning it to another statutory auditor. In the event of resignation or consensual termination of the contract, the external audit activities may continue to be carried out by the same statutory auditor until the administrative body has conferred the new assignment, and in all cases, not beyond six months from the resignation date or the date of termination of the contract. The undertaking shall provide the statutory auditor with all the information that is useful for performing the external audit, and the statutory auditor entrusted with the external audit shall communicate to the control body and IVASS any technicaloperational difficulties encountered in the course of the statutory audit or any aspects deserving attention concerning the internal control and risk management systems. The solvency and financial condition report, approved by the administrative body of the undertaking, shall be made available to the statutory auditor at least 15 days before its publication date, as outlined in the reference regulations. The external audit includes at least (a) a “full” external audit30 of all items included in the solvency and financial condition report, as identified in Articles 4, paragraph 1, letters (a)31 and (b),32 and 5, paragraph 1, letters (a)33 and (b)34 of IVASS Regulation No. 33,35 as well as the reasonable assurance opinion provided in a specific report, addressed to the administrative body of the undertaking, and (b) a “limited” external

30 According to art. 2, par. 1, q), “full external audit” shall mean the formulation of an opinion on the fact that all information was drawn up in compliance with the directly applicable provisions of the European Union and with the national legislation regulating the sector (so-called reasonable assurance opinion). 31 Balance sheet and related Solvency II valuations. 32 Eligible own funds covering the solvency capital requirements. 33 Group balance sheet and related Solvency II valuations. 34 Eligible own funds covering the group solvency capital requirements. 35 IVASS Regulation IVASS no. 33 of 6 December 2016.

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audit36 of all items included in the solvency and financial condition report, as identified in Articles 4, paragraph 1, letter (c),37 and 5, paragraph 1, letter (c)38 of IVASS Regulation No. 33, as well as the limited assurance opinion provided in a specific report, addressed to the administrative body of the undertaking. External audit activities, whether full or limited, shall be carried out in compliance with the international auditing standards in use and with the sector’s regulations. The undertaking shall publish the external audit reports, together with the solvency and financial condition report, in compliance with the same methods and terms set forth for the latter; according to also the same terms and methods, these reports shall be forwarded to IVASS.

8 Exceptional Non-disclosure, Updates and Additional Voluntary Information According to Article 47-octies of the Italian Insurance Code, IVASS shall permit an undertaking not to disclose information to the public where such disclosure (a) may allow market competitors to gain a significant undue advantage or (b) is covered by the secrecy or confidentiality obligations of the undertaking to policyholders or other counter-parties. In that case, undertakings shall make a statement on the exemption from the disclosure obligation in their report on solvency and financial condition (SFRC) and shall state the reasons therefor. IVASS shall permit undertakings to make use of—or refer to—public disclosures made under other legal or regulatory requirements to the extent that those disclosures are equivalent to the information required under Article 47-septies in both their nature and scope. The exception may not include—and therefore IVASS does not allow the undertakings not to disclose—the information referring to the description of the capital management. In the event of any relevant circumstance affecting significantly the information disclosed in the report on solvency and financial condition, the undertaking shall disclose appropriate information on the nature and effects of that relevant circumstance. For such a requirement,39 at least the following shall be regarded as relevant circumstances: (a) IVASS, after observing non-compliance with the Minimum Capital Requirement, considers that the undertaking will not be able to submit a

According to art. 2, par. 1, r), “limited external audit” shall mean the performance of audit activities providing evidence that, based on the procedures and the findings, no issues have been identified by the statutory auditor indicating that the information was not drawn up, in its most significant aspects, in compliance with the directly applicable EU provisions and of the national legislation applicable to the sector (so-called limited assurance opinion). 37 Solvency Capital Requirement and Minimum Capital Requirement. 38 Solvency Capital Requirement and consolidated group Minimum Capital Requirement. 39 Article 47-novies of the Italian Private Insurance Code. 36

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realistic short-term finance scheme or the undertaking does not submit such a scheme within one month of the date when non-compliance was observed and (b) IVASS finds that the undertaking had not submitted a realistic recovery plan within two months of the date when significant non-compliance with the Solvency Capital Requirement was observed. In the case of non-compliance with the Minimum Capital Requirement, IVASS shall require the undertaking to disclose the amount of non-compliance immediately with the Solvency Capital Requirement, together with an explanation of the relevant causes and effects for the undertaking, including any remedial measure taken. Where, despite a short-term finance scheme initially considered to be realistic, non-compliance with the Minimum Capital Requirement has not been resolved three months after its observation, the undertaking shall disclose it at the end of that period, together with an explanation of its origin and consequences, including any remedial measures taken as well as any further remedial measures planned. In the case that the undertaking has not submitted a realistic recovery plan, IVASS shall require the undertaking to disclose the amount of non-compliance immediately, together with an explanation of its causes and effects on the undertaking, including any remedial measure taken. Where, despite the recovery plan initially considered to be realistic, a significant non-compliance with the Solvency Capital Requirement has not been resolved six months after its observation, the undertaking shall disclose it at the end of that period, together with an explanation of its origin and consequences, including any remedial measures taken as well as any further remedial measures. Undertakings may also publish any further information, also of an explanatory nature relating to their solvency and financial condition, which is not already subject to the compulsory disclosure obligation. Being any additional voluntary information part of the SFRC, any subsequent version of the report shall be subject to approval by the board of directors and be published only after that approval. Insurance public disclosures under Pillar 3 of the Solvency II framework play a key role in promoting market discipline through the public reporting of meaningful information on institutions’ risks to their solvency position, thus reducing the asymmetry of information between institutions and users of information. The definition and implementation of granular, consistent and comparable transparency requirements is a major step towards an enhanced market discipline by allowing the use of information to compare risk profiles of institutions and make informed decisions. Transparency should also be part of an overall strategy40 to contribute to the quality of the governance of financial and insurance undertakings and, ultimately, contributes to creating a market discipline41 and thus to the efficiency of the insurance markets. Since the goal of transparency is to help the policyholders make proper decisions, the relevant information is to be translated in a more

40 41

Ostrowska (2018), volume 99, pp. 293–313. Dreher (2015), p. 81 f.

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understandable way to policyholders. Further steps at the European level are forthcoming on the review of Solvency II Directive, both on supervisory reporting and public disclosure,42 to improve the efficiency and effectiveness of the reporting and disclosure framework, thereby reducing the costs associated with the processes to the benefit of the insurance undertakings as information producers as well as of the consumers and the general public.

9 The Transparency as a General Principle for Distributors The IDD requires distributors to act honestly, fairly and professionally in accordance with the best interest of their customers.43 These general principles have been implemented in the CAP by requiring distributors to act honestly, fairly, professionally and with transparency in accordance with the best interests of policyholders.44 Italian law, therefore, added “transparency” to the principles that distributors must comply with. In this respect, there is an alignment with the provisions of Legislative Decree No. 58 of 24 February 1998 Consolidated Law of Finance, which is related to financial products and has included transparency as a general principle for investment firms since 1996.45 The term “Mifidization” was coined to identify the impact of the regulation on financial products, mainly the rules laid down by the Directive 2014/65/EU on markets in financial instruments (MiFID II), to the insurance sector.46 This impact is not limited to insurance-based investment products (IBIPs), but it is also likely to extend to non-life insurance products.47 Italian law does not only align to this tendency of the European legislator, but it also extends this tendency as in the case of transparency. Transparency and the other general clauses mentioned in the aforementioned rules raised essentially the issues of their meaning and relationship with the general clauses of the civil code on all contracts.48 Transparency in financial products generally refers to a duty to provide complete information to the customer on the

42 EIOPA “Consultation Paper on proposals for Solvency II 2020 Review. Review of technical implementation means for the package on Solvency 2 Supervisory Reporting and Public Disclosure” EIOPA- BoS-19-582 18 December 2019. 43 See Article 17 of IDD. 44 See Article 119-bis CAP. 45 See Article 17 of Legislative Decree 23 July 1996, n. 415, which then flowed into Article 21 of Legislative Decree No. 58 of 24 February 1998 Consolidated Law of Finance. 46 Marano (2017a), p. 219 ff.; Id (2017b), p. 415 ff. 47 The current “Mifidization” concerns: (i) the sources of the regulation on insurance; (ii) the design and distribution of the insurance products; (iii) customers’ protection; (iv) the interpretation by the Courts of the rules on life insurance products. See Marano (2017a), p. 219 ff. 48 Rimini (2020), p. 426; Berti de Marinis (2016); Maggiolo (2012), p. 356 ff.; Lucantoni (2011), p. 254 ff.; Sartori (2004); Venuti (2000), p. 1049 ss.; Santoro (1994), p. 791; Alpa (1992), IV, p. 409.

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characteristics and nature of the product, as well as the investment risk, and this duty also includes how the information is provided to the customer, having to ensure that the information is clear and understandable regardless of the customer contact techniques used.49 Italian scholars have not yet explored in depth the concept of transparency in insurance distribution after the implementation of the IDD. In general terms, scholars refer transparency in the CAP to the information on the insurance product, which is relevant to the customers’ decision and provided in ways that facilitate the comparison between the products thus encouraging the shopping around.50 However, scholars also outlined how (i) transparency refers to behaviours rather than contractual features,51 and (ii) transparency has shifted from the product to the issuer at least for life insurance.52 The inclusion of transparency among the principles applicable to distributors opens up a new perspective. The EU legislator aimed at increasing the quality of the information provided to the customers before the conclusion of a contract. An information document providing customers with standardised information on the insurance product has been introduced for both life and non-life products. The insurer must manufacture these standardised documents. Thus, the meaning of transparency for distributors must be found outside the content of the insurance product as the information on the characteristics of the product is embedded in the document manufactured by the insurer. Transparency in insurance distribution coincides neither with the content of the contract or its comprehensibility nor with other information relating thereto. Article 119-bis, para 2, CAP provides that “All information related to insurance distribution, including marketing communications relating to the products distributed, addressed by the insurance distributor to policyholders or potential policyholders shall be fair, clear and not misleading, impartial and complete”. These adjectives characterise the information to the customers but do not refer specifically to transparency or other general principles set forth by Article 119-bis, para 1, CAP, under which insurance distributors shall act honestly, fairly, professionally and with transparency in accordance with the best interests of policyholders.53 Although transparency applies as a general principle to distributors, there are some rules that are specific to distributors. Thus, it could be argued that such specific rules contribute to clarifying the meaning of the general principle as they could be deemed as applications of such principle. These rules expressly concern information

49

De Mari and Spada (2005), p. 133. Siri (2007), p. 387 f. 51 Gaggero (2013), p. 461 ff. 52 Corrias (2017), p. 265 ff. 53 According to Article 55 of Regulation No. 40 of 2 August 2018, “Based on the information collected, the distributors, taking into account the type of policyholder and the nature and complexity of the product offered, provide the policyholder, in a clear and understandable form, objective information on the product, illustrating the characteristics, duration, costs, limits of coverage and any other useful element to allow him to make an informed decision”. 50

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on remuneration54 and conflicts of interests.55 The rules implement in the CAP the provision of Article 19 of IDD, which refers to “conflicts of interest and transparency”. If the general principle of transparency has its meaning deduced by the rules that specifically apply such principle, transparency concerns the relationship between distributors and customers. This relationship pertains to the insurance contract but cannot be confused with the contract. Conflicts of interests and remuneration can affect this relationship. Both of them are not intrinsic characteristics of the product offered but are likely to distort how the distributor establishes its relationship with the customer. Thus, the transparency of the distributors complements the characteristics of all information that should be provided to customers, that is clear and comprehensible. Transparency refers to the relationship of the distributors with the customers and requests the distributors to disclose specific information about the relationship rather than the insurance product. This information must be fair, clear, not misleading, impartial and complete as all other information given to customers should be. IVASS Regulation No. 40 of 2 August 2018 on insurance distribution complements the rules of CAP on remuneration and conflicts of interests. Article 55 requires distributors to provide all information related to the general nature or sources of the conflicts of interests when the organisational and administrative arrangements designed to prevent conflicts of interests by distributors are not sufficient to ensure, with reasonable confidence, that risks of damage to policyholder interests will be prevented. This information must be provided when both are offering and managing insurance contracts, thus extending the provision of Article 119-bis, para 7, to the offer only. Moreover, Article 57 sets forth that the information concerning the remuneration for each distributed insurance contract should be communicated to the customer (i) by the intermediary who distributes the contract or (ii) by the insurer, with respect to the employees directly involved in the distribution of the contract. The transparency of conflicts of interests and remuneration as a standard complementing the information on the insurance product, and concerning the relationship between distributors and customers, can be confirmed from rules that apply to specific classes of insurance or the distribution of insurance products. This is the case for motor liability insurance contracts. When offering these contracts, intermediaries shall previously inform the consumer about the commissions paid to them by the undertaking, or by each undertaking on behalf of which they carry on business.56 This transparency is also requested for customised estimates at the sales point or online.57 Estimates and policies shall show, in highlighted characters, the tariff premium, the commission for the intermediary, and the total discount for the policyholder.58 This is also the case for contracts related to mortgages and other

54

See Articles 119-bis, para. 5, and 120-bis CAP. See Articles 119-bis, para. 6, and 120-ter CAP. 56 See Article 131 CAP. 57 See Articles 5, 6 and 9 of Regulation No. 23 of 9 May 2008. 58 See Article 131 CAP. 55

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loans, which must indicate the amount of costs incurred by the policyholder or by the debtor/insured with evidence of the amount received by the intermediary.59 As mentioned earlier, transparency in distribution refers not only to the offering but also to the management of insurance contracts. Two rules expand the principle of transparency beyond distributors. On the one hand, Article 149-bis CAP refers to the transparency of compensation procedures, setting forth that “In case of assignment of the claim arising from the right to compensation for the damage caused by the use of motor vehicles and craft, the amount of damages for the repair of the damaged vehicles shall be paid only after submission of the invoice issued by the repair shop licensed pursuant to law n. 122 of 5 February 1992, which has performed the repair work”.60 On the other hand, the professional activity of a loss adjuster, consisting in assessing and estimating material damage resulting from the use, theft and fire of motor vehicles and craft, must be exercised by persons enrolled in the list of loss adjusters, providing that “In the performance of their tasks loss adjusters shall behave with diligence, correctness, and transparency.”61

10 10.1

The Transparency of the Activities Carried Out by the Italian Supervisory Authority Consultations in the Decision-Making Process on Regulatory Measures

The Italian supervisory authorities on financial services (banking, financial markets, insurance and pensions) must comply with the principles set forth by Article 23 of Law 28 December 2005, No. 262, when adopting regulatory or general measurers. In particular, they must motivate such measurers concerning the regulatory and supervisory choices of the sector or of the matter they concern. The related proposals have to be accompanied by a report that illustrates their consequences on regulation and on the activities of operators and the interests of investors and savers.62 In defining the content of the general regulatory acts, these authorities take into account, in any case, the principle of proportionality, intended as the criterion for exercising power adequate to achieve the purpose, with the least sacrifice to the interests of the recipients. To this end, they consult the representative bodies of supervised entities,

59

See Article of Regulation No. 41 of 2 August 2018. This rule is complemented with the rule sets forth by Article 148, para 11-bis, which provides the policyholder with “the possibility [. . .] to obtain the whole amount of damages for the professional repair of the damaged vehicle using a trusted repair-shop licensed pursuant to law n. 122 of 5 February 1992. To this end, the repair-shop shall provide the tax documents and an adequate warranty on repairs of no less than two years for all the components other than wear parts”. 61 See Article 156 CAP. 62 See also Article 12 of law n. 229 of 29 July 2003. 60

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financial service providers and consumers. Moreover, the authorities have to review periodically, at least every three years, the content of the regulatory documents to adapt them to changes in market conditions and the interests of investors and savers. Finally, the authorities are requested to regulate the application of the exposed principles also indicating the cases of necessity and urgency or the reasons for confidentiality for which it is allowed to derogate. These principles comply with the rules governing regulatory activities on insurance, which are established at the international level63 as well as EU level.64 They are mirrored in Article 191, para. 4, CAP, under which IVASS regulations shall be adopted following open and transparent consultation procedures enabling to obtain knowledge of the law in preparation and of the comments received - also through publication on ISVAP’s website. When starting the consultation IVASS shall publish the draft measure and the outcome of the analysis on the impact of the new rules. IVASS detailed these principles in Regulation No. 3 of 5 November 2013 governing the procedures for the adoption of regulatory measures. As general principles of this activity, IVASS takes into account the principle of proportionality, defines the intervention objectives, identifies the relevant recipients, performs an analysis on the consequences of regulation and put in place consultation procedures, which influence the making of regulatory and supervisory choices.65 As a preliminary step of the procedure, IVASS has to carry out a regulatory impact analysis (i) examining any market and regulatory failures; (ii) identifying the possible regulatory choices aimed at achieving the established objectives, including, where appropriate, the option not to take any regulatory action; and (iii) evaluating the costs and benefits of the various options envisaged, also in comparative terms. As a result of this analysis, IVASS identifies the most suitable regulatory options for achieving regulatory and supervisory objectives, influencing the choice made and taking into account a lesser sacrifice of the recipients’ subjective positions.66 The

63

The principle No. 2 of the Insurance Core Principles (ICPs) issued by International Association of Insurance Supervisors (IAIS) sets forth that “The supervisor is operationally independent, accountable and transparent in the exercise of its responsibilities and powers”. This principle is detailed though standards and guidance. Standard No. 2.9 specifies that the supervisor must consult publicly on significant changes that it makes to requirements, policies and supervisory procedures. This standard is detailed by guidance No. 2.9.2, stating that “A critical element of transparency is for the supervisor to provide the opportunity for meaningful public consultation on proposed requirements and supervisory procedures. Meaningful public consultation benefits from participation by a diversity of stakeholders. Consequently, the supervisor should have methods in place to encourage and solicit stakeholder participation”. While guidance No. 2.9.3 sets forth the supervisor “should have written procedures on the types of documents that are subject to public consultation as well as the process and timelines for consultation. Some documents used in the supervisory process may not be suitable for consultation, such as detailed procedural manuals that are used to guide staff of the supervisor in the performance of their day-to-day duties”. 64 See Commission staff working document, Better Regulation Guidelines [SWD (2017) 350], Brussels, 7 July 2017. 65 See Article 4, Regulation n. 3/2013. 66 See Article 5, Regulation n. 3/2013.

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following step consists of launching a public consultation to (i) ensure transparency in the procedure for the adoption of regulatory acts applicable to interested parties, including the representative bodies of supervised entities, insurance and financial service providers and consumers; (ii) acquiring information and useful elements also for the evaluation of possible regulation choices; and (iii) assessing the effects of the regulation on the activity and interests of the recipients of the intervention.67 Public consultation is carried out through publication, on IVASS’s website,68 of a document containing elements aimed at clarifying the context within which the regulatory intervention is placed and the purposes for which the consultation is aimed. In particular, the consultation document contains the outline of the regulatory act and an illustrative report (so-called Preliminary AIR) of the main contents of the same, the objectives of the intervention as well as the aforementioned analysis on the consequences of the regulation carried out by IVASS.69 In the consultation document, IVASS indicates the procedures for the transmission of contributions and the proposed changes by the interested parties and sets the terms for their submission, ranging from a minimum of 30 days to a maximum of 90 days. In the case of motivating needs, IVASS can establish that public consultation lasts shorter or longer.70 After the consultation procedures, IVASS publishes on its website the final regulatory act, together with a conclusive report (so-called Air Finale) containing (i) an indication of the main contents of the regulatory act, of the objectives of the intervention as well as of the analysis on the consequences of regulation carried out by IVASS; (ii) a summary of the contributions and proposed modifications received, indicating the Institute’s determinations and related reasons; and (iii) the final results of the impact analysis.71 Simultaneously with the publication of the aforementioned documents, IVASS publishes the names of the participants in the public consultation on its website, as well as the related contributions and proposed changes.72 With specific needs, IVASS may provide for further consultations, such as meetings with the representatives of the interested parties, also at the request of the parties themselves; interviews; formulation of questionnaires; and publication of documents of discussion, aimed at the acquisition of data and information useful for the regulatory procedure.73 Moreover, IVASS can carry out further consultations if it is necessary 67

See Article 6, Regulation n. 3/2013. IVASS, where deemed necessary, may provide for further forms of advertising, see Article 6, Regulation n. 3/2013. 69 See Article 6, Regulation n. 3/2013. 70 See Article 6, Regulation n. 3/2013. 71 See Article 7, Regulation n. 3/2013. 72 According to Article 7, Regulation n. 3/2013, if the contributions and proposals received contain data or information that, by their nature, are confidential, their senders can ask IVASS, stating the reasons, not to proceed with the publication of the paper or proposal, or to publish it anonymously. If the final version of the regulatory act accepts the proposal that the sender requests to omit publication, IVASS will still make the proposal public anonymously. 73 See Article 6, Regulation n. 3/2013. 68

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to make substantial changes to the scheme of the regulatory act following the examination of the results of the public consultation.74 IVASS’s duty to conduct consultations before adopting regulatory measures protects the interest of the parties and ensures their participation in the regulatory process. The participation of interested parties makes up for a lack of representativeness of the authority. As a result, the introduction of a new provision in the final text of the regulatory act was deemed illegal when this rule was not included in the text submitted for public consultation. This omission prevented the new provision to be introduced, respecting the rules that ensure the transparency of the authority’s regulatory process.75 In addition to providing for further consultations, the Italian legal system also provides some exceptions to the regulatory process outlined so far. If the adoption of the regulatory acts derives from the obligation to implement European Union provisions or national legislation, IVASS can justify the regulatory choices by referring to the guidelines that emerged and the work carried out at international, community or national levels.76 IVASS can omit the analysis provided in the illustrative report called Preliminary AIR if the regulatory action is implementing national or European Union legislation characterised by limited margins of discretion or does not entail appreciable additional costs for the recipients of the standard.77 IVASS may derogate from the provisions of the regulatory process also by providing procedures and terms for carrying out the procedure other than those established in that process. This is allowed if the provisions of the regulatory process are not compatible with the reasons of necessity and urgency or of confidentiality, connected to the need for (i) the protection of policyholders, the orderly conduct of insurance business, transparency and market integrity, also due to exceptional changes in market conditions, and (ii) a timely implementation of EU and national rules, and (iii) do not compromise the achievement of the purposes of the act.78 Moreover, IVASS can avoid the regulatory process when adopting acts having purely an interpretative or application purpose, which therefore do not set up new rules, as well as legal opinions related to existing rules.79 It is not always easy to distinguish between a pure interpretation of a rule and an introduction of a new rule as a result of that interpretation. This criticality is probably unavoidable. The interpretation of a rule provided by the same authority that issued it is considered

74 See article 6, Regulation n. 3/2013 under which these further consultations must take place according to the methods and terms established on the basis of the complexity of the changes. 75 See the rulings of the administrative Court—TAR Lazio—that has jurisdiction over appeals against acts adopted by IVASS: TAR Lazio, 27 October 2010 n.33044; TAR Lazio, 27 October 2010 n.33033; TAR Lazio, 27 October 2010 n.33133; TAR Lazio, 27 October 2010 n.33031. 76 See Article 4, Regulation n. 3/2013. 77 See Article 2, Regulation n. 3/2013. 78 See Article 2, Regulation n. 3/2013. 79 See Article 2, Regulation n. 3/2013.

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an authoritative opinion because it comes from the person who issued the rule but only binds the authority. Supervised entities are interested in knowing how the authority is interpreting their rules because it dissolves the uncertainty about the conduct expected of the authority. However, they can deem such interpretation unlawful and therefore not respect it. Indeed, only the courts have the task of interpreting the rules, thus binding both the authority and the supervised entities. On the other hand, IVASS shall disclose all appropriate recommendations or interpretations for transparency and fairness in the behaviour of supervised entities.80 The rules on the insurance sector include both (few) general principles and (many) detailed rules. While interpretations necessarily refer to existing rules, recommendations may consist of exhortations to conform to certain market practices with general principles providing operational indications in this regard. IVASS spreads these recommendations as Letters to the Market (in the past called Circulars).81 They arise from the results of a supervisory activity, a litigation with customers, reports and proceedings of other supervisory authorities.82 However, they are also used to inform about the self-assessment process that IVASS expects the recipients to follow83 or to draw the attention of insurers operating under the freedom of service (FOS) or freedom of establishment (FOE) regime to the Italian rules applicable to them.84 They should not introduce new rules.85 If this happens instead, these new rules had therefore not been introduced by the procedures requesting for public consultation. Supervised entities not intending to comply with these recommendations, considering them incorrect or illegitimate, can oppose any sanction that the authority imposes on the assumption that the company has violated the behaviour (or the new rule) indicated in the Letter.86 Finally, at each stage of the regulatory activity, IVASS can establish advisory panels representative of interested parties and consumers for the study and analysis of issues relating to the regulation activity of IVASS.87 The authority, therefore, did not provide for a single stakeholder group. This choice differs from the model adopted for the European Supervisory Authorities (ESAs) by the EU legislator.88

80

See Article 5 CAP. The list of the Letters to the Market and Circulars is available in English at https://www.ivass.it/ normativa/nazionale/secondaria-ivass/regolamenti/index.html?com.dotmarketing.htmlpage. language¼3. 82 See, e.g., the Letter to the Market of 17 March 2020, Joint Communication of IVASS—Bank of Italy: offer of products linked to loans. 83 See, e.g., the Letter to the Market of 5 July 2018, Guidelines on the application of the principle of proportionality in the system of governance. 84 See, e.g. Letter to the Market of 1 April 2019, EEA insurance undertakings operating in Italy— new regulations on dormant life assurance policies. 85 Clarich (2019), p. 96. 86 See Consiglio di Stato—that is the administrative court of Appeal to the rulings of TAR—of 1 August 2012, n 5434. 87 See Article 6, Regulation n. 3/2013. 88 See Article 37 of Regulation (EU) No 1094/2010 of 24 November 2010 establishing EIOPA. 81

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On the other hand, a single stakeholder group has been adopted for financial markets and products by CONSOB, the competent Italian supervisory authority.89 Moreover, IVASS (and EIOPA) did not adopt rules setting forth the publication of details of staff meetings with external stakeholders, as the European Securities and Markets Authority (ESMA) did.90

10.2

Dissemination of Information on Official Actions and the Insurance Sector

Transparency is a standard related to all the supervisors’ tasks without being limited to the regulatory process. The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), the predecessor of EIOPA, adopted a list of Recommendations on the independence and accountability of supervisory authorities in 2006.91 CEIOPS recommended the supervisory authority to adopt a clear, transparent and consistent supervisory process and rules92 since the authority must operate in a transparent and accountable manner.93 CEIOPS outlined the fact that accountability and transparency are also interlinked. The supervisory authority should make information on its role publicly available to provide transparency in respect of its actions and publish a regular report in which the objectives and the substance of its work are described. The supervisory authority is to provide information about its official actions concerning failed undertakings. Furthermore, the supervisory authority should publish information about the general financial situation of the insurance industry.94 The Italian legal system was already previously in line with these recommendations. Nonetheless, the implementation of Solvency II pushed for a fine-tuning of the rules in these fields. Regarding information about the insurance industry, Article 4 of Law 12 August 1982, No. 576, mandated the supervisory authority to publish an annual report on its activity, which should also contain significant data on national and Community insurance activities, as well as other studies relating to the insurance market. This principle has been embedded in Article 5, para. 3, CAP, under which IVASS shall perform the activities necessary to promote an appropriate degree of consumer protection and to develop the knowledge of the insurance market, including statistical and economic surveys and the gathering of input for the formulation of insurance policy lines. The principle is complemented by Article 5, para. 3, CAP,

89

CONSOB, Delibera n. 20477 of 12 June 2018. Enriques and Gargantini (2020), p. 355 refer this criticism to CONSOB. 91 These Recommendations are available at https://www.mnb.hu/letoltes/pszafhu-szolvencia-recia2.pdf. 92 See at point 40. 93 , See at point 11. 94 See at point 22. 90

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according to which IVASS shall perform the activities necessary to promote an appropriate degree of consumer protection and to develop the knowledge of the insurance market, including statistical and economic surveys and the gathering of input for the formulation of insurance policy lines, and Article 190-bis, para. 1, CAP, which requires IVASS to regulate the frequency, terms and procedures under which the supervised entities have to send data and information to conduct statistical surveys, studies and analyses of the insurance market.95 IVASS publishes annual reports and economic and supervisory analyses, as well as statistics with data on the business of Italian insurance undertakings.96 IVASS also publishes data on the complaints received by Italian insurance undertakings at an aggregate level and broken down by a single undertaking. Moreover, IVASS publishes data provided by insurance undertakings with head office in another EU country carrying out business in Italy under the FOS or FOE regime, if these undertakings received more than 20 complaints in a year.97 IVASS collects and publishes data every semester and year.98 Complaints are reported for life business, non-life business except motor liability, and motor liability. Published tables contain interactive buttons that allow one to sort insurance undertakings by various keys (number of complaints, claims/premiums indicator, complaints/contracts indicator). The indicators calculated for each undertaking can be compared to the average market values, also indicated in the tables. The tables mirror the classification that is required of undertakings when submitting data to IVASS.99 Although reported by each company, the average processing times of complaints are not published by IVASS. Regarding information on the actions taken during the sanctioning procedures against the entities supervised, Legislative Decree 13 October 1998, No. 373, provided that the dissemination of acts and measures is also ensured through the drafting of a Supervisory Bulletin by the authority. This Bulletin, published on the IVASS website monthly, illustrates the main regulatory and administrative measures laid down by the Institute, as well as sanctions adopted in the performance of its mission.100 The sanctions to be imposed on supervised entities violating the rules can consist of administrative pecuniary sanctions and, in case of infringements of the rules on distribution, disciplinary sanctions, including administrative pecuniary sanctions. Article 325-ter CAP provides that the orders imposing the sanctions, the judgments on appeals issued by the administrative courts and the decrees relating to extraordinary petitions to the President of the Italian Republic

95

See IVASS Regulation No. 36 of 28 February 2017. Publications and statistics are available in English at https://www.ivass.it/pubblicazioni-estatistiche/index.html?com.dotmarketing.htmlpage.language¼3. 97 See Article 9 of IVASS Regulation No. 24 of 19 May 2008. 98 Reporting on complaints are available in English at https://www.ivass.it/pubblicazioni-estatistiche/statistiche/reportistica-reclami/index.html. 99 See Annex 2 to IVASS Regulation No. 24 of 19 May 2008. 100 The Bulletin is available in English at https://www.ivass.it/pubblicazioni-e-statistiche/ pubblicazioni/bollettino-vigilanza/index.html?com.dotmarketing.htmlpage.language¼3. 96

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shall be published, in the form of a notice, in IVASS’ Bulletin and website. On account of the infringement as well as of the interests involved, IVASS may establish further forms of publicity of the measure, and order the infringer to bear the relevant costs. However, the rule above-mentioned lists several cases in which IVASS may decide to publish sanctions anonymously, defer the publication, or dispense with the publishing of sanctions.101 According to Article 30 of Regulation No. 39 of 2 August 2018, the order imposing the sanction is published, as an excerpt, in the Bulletin and is available on the website of IVASS, with indication of the sanctioned entities, the assessed breaches, the violated provisions and the applied sanctions.102 In addition to the information on sanctions provided to the public, Article 325-quarter CAP requires IVASS to inform EIOPA of all sanctions imposed for breaches relating to insurance distribution, including those published on an anonymous basis and information on appeals and the outcome of such appeals, as well as to annually provide EIOPA aggregated information regarding all administrative sanctions and other sanctioning measures.

11

Conclusion

Solvency II identifies the protection of policyholders and beneficiaries as the main objective of supervision. The Italian Code of Private Insurance (CAP) implemented such principle, and transparency became a standard for supervision rather than the objective, thus reversing the relationship purpose/medium that was established earlier in the CAP. This standard is twofold. The supervised entities—insurance undertakings and insurance intermediaries—must be transparent to the supervisor and stakeholders in the insurance market. Likewise, the supervisor must be transparent to them when exercising its tasks of supervision and regulation. Several aspects of the Italian regulatory framework were already in line with the provisions of the EU framework, as outlined by both Solvency II and IDD. The implementation of this framework pushed for a fine-tuning of the rules in these fields. Also, the decision-making process on regulatory measures complies with the standards set forth by the International Association of Insurance Supervisors (IAIS) and the Better Regulation Guidelines issued by EU.

101

See Article 325-ter, respectively, para. 2, 3, and 4, CAP. In addition, “An excerpt of the rulings issued by the administrative judges who decide on the appeals and the rulings on extraordinary appeals to the President of the Republic, are posted in the Bulletin. As regards anti-money laundering breaches per Legislative Decree no. 231 of 21 November 2007, as amended by Legislative Decree no. 90 of 25 May 2017, an excerpt of the start of the legal proceedings and of its outcome are also published in the Bulletin Sanctions and information referred to in the previous sentences are published in IVASS website for five years”.

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References Doctrine Alpa G (1992) La trasparenza del contratto nei settori bancario, finanziario e assicurativo. Giurisprudenza italiana IV Berti de Marinis GM (2016) La nuova trasparenza pre e post negoziale alla luce della direttiva MIFID II e del regolamento MIFIR. In: Troiano V, Montroni R (a cura di) La MIFID II: Rapporti con la clientela – regole di governance – mercati. Padova Clarich M (2019) Manuale di diritto amministrativo. Bologna Corrias P (2017) Informativa precontrattuale e trasparenza nei contratti assicurativi tra testo unico finanziario e codice delle assicurazioni. Responsabilità civile e previdenza De Mari M, Spada L (2005) Intermediari e promotori finanziari. Bologna Dreher M (2015) Treatises on Solvency II. Springer Enriques L, Gargantini M (2020) La CONSOB: Natura, Organizzazione e Funzioni. In: Cera M, Presti G (diretto da) Il Testo Unico Finanziario. Bologna Floreani A (2017) Solvency II: the supervisory reporting and market disclosure. In: Marano P, Siri M (eds) Insurance regulation in the European Union Solvency II and beyond. Palgrave MacMillan Gaggero P (2013) Trasparenza del contratto e rimedi di autotutela. Rivista trimestrale diritto e procedura civile Lucantoni P (2011) Le regole di condotta degli intermediari finanziari. In: Gabrielli E, Lener R (a cura di) I contratti del mercato finanziario. Torino Maggiolo M (2012) Servizi ed attività d’investimento. Milano Marano P (2017a) The “Mifidization”: the sunset of life insurance in the EU regulation on insurance? In: Liber Amicorum in Honour of Joannis Rokas. ΝΟMIKΗ ΒIΒΛIΟΘΗKΗ, Athens Marano P (2017b) La “Mifidización”: El atardecer de los Seguros de vida en la normativa europea sobre seguros? Revista Española de Seguros Ostrowska M (2018) Transparency regime within the financial institutions: does it really work? In: Grima S, Marano P (eds) Governance and regulations: contemporary issues. Emerald, Bingley Rimini E (2020) Le regole di condotta. In: Cera M, Presti G (diretto da) Il Testo unico finanziario. Bologna Santoro V (1994) Gli obblighi di comportamento degli intermediari mobiliari. Rivista delle società Sartori F (2004) Le regole di condotta degli intermediari finanziari. Milano Siri M (2007) Trasparenza delle operazioni e tutela dell’assicurato nel codice delle assicurazioni e nella legge sulla tutela del risparmio. In: Amorosino S, Desiderio L (a cura di) Il nuovo codice delle assicurazioni. Milano Van Hulle K (2019) Solvency II requirements for EU insurers. Solvency II is good for you. Intersentia, Cambridge Venuti MC (2000) Le clausole generali di correttezza, diligenza e trasparenza ne testo unico delle disposizioni in materia di intermediazione finanziaria. Europa e diritto privato

Case Law Consiglio di Stato, 1 August 2012, n 5434. TAR Lazio, 27 October 2010 n.33044; TAR Lazio, 27 October 2010 n.33033; TAR Lazio, 27 October 2010 n.33133; TAR Lazio, 27 October 2010 n.33031

Transparency in Insurance Regulation and Supervisory Law of Malta Geoffrey Bezzina, Simon Grima, and Andre Farrugia

1 Introduction One of the most notable economic pillars in Malta is undoubtedly the financial service industry. Over the years, the Mediterranean Island of Malta has managed to attract a fair share of international business amid superior economic growth. This financial services’ niche contributed to around 6% of gross value added in 2018, surpassing the EU average over a period of ten years (MFSA Annual Report, 2018). In addition, despite a challenging European economic environment, Malta registered an increase of 37% in non-life gross written premium (GWP) in the second quarter of 2019 (year-on-year), placing the country in the third highest guaranteed minimum pension/gross domestic product (GMP/GDP) (after Luxembourg and Belgium) in the EU28 for the second consecutive year.1 One of the reasons making Malta an investment domicile is its financial legislation and regulations, which hail from those of the European Union. Malta was one of the first few jurisdictions in the EU to legislate on virtual financial assets, and with little tangible business results so far, compared to its tremendous effort, rules and other regulatory initiatives were rolled out within a relatively short period of time, placing the island at the forefront of such an innovative niche of business.

1

EIOPA Financial Stability Report 2019.

G. Bezzina University of Leicester, Leicester, UK e-mail: [email protected] S. Grima (*) · A. Farrugia University of Malta, Department of Insurance, Faculty of Economics, Management and Accountancy, Msida, Malta e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Marano, K. Noussia (eds.), Transparency in Insurance Regulation and Supervisory Law, AIDA Europe Research Series on Insurance Law and Regulation 4, https://doi.org/10.1007/978-3-030-63621-0_8

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It may be observed that the insurance sector in Malta has proved rather resilient despite the many challenges relating to the last financial crisis and the current pandemic (COVID-19). As at the end of 2019, the total number of insurance undertakings totalled 70, up from 66 in 2018 and 63 in 2017. Moreover, the country has its own suite of indigenous regulatory frameworks, such as the Protected Cell Company (PCC) and Incorporated Cell Company (ICC) legislation, which makes it an attractive and somewhat advantageous location for insurance activities in Europe.2,3

2 The Regulator 2.1

The Malta Financial Services Authority (MFSA)

The MFSA is the single regulator for all financial services in Malta incorporating the banking, insurance and investment sectors under one roof (MFSA 2019). One does observe, however, that its approach to particular aspects of supervision is sectorally aligned, reflecting the respective different legislative frameworks that have evolved and updated ever since 1994, when a legislative package of laws was passed through parliament unanimously in the island’s preparation to join the EU and in an effort to break the dichotomy between an ‘offshore’ and an ‘onshore’ regime. The conduct of business is, however, aligned horizontally across the main sectoral areas of banking, securities, insurance and pensions. A specific unit that was tasked with handling authorisations of new applications and approval of senior management was disbanded in the first quarter of 2020, with its functions being merged into the respective supervisory functions.4 The Authority promotes itself as being accessible and seeks discussion with the respective players in the market for authorisation, regulatory compliance and business solutions. The MFSA applies a rigorous due diligence process and takes a firm approach in regulating the industry to ensure that the market players meet all regulatory standards.5 The MFSA regulates the financial service industry for both conduct and prudential matters. Having been established under the Malta Financial Services Authority Act,6 the MFSA is responsible for the authorisation of insurance and reinsurance 2 Angele Galea St. John, Captives Insurance Times. VCIA Special. European Domicile. The opportunity of regulatory innovations, pp. 32–34. Nov 12, 2013. http://www. captiveinsurancetimes.com/citimes/CITimes_issue_53.pdf. 3 Finance Malta (2019), pp. 4–32. 4 Malta Financial Services Authority, ‘The MFSA Announces Organisational and Senior Leadership Team Appointments’ (Malta, 14 February 2020)