The Law on the Organisation of Insurance Activity refers to two types of insurance intermediary: the insurance agent and the insurance broker. However, the law does not comprehensively address their legal status or working practices. Taken together, a number of discrepancies in insurance legislation have led to the appearance on the Russian market of intermediaries which operate in the margins between agent and broker status, and which are frequently involved in corrupt practices and breaches of legislation.

According to the law, an insurance broker is a recognised insurance practitioner. Brokers must be licenced and must make periodic statutory returns. The work of an insurance agent is effectively regulated only by the insurance company which employs him or her. Furthermore, an insurance agent may act on behalf of an unlimited number of insurers.

In order to prevent such practices, a working group has been established in order to develop proposals to regulate the activities of all types of insurance intermediary.

The working group met for the first time in February 2011 at the offices of the Federal Anti-monopoly Service to establish proposed changes to insurance legislation and, in particular, to define the functions of insurance intermediaries more precisely.

The working group comprises representatives of the Ministry of Finance, the Federal Financial Markets Service (of which the Insurance Supervisory Authority is now a part), the Federal Anti-monopoly Service, leading insurance companies and representatives of the Society of Insurance Lawyers. At their first meeting, the participants discussed:

  • the problems involved in clarifying the legal status, function and responsibilities of insurance agents and insurance brokers;
  • the responsibility of insurers for their agents' activities; and
  • international practice in the regulation of insurance intermediaries' activities.

As a result, the working group decided to prepare proposals for a service standard for insurance brokers and to identify ways of removing conflicts of interest in the market for insurance intermediaries' services. This will involve establishing the group's position on such key questions as the source of brokers' remuneration and the need to create an insurance agents' register.

While this process continues, draft alterations to the law are being prepared for consideration by the State Duma. The aim is to clarify the status of insurance agents and establish new regulatory standards for their activity.

The legal basis for insurance agents' activity is codified in the provisions on agents' services in Chapter 52 of the Civil Code and Article 8 of the law. As the proponents of the draft law have observed, insurance agents in the Russian market have traditionally represented a specific insurer and played an intermediary role between the insurer and its clients. However, in recent years the working practices of such agents have effectively transformed them into independent operators. For practical purposes, most agents have taken on a brokerage role, working with many insurers. Moreover, some insurance agents have been guilty of unscrupulous behaviour and even fraud. Sometimes, would-be insureds sign a policy and only subsequently discover that the insurer's licence has been suspended, as the agent deliberately withholds this information. It is all too common for agents to try to take their client base with them when they leave an insurer's employment.

Since the Law on Compulsory Liability Insurance for Motor Transport Owners was signed, insurers that have been excluded from membership of the Union of Motor Insurers have failed to return 2.5 million blank policies to the organisation - most of these are now in illicit circulation. According to the union, an average insurance premium of Rb2,300 a policy gives such policies a black-market value of Rb1.2 billion a year. Of the many crimes committed by insurance intermediaries, only a tiny percentage are discovered and brought to court. Insurers estimate the damage from such crimes in the hundreds of millions of roubles.

The plan to prevent such abuses involves amending Article 8 of the law and adding a new sub-clause to Part 4, Article 30, which would give the insurance supervisory authority extended powers of control over agents. The alterations are intended to:

  • clarify the legal status of an agent (restricting it to individuals who represent an insurer);
  • link the insurance agent to a specific insurance group or organisation;
  • introduce a certification programme for insurance agents, with regular training and examinations;
  • create a unified, readily accessible register of certified insurance agents - this will allow insureds and other interested parties to ensure that they are doing business with a genuine insurance agent; and
  • introduce compulsory liability insurance for insurance agents.

The draft law is expected to be presented to Parliament in the first half of 2011.

Better regulation of insurance intermediaries is long overdue. International experience indicates that the activity of all insurance intermediaries could be governed by a separate legislative act; however, the steps already taken point towards the development of an efficient, modern insurance market in Russia.

For further information on this topic please contact Constantin Saranchouk or Polina Kondratyuk at Clyde & Co (CIS) LLP by telephone (+7 495 728 99 55), fax (+7 495 926 49 40) or email ([email protected] or [email protected]).