The Austrian parliament recently adopted the government bill for the new Insurance Distribution Act Amending Act 2018 [Versicherungsvertriebsrechts-Änderungsgesetz 2018], which will transpose the Insurance Distribution Directive into Austrian law. For the time being, this only affects insurance and reinsurance companies; there are no transposition measures for insurance intermediaries as yet. The main changes relate to comprehensive information obligations, rules regarding remuneration, stricter provisions concerning product approval procedures and mandatory further training. Another area covered in detail by the new law is the distribution of insurance-based investment products.
The Austrian parliament adopted the government bill for the new Insurance Distribution Act Amending Act 2018 [Versicherungsvertriebsrechts-Änderungsgesetz 2018 – VersVertrRÄG 2018; the “Bill”], which will transpose the Insurance Distribution Directive (EU) 2016/97 (“Directive”) into Austrian law, at least for insurers and reinsurers. The reason for this is that the Bill is primarily intended to transpose those parts of the Directive that relate to direct distribution. For now, there are no transposition measures concerning insurance intermediaries. The core element of VersVertrRÄG 2018 is the integration of a 6th section into the Insurance Supervision Act 2016 [Versicherungsaufsichtsgesetz 2016 – VAG 2016], where the current rules relating to information and conduct of business in VAG 2016 are to be merged with the new provisions pursuant to the Directive. The new rules will come into force on October 1, 2018 and cover the following measures in particular:
1. Obligations in relation to information, conduct of business and advice
According to the general principle applicable to the distribution of all products, insurance companies must “act honestly, fairly and professionally in accordance with the best interests of the policyholders”. As a result, insurance companies have an obligation to provide clients with comprehensive information, with a distinction made (in simplified terms) between distribution-related information requirements and product-related information requirements.
Distribution-related information mainly includes information concerning the insurer itself, which must be communicated to the policyholder in good time before a contract is concluded. It essentially concerns the identity, address, responsible supervisory authority and nature of the business. Among the things that must be disclosed is the fact that it is an insurance company and that the insurance company will offer the policyholder advice before the contract is concluded. In addition, information must be communicated concerning particular complaint opportunities and dispute resolution procedures.
Every contract offered must be consistent with the policyholder’s insurance demands and needs. Insurers are therefore obliged, before concluding an insurance contract, to obtain from the policyholder the information that they need to determine the latter’s demands and needs (“demands-and-needs test”). There is no need to conduct a comprehensive requirement analysis. With regard to the distribution of insurance-based investment products, the Bill also demands that information be obtained concerning policyholders’ knowledge and competence in the investment field, their financial situation, including their ability to bear losses, as well as their investment objectives and that a suitability test be performed, as policyholders should only be offered an insurance-based investment product that is suitable for them in view of the information obtained.
The performance of the demands-and-needs test and/or suitability test with insurance-based investment products is a prerequisite for the subsequent provision of advice to the policyholder. The insurer must provide the policyholder with a personalised recommendation as to which contract from its range of products best meets the policyholder’s demands and needs or, in the case of insurance-based investment products, is suitable for the policyholder before the latter submits his or her contract declaration. In addition, the insurer must also provide the corresponding reasons (advisory obligation). According to the legislative materials, such advice can also be provided online via the internet, at least with insurance products that are not insurance-based investment products, if certain prerequisites are met. With the distribution of insurance-based investment products, a declaration of suitability on paper or on another durable medium must be made available to the client in addition to the personalised recommendation.
However, there are also exceptions; there is no obligation to provide advice if:
- the insurance concerns large risks (Article 5(34) VAG 2016),
- the policyholder wishes to conclude a specific insurance contract or, with the distribution of insurance-based investment products, does not want to provide the additional information just mentioned or provides insufficient information in this respect, and in a separate declaration demonstrably waives the right to receive advice and this waiver must not be prompted by the insurance company, or
- the contract is distributed via an entitled third party (insurance intermediary, registered ancillary insurance intermediary or an entitled insurance company), unless the insurance company has reason to assume that the policyholder is not receiving proper advice from this party.
Even if advice is waived, the obligation remains to perform the demands-and-needs test. That means that in any case, the offered contract must satisfy the policyholder’s demand’s and needs. However, the policyholder must be warned that the insurer will not assess whether the contract under consideration best meets his or her demands and needs. The same applies to the distribution of insurance-based investment products, as here, too, the insurer will not assess whether the contract is suitable for the policyholder in view of his or her financial situation and investment objectives. For insurance-based investment products, if advice is waived, the suitability test must be replaced by an appropriateness test in relation to the specific type of products or services offered or requested after obtaining the necessary information concerning the policyholder’s knowledge and experience in the investment field, and the policyholder must be warned by the insurer if the latter concludes that the product or service is inappropriate. If the policyholder does not want to disclose this information or provides insufficient information, he or she must be warned that there will be no assessment as to whether the product or service is appropriate for him or her.
Regardless of whether advice is or is not given, the policyholder must be provided with comprehensive product-related and contract-related information about the recommended or alternatively offered suitable product which should enable the policyholder to make a well-informed decision.
In general, the information to be provided to the policyholder must be communicated on paper, in a clear, accurate and comprehensible form, in German (unless explicitly agreed otherwise) and free of charge. Under certain conditions, the information may be provided using a durable medium other than paper or via a website. With telephone selling, the information must be provided verbally and, immediately after the contract has been concluded, repeated in a form just described.
However, with regard to the nature of the provision of product-related and contract-related information, it is essential to make the following distinction: in relation to the distribution of non-life insurance products a standardised information document must be drawn up which sets out this information precisely (“Insurance Product Information Document – IPID”). In relation to the distribution of life insurance products, where the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or disability, a standardised information document must also be drawn up (“Life Insurance Product Information Document – LIPID”). These products are not covered by the Directive, nor by Regulation (EU) 2016/2340 on key information documents for packaged retail and insurance-based investment products (PRIIPs), which provides for a standardised information document (“Key Information Document – KID”) for insurance-based investment products. The introduction of the LIPID closes this protection gap in the Directive.
2. Remuneration rules
The Bill does not impose a remuneration ban. The regulations do, however, subject insurance companies to stringent framework conditions. For example, insurers must not remunerate or assess the performance of their employees/insurance distributors, or be remunerated themselves, in a way that conflicts with their duty to act in accordance with the best interests of their clients. In particular, insurers must not make any arrangement by way of distribution remuneration or otherwise that could provide an incentive to themselves or to their employees/insurance distributors to recommend or offer a particular insurance product to a policyholder even though a different insurance product meets the policyholder’s needs better. The term “distribution remuneration” must be interpreted broadly.
The specification of these (very unclear) provisions is the responsibility of the Austrian Financial Market Authority (FMA), which is granted the power to issue ordinances for this purpose.
Special rules apply to the distribution of insurance-based investment products. In this case, an insurance company may only pay or receive a fee or commission, and may only grant or receive a non-monetary benefit, if
- the party granting or receiving it is the policyholder or a person who is granting or receiving it on behalf of the policyholder, or
- the fee, commission or non-monetary benefit
- does not, according to reasonable judgement, have a detrimental effect on the quality of the corresponding service for the policyholder and
- does not impair compliance with the obligation of the insurer or recipient of the benefit to act honestly, fairly and professionally in accordance with the best interests of the policyholder and entitled parties.
In any case, before the policyholder submits his or her contract declaration, he or she must be informed of the nature of the distribution remuneration which employees of the insurance company receive in connection with an insurance contract.
3. Product governance
The obligations in relation to conduct of business and information are supplemented with an upstream company-internal product approval process known as product oversight and governance requirements (“POG”). POG is intended to regulate the entire product and distribution cycle which begins with the development and manufacture of a new financial product. Exceptions exist with the distribution of insurance for large risks (Article 5(34) VAG 2016) and reinsurance products which are not covered by the POG rules.
According to the Bill, insurance companies must maintain internal procedures for the design and release of every new insurance product as well as every significant change to existing insurance products and also for proper distribution and regular review of the insurance products they have designed. Before an insurer may market or distribute a newly designed insurance product or one with significant changes in a Member State, it must subject this to an internal product release process. A particular target market and the group of suitable clients must be determined for the product concerned. All the relevant risks for this target market must be evaluated and the insurer must make sure that the insurance product and the intended distribution strategy correspond to the target market and the client group. The insurance company must subsequently guarantee that the insurance product will only be marketed on or distributed to the defined target market. The insurance company must review the insurance product regularly, especially to check whether it continues to meet the needs of the target market.
4. Professional requirements / training and development obligation
The members of the Executive Board or Board of Directors, or the Executive Directors who are predominantly responsible for the distribution of insurance products must demonstrably have the knowledge and competence required for proper performance of the duties assigned to them. With regard to all other persons involved in insurance distribution directly or in a managerial capacity, insurance companies must ensure that they have the corresponding knowledge and competence. If necessary, training and professional development opportunities must be offered.
All persons involved in insurance distribution directly or in a managerial capacity must complete ongoing professional training and development on the basis of at least 15 hours per year.
The transposition measures for insurance and reinsurance companies adhere to the (minimum) requirements of the Directive. There has been no “gold plating”. The advisory obligation introduced through the exercising of a Member State’s right of choice corresponds to real insurance practice in Austria and had evidently been desired by virtually all stakeholders. In future, policyholders will have to prepare themselves for even more information concerning the insurance product they desire – the provisions concerning the nature and content of the information to be provided are extremely detailed and comprehensive. Insurers are particularly advised to check their distribution documents very carefully to make sure that they conform to these requirements.
The actions of third parties also pose a risk as even if an insurance company is not directly obliged to advise a client in the event of distribution via an insurance agent, the legislative materials certainly do not rule out responsibility under civil law on the part of the insurance company for violations of the advisory obligation by an insurance agent as an auxiliary that is significantly involved in the realisation of the contract and acting in the insurer’s interests. Of course, the same applies, for instance, to the provision of timely and complete information by the insurance agent. The precise preparation of all persons to be classified as auxiliaries of the insurance company in this sense will also pose a major challenge for insurers which must be resolved.