Olga Orzechowska – Team Manager at the Insurance Governance and Distribution Supervision Department at the UKNF

The consultation on draft recommendations for insurance undertakings on insurance distribution is a good moment to set out the rationale behind the ongoing work on the recommendations and the goals we want to achieve by introducing them.

Recommendations are an instrument the supervisor uses to present its expectations about how a specific area of business of supervised entities should operate. In its practice of insurance market supervision, Komisja Nadzoru Finansowego (KNF) issues recommendations primarily to address irregularities it observes when performing its supervisory tasks. Recommendations are also a response to questions put to the supervisory authority about the interpretation of legal provisions. In its recommendations, the KNF also points to the market practices which should be used by supervised entities to eliminate irregularities. 

The draft recommendations are to supersede the Guidelines of 24 June 2014 for insurance undertakings on insurance distribution. The guidelines, issued more than 10 years ago, are already slightly obsolete and inappropriate for today’s reality, not only the legal one. The guidelines were the KNF’s response to irregularities occurring in the market prior to the entry into force of the Insurance Distribution Directive (IDD) and the Polish Act on insurance distribution.

Both legal acts substantially changed the requirements on insurance distribution. The customer was placed at the heart of these regulations: each insurance product offered should meet the customer’s needs and requirements in terms of the scope of insurance cover. The main objective of these regulations is to eliminate the offering of ‘empty boxes’, i.e. products that for various reasons are not good for the customer and fail to provide real protection in case of an insurance event. Such protection is provided mainly by the scope of insurance cover tailored to the customer’s needs, with no exemptions from liability ‘popping up’, as well as by the sum insured which provides actual support if an insured event occurs. It’s also crucial that the information provided by the distributor to the customer is clear and accurate, so that the customer can make an informed decision on the choice of the product. A natural consequence of these changes was an increase in the level of expectations towards distributors. They are required to act honesty, fairly and professionally, in the best interest of their customers. 

The requirements introduced by the IDD and the Act on insurance distribution forced the adaptation of distribution processes at insurance undertakings. This involved changes to the rules for both own distribution, carried out by authorised employees, and for distribution carried out through cooperation with insurance agents and brokers, covering also the oversight over the performance of distribution activities and information disclosure obligations towards customers, as well as remuneration policy in relation to employees and intermediaries, so as not to encourage them to place their own interest above the customer’s interest. The new requirements also included the requirement to oversee the performance of the obligation to complete regular professional training.

At the same time, a change was made to the scope of oversight over insurance distribution carried out by insurance undertakings and insurance intermediaries. The KNF’s tasks include the assessment of such entities’ compliance, performed while conducting supervision activities.

When performing its tasks, the supervisory authority gained more knowledge about the activities of insurance distributors and identified undesired practices of insurance undertakings and insurance intermediaries. The outcome of those efforts are the supervisory expectations expressed in the draft recommendations on insurance distribution. The KNF also explained how it understands compliance with the standards following from the regulations applicable in the area addressed by the draft recommendations. Therefore, the draft recommendations will be useful for insurance undertakings and other distributor categories (insurance agents and insurance brokers) engaging in distribution activities. 

The aim of the recommendations is to protect the customer’s interest by improving the quality of distribution. In fact, from the point of view of an insurance undertaking, it is essential that it can effectively check how its insurance products are offered, what doesn’t work in the distribution process and, as a result, exposes the undertaking to risk. From this perspective, we notice problems related to incorrect application of the law in customer relations, mostly when determining the customer’s needs and requirements and when performing disclosure obligations towards the customer. The definition of needs and requirements is the key task of the distributor; any mistake might have negative consequences for the customer, leading to a contract that doesn’t fully protect the customer’s life, health, or property.

The existing issues stem also, to a large extent, from improper organisation of distribution operations and inadequate oversight over own distribution and insurance agents. 

Another important point identified in the draft recommendations is the elimination of distribution of products that fail to provide an appropriate value for the customer, regardless of the type of product and distribution channel. In this respect, we continue the initiative set up with the product intervention measure and Recommendation U of 2023. These solutions are well known and applied by insurance undertakings. 

The text of the draft recommendations gathers in one place the interpretations of laws the supervisory authority applies in its direct relations with insurance undertakings and insurance intermediaries, as well as the answers to questions that are asked during supervisory or educational initiatives (e.g. as part of CEDUR). It also contains elements of good practice proposed by market organisations. 

By submitting the draft recommendations for consultation, we hope to have a constructive dialogue with the market about their final version. A sound review of the draft regulations will certainty help create a document that will significantly improve the quality of distribution processes at insurance undertakings.