15 November 2013

BaFin: Incentives in sales - Recommendations for improved consumer protection

The insurance industry has learned its lesson: compliance officers, risk managers and experts on the planned European Solvency II regulations now recognise that certain practices in sales can cause massive damage to a company's reputation and cost it a great deal of money.

The German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft – GDV) responded by developing a code of conduct for selling insurance products which insurance companies can adopt.

Effective consumer protection also involves avoiding unnecessary costs, as the costs an insurance company incurs if its reputation is damaged are also passed on to policyholders. In order to protect consumers, it is therefore essential that insurance companies establish clear rules for sales incentives and also comply with them.

However, the question remains whether all insurance companies have in fact seriously addressed the issue of sales incentives and whether companies could be underestimating the problem under their own roof. This article is therefore intended to increase awareness of this issue.

Why has BaFin not yet imposed any binding requirements for intermediaries or insurance companies although consumer protection is at stake? For intermediaries, the answer is simple: BaFin does not supervise any insurance agents or brokers. It is only in the case of tied intermediaries (those employed exclusively by one company) that BaFin is able to exert an indirect influence through supervision of the intermediaries' insurance companies. However, this is not comparable with supervision in the traditional sense.

In order to ensure the protection of policyholder interests, BaFin has developed a set of recommendations which insurance companies should follow when managing sales operations. Depending on an insurance company's business model – in particular regarding its sales channel – and the company's size, these recommendations can be implemented in different ways, and further measures can also be taken. BaFin does not intend this to be an exhaustive list of recommendations. What is important is that the management board takes material decisions on sales-related measures and oversees compliance with them.

Recommendations include:

• Clarify the responsibilities of the management board
• Perform a risk inventory
• Establish internal guidelines
• Prepare positive or negative lists of incentives
• Define responsibilities
• Describe events
• Separate event organisation from accounting
• Introduce prior checks
• Review agreements with external providers
• Provide for sanctions
• Involve sales
• Monitor measures
• Consider alternatives

Full press release

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