The amount of insurance commissions paid to insurance intermediaries for the placement of life insurance contracts has been a thorn in the side of consumer protection groups and the German insurance regulator BaFin for years. Another area which came increasingly in the focus of the regulator’s attention are payment protection policies and the related remuneration models.
However, the associations of insurers and intermediaries consider a cap on commissions to be unconstitutional and in conflict with EU law and warn that appropriate advice cannot be provided without costs and a shift to fees to be paid by the customers directly would be detrimental in particular to the financially weaker customers.
In 2014, the introduction of a ban or cap on insurance commissions could be prevented by the industry and only indirect measures to motivate insurers to reduce commissions were introduced. In 2018 the effects of such measures on the level of commissions were reviewed and did not meet BaFin’s expectations. Subsequently, BaFin suggested to introduce a limitation of commissions to a percentage of the gross premium depending on the quality of the advice provided by the intermediary (flexible cap).
Following BaFin’s proposal, on 18 April 2019, the German government made a draft Law for a Cap on Commissions for Life and Payment Protection Insurance available, allowing the industry to comment until 6 May 2019 before the draft Act will be given into the legislative process.
The draft Act mainly provides the following:
- Introduction of a cap on any remuneration, commission, fee or other financial benefit granted on the basis of the execution or continuance of endowment policies (initial commission including subsequent payments during the term of the policy);
- The cap amounts to 2.5% of the gross premium agreed and may be increased to 4% of the gross premium if certain qualitative criteria are met;
- The insurer needs to install a system to define and monitor the relevant qualitative criteria if it wishes to make use of the increased cap;
- Examples of qualitative criteria are the number of complaints and cancellations of policies, compliance with statutory requirements and verifiable measures to ensure a comprehensive advice of high quality in the best interest of the customers;
- In relation to payment protection insurance for consumers, the cap is fixed at 2.5% of the insured credit amount;
- An arm’s-length requirement for outsourcing remuneration paid by insurers is introduced and if an intermediary provides services in addition to the intermediation of policies, a remuneration for those services in addition to the initial commission may only be granted if the insurer can demonstrate that the services lead to a corresponding saving on the side of the insurer;
- In case of payment protection insurance either an initial commission or a remuneration for services provided may be paid – not both.
These provisions will apply to German insurers and intermediaries as well as market participants from other EEA states active in Germany under the freedom of services or freedom of establishment. The provisions apply accordingly in the case of group insurance contracts. If the provisions will be enacted, they should come into force six months following the publication of the Act in the Federal Gazette and apply to all contracts concluded after that day. Insurers will be obliged to adapt existing contracts to the requirements as far as legally possible.