Stability of insurance companies enhanced?

An amendment to the Act on Insurance implementing, inter alia, the Solvency II Directive into the Czech legal system, was published in the Collection of Laws under No. 304/2016. This legislative change mainly aims to enhance the financial stability of insurance and reinsurance companies and increase the protection of their clients. It also harmonises rules for the performance of these activities within the European Single Market and expands the Czech National Bank’s competencies as a supervisory body. The Act on Insurance Intermediaries and Loss Adjusters has also been amended.

These legislative changes aim to unify the risk and capital management systems of insurance companies throughout the EU. Insurance companies, which are authorised to carry out their businesses in the EU based on the EU single passport similarly as banks, will be able to apply their internal processes globally, thus harmonising their internal procedures. In the long term, this may save expenses incurred for these internal activities.

In contrast, insurance companies have expressed concern about the elimination of or the ban on associated activities. In accordance with the new legislation, insurance companies will no longer be allowed to carry out activities associated with insurance, including, for example, intermediation of other financial services (e.g. loans). The Ministry of Finance claims that this complies with the requirements set by Solvency II, according to which member states should ensure that all insurance companies applying for a permit restrict the scope of their business activities to insurance activities and operations directly related to insurance, eliminating any other business activities. However, the content of activities directly related to the permitted activities has been a matter of controversy. The question therefore arises what activities will actually be performed by insurance companies in the future. A feeling of uncertainty persists among insurance businesses as to whether the above changes on top of the proposed restriction of permitted activities may not end up threatening their stability.

An amendment to the Act on Insurance Intermediaries and Loss Adjusters has been adopted along with the amendment to the Insurance Act. According to this amendment, insurance intermediaries will only be entitled to a proportionate part of their compensation when an insurance contract is terminated prematurely for reasons other than a reported claim, provided that this happens within five years from the date on which it was concluded. In addition, when calculating a surrender value, insurers will have to spread the acquisition costs over a period of five years from the insurance policy inception date or over the entire insurance period, if shorter. This may increase the surrender value paid to policy holders upon termination of insurance. The above changes will affect insurance contracts concluded after the effective date of this amendment.

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