AFM publishes guidance on the role of the policyholder in group insurance structures

Introduction

On 14 March 2024 the Dutch Authority on Financial Markets (Autoriteit Financiële Markten, the AFM) shared its guidance and interpretation of the role of a policyholder of a collective / group insurance product.¹ The AFM has shared its guidance in light of two rulings from the European Court of Justice (ECJ) from 2022 that significantly impact the distribution structure of group insurance offerings. Since in practice, many insurers engage in partnerships making use of group insurance policies, market participants will welcome the long-expected guidance from the AFM elaborating on the potential applicability of the license obligation for policyholders in a group insurance structure.

In this blog, we address the main elements of group insurance structures, the distribution of insurance products, the ECJ rulings and the guidance from the AFM regarding the potential license obligation for policyholders qualifying as insurance intermediaries.

Group insurance structures

Under a group insurance policy, an insurer covers the risks of multiple insureds, while engaging only one entity as the (group) policyholder. This policyholder adds customers to the policy who accept the existing terms and conditions and become insured under the (group) policy only. The benefit of this structure is that it will only result in one set of terms and conditions, one policy and one contracting party. It was assumed in many EU jurisdiction that the policyholder cannot be seen as an insurance intermediary, eliminating the need for a license as an insurance intermediary. It was also, in some jurisdictions, believed that insureds (not being policyholders) were not in scope of certain customer protection rules, easing the compliance burden with related ongoing requirements (such as the cross-selling prohibition or (pre-contractual) information requirements).

General legal framework: insurance distribution in the EU and the Netherlands

Several parties within the insurance sector play a key part in distributing insurance products within the EU. The insurance distribution channels can vary greatly. Therefore, at a European level the Insurance Distribution Directive (IDD) was introduced to provide minimum criteria for the distribution of insurance products and customer protection throughout the EU. The IDD requires certain insurance intermediaries to obtain a registration or authorization and comply with several organizational requirements, (pre-contractual) information requirements and conduct of business rules.

In the Netherlands, the IDD is implemented in the Dutch Financial Supervision Act (FSA) and regulations thereto. According to Article 1:1 FSA – to the extent relevant for this blog – "intermediating" means all business activities aimed at, as an intermediary, concluding an insurance agreement between a client and an insurer or assisting in the execution of an insurance agreement.

Further to guidance from the AFM and the Dutch legislator (Kamerstukken II 2005/2006, 29708, nr. 19, p. 356-357), it was always understood that "conducting a business" means that the activities are undertaken on a commercial basis, as an independently identifiable (business) activity, not merely supporting the main activity of a company and not occasionally. It was also understood that it was not strictly required that the (legal) person was remunerated for its business activities in order to be subject to the license obligation. Furthermore, an intermediary would not become a contracting party to the insurance contract.

ECJ rulings

In the ECJ decision of 24 February 2022 in joined cases C-213/20 and C-143/20 (Polish ULIP) and ECJ decision on 29 September 2022 in case C-633/20 (Medical Air Ambulance Agency), group insurance structures were put under scrutiny. In particular it concerned the qualification of the policyholder (as an insurance intermediary, potentially subject to the lDD license obligation) and insureds (as policyholders enjoying customer protection rights under the IDD) under such group insurance.

In short, the ECJ concluded that the legal2 person whose activity consists of:

(i) offering its customers membership on a voluntary basis;

(ii) which entitles those customers to insurance benefits, in particular in the event of sickness or accident abroad;

(iii) in return for payment;

(iv) to a group insurance policy; and

(v) to which the legal person has subscribed previously with an insurance company should be regarded as an insurance intermediary that may be subject to the license obligation.

From the Medical Air Ambulance Agency case, it furthermore follows that, different from what used to be market practice in the Netherlands, it is possible for a party to be simultaneously an intermediary and a policyholder (and, therefore, also be a contracting party to the insurance policy). Another difference is that the AFM used to emphasize that whether a (legal) person receives a remuneration for its business activities is not relevant for determining whether that (legal) person qualifies as an insurance intermediary within scope of the license obligation. The ECJ, however, seems to consider the remuneration element as a decisive factor in determining whether a license as an insurance intermediary is required.

A detailed explanation of the ECJ cases can be found in the article written by Aline Kiers and Yael Boekhout published in the Tijdschrift Financieel Recht In De Praktijk (Number 4, July 2023, the article is available in English).

AFM interpretation

Due to the discrepancies between the ECJ rulings and the AFM guidance that used to be market practice in the Netherlands, the AFM’s interpretation of the ECJ rulings was long-awaited. In its interpretation, the AFM indicates that the license obligation for the policyholder of a group insurance product may come in scope if the insured:

(i) makes a conscious decision to be added to the group insurance contract and

(ii) pays a fee in return.

With regard to (i), the AFM notes that a choice can be considered as a "conscious choice" if the insured is not added to the policy automatically. An example of adding insureds automatically to a policy would be an employee who is automatically added to its employer’s liability insurance. With regard to (ii), the AFM refers to the definition of a "fee" as defined in Article 2 (1) (9) of the IDD: any commission, fee, charge or other payment, including an economic benefit of any kind or any other financial or non-financial advantage or incentive offered or given in respect of insurance distribution activities. We note that this is a very broad definition. The AFM, however, does not consider the sole passing on of the premium and (administration) costs as a compensation that qualifies as a fee.

The AFM also emphasizes that meeting the conditions set-forth in the AFM interpretation does not automatically trigger the license obligation as an exemption may apply, as we are setting out in more detail below. 

In its guidance, the AFM also provides for a flow chart, which is translated in English as follows

Ancillary insurance intermediaries: exempted from the license obligation

The most relevant exemption in this regard is the exemption available to the ancillary insurance intermediary (as defined in Article 2 (1) (4) IDD). In the Netherlands, this exemption may be available if the conditions stipulated in Article 7 (1) (c) Exemptions Regulation FSA (Vrijstellingsregeling Wft) are met. According to this provision, the requirement to apply for a license as an insurance intermediary does not apply if:

(i) the insurance is complementary to the good or service provided by that intermediary, where such insurance covers the risk of breakdown, loss of, or damages to the good or the non-use of the service provided by that provider; or

(ii) the risk of damages to, or loss of, baggage and other risks linked to a travel booked with that provider.

Additionally, the amount of the premium paid for the insurance product does not exceed EUR 600.-- calculated on a pro rata annual basis, or in the event that the duration of that service is equal to, or less than, three months, the amount of the premium paid per person does not exceed EUR200.--.

In relation to whether this exemption for policyholders of a group insurance contract is appropriate or available, it should be considered that (i) the premium income of such policyholder often may exceed EUR600 on an annual basis and (ii) the policyholder will often in practice provide a service to the insured and not deliver a good. With a strict interpretation of the legal framework, this would mean that the exemption would only be available if the insurance policy in question covers the risk of the non-use of the service provided by the policyholder. From the cases that we have seen in practice, we conclude that in most cases the insurance policy does not (just) cover the non-use of the service provided by a policyholder.

We must therefore conclude that, if a strict interpretation of this exemption is followed, the availability of the ancillary insurance intermediary exemption is not a given.

We also note that an exemption to the license obligation does not mean a full exemption to all conduct requirements that apply to insurance intermediaries.

Conclusion

If you or your company offers coverage under a group insurance contract (either as an insurer or a policyholder), it is of relevance to consider whether this distribution structure is legally compliant. The AFM has announced a transitional period and expects policyholders qualifying as intermediaries and unable to rely on an exemption to obtain a license no later than 1 October 2025. Obtaining a license as an insurance intermediary can be an onerous and time-consuming matter. We therefore advise to submit a license application with the AFM in a timely manner, in any case taking into account AFM’s consideration period of 13 weeks (which is, in practice, often longer).

We would be happy to advise you on the above in your specific situation, including the applicable conduct requirements for exempted ancillary insurance intermediaries and the license application process.

¹ The guidance can be found here: Vergunningplicht bij groepsverzekeringen (afm.nl) (available in Dutch only).
² The ECJ decision refers to a legal person, in practice also natural persons can be regulated.