President, Union of Independent Insurance Brokers in Hungary
CEO, Polip Insurance Services Plc
General outlines of new legislationThe Hungarian Parliament adopted a new law - Act No. XCVI of l995 on insurance companies and insurance activities (hereinafter referred to as the Act) - on 7 November 1995. The legislation came into force on 1 January 1996. The Act is the result of several years of effort and is undoubtedly a compromise between companies and regulators and a further harmonisation with European Union legislation and local interests to protect a market still in formation. In its structure and principles, however, the Act strives at conformity with the European rules to be fully introduced in the Hungarian insurance sector by 2002 at the latest.
The Act is a legislation of public law nature, therefore not affecting rules on the contract of insurance provided for by the Civil Code of l959. The main goals of the Act are:
Insurance companiesAccording to the Act, insurers may operate only as joint-stock companies, co-operatives or mutual associations duly registered in Hungary. Branch offices of foreign companies or cross-border services are not yet allowed. Representative offices of foreign insurers are considered to be mere observers by the Act and are not permitted to act as carriers, intermediaries or consultancies.
After 1 January 1996, the foundation of new composite insurers is not allowed in Hungary. Existing composite insurers have not lost their vested rights, but have to keep life and non-life business and the respective balance sheets separate. The Act also permits life insurers to underwrite accident and health risks as well.
The Act requires joint-stock companies to provide for an organisational capital of HUF100 million and an additional capitalisation of between HUFl50 million and 350 million depending on the classes of risk to be underwritten. The minimum organisational capital of co-operatives is HUF50 million and the additional capitalisation requirement is 75 per cent of the respective amounts as provided for with joint-stock companies. Mutuals are required to provide for an organisational capital of HUFl million and an additional minimum capitalisation of between HUFl0 million and 30 million, depending on the projected premium revenues. Co-operatives and mutuals, however, are not allowed to underwrite bonds and credit insurance.
Seventy per cent of the initial capital (with mutuals, the full amount) has to be paid up in cash before the insurer is registered.
Insurers may not start to operate without the permission of the Authority. To grant this, the Authority also requires a sound business plan and operations facilities, further that directors be fit and proper for their functions. Foreigners are not subject to any restrictions or exemptions. However, the Authority has to consult the Insurance Supervisory Commission (the highest-ranked professional consultative body in the insurance sector) before permitting insurers to operate with foreign participation of more than ten per cent (the same applies to foreigners buying shares in Hungarian insurers).
Companies are free to introduce and sell new non-life insurance products on the market. However, the Authority has to be informed about policy wordings, premium calculations and financial planning of new products. In the life sector, the introduction of new products is still subject to prior approval by the Authority until 1998.
Insurance brokerages (and also independent agencies) may not start to operate without permission to do so by the Authority. Such permission is granted only to joint-stock companies and limited companies with a minimum capitalisation of HUF5 million with an exclusive broking profile. Broking companies have further to provide for a professional indemnity insurance to cover at least HUF25 million per each and every occurrence or an alternative financial security to the same amount (cash deposit, bank guarantee, etc) and their directors have to meet certain training and routine conditions as well.
With the exception of reinsurance, brokers may not place risks with, and agents may not sell products of, insurers other than those registered in Hungary.
The Authority may also permit individuals or companies to operate as insurance consultants if these meet training and routine requirements, and provide for a professional indemnity insurance to cover at least HUF15 million per each and every occurrence or an alternative financial security to the same amount (cash deposit, bank guarantee, etc). Consultants are, however, not allowed to place risks or act as intermediaries.
The impact of the Act on the marketThe benefits of the Act are further liberalisation and more transparency, merits that may by themselves also attract investors.
By introducing lower and more flexible capitalisation requirements for insurance companies, instead of the former rigid HUF1 billion rule, the legislator intended to increase the number of market players, which has not changed after reaching 14 in 1993. Only a quite spectacular growth in this area could lead to a more balanced market (it is worth mentioning that the overall market share of the two largest insurance companies still exceeds 60 per cent) and thus create more competition, more capacities and a greater variety of products on the supply side. The first results of the Act seem to be quite promising: the Authority has had to tackle five new applications (four of which have been approved).
On the other hand, as far as insurance intermediaries are concerned, more stringent requirements may lead to higher professional standards in general, thereby improving the protection of the consumer and raising the image of the profession. As a result of higher requirements imposed by the Act, the number of insurance brokerages and independent agencies shrank from a nominal figure of more than 260 to roughly 150 in six months, and a further decrease in the number of market players is expected as a result of mergers and liquidations.
It is, however, remarkable that contact and co-operation between the professional organisations of insurers and insurance brokers are improving. An important sign of this is the recent adoption of the model terms of business agreement for general insurance, to be applied as minimum standards in business between members of the respective associations.
Peter Takáts; was a member of the team of experts tasked with dismantling Hungary's state monopoly on insurance in 1986. He then became an officer at the State Insurance Supervisory Authority. He has been an insurance broker and consultant since 1989, and was elected President of the Union of Independent Insurance Brokers in 1993 and a member of the Insurance Supervisory Commission in 1996