The Swedish Insurance Contract Act
The Swedish Insurance Contract Act dates back to 1927 and is in many respects not adapted to the current conditions of the insurance market. The applicability of the act is also limited and has been partly overtaken by separate legislative solutions for the most urgent demands, such as the Consumer Insurance Contract Act and various regulations regarding items such as third-party motor insurance.
In May this year the government presented a bill proposing a new Insurance Contract Act. The new legislation is expected to enter into force on January 1, 2006. This new act will replace both the Insurance Contract Act and the Consumer Insurance Contract Act. It will cover almost all kind of private insurance policies. The new act will not only be relevant for individual consumer insurance, personal insurance and company insurance. Different types of group insurance policies (group life- and non-life insurance and collective bargain based insurance) will also be covered by the new legislation.
According to the proposal, an insurer shall be obliged to issue an insurance policy if such a policy normally is provided to the public by the insurer, unless it exist special circumstances, i.e. the policyholder will have a right to take out an insurance policy if the insurer can not plead special circumstances. The rule applies not only to property consumer insurance, but also to personal insurance of individual character, such as life insurance, accident and health insurance.
An insurance company must provide the policyholder with comparatively extensive information about the policy. Certain information must be given before the insurance agreement is entered into and certain information during the policy period.
Financial Advisory Service
On July 1 2004 a new act on financial advice to consumers will enter into force. The new act will be mandatory in favour of the consumer. The legislation will be applicable to so called investment advice, i.e. advice regarding investment of consumer assets in different kind of financial instruments, for example equity, mutual funds and bonds. Advice regarding life insurance policies will also be covered by the new legislation.
The new legislation require that the adviser shall be competent. The advice and other circumstances shall be documented. Further, the business shall be conducted at a certain professional level.
The Swedish government recently presented a memorandum proposing a new act for insurance mediation. The proposal will implement the Directive of the European Parliament and Council on insurance mediation (2002/92/EC). The memorandum also considers a proposal by a governmental committee in 1997 suggesting a new insurance brokerage act.
The new act will establish a system of licence and registration for all insurance intermediaries. An insurance intermediary shall possess appropriate knowledge and ability, be of good repute and have a professional indemnity insurance.
Special rules are suggested for so called linked intermediaries. A linked intermediary is a legal or natural person who has an appointment with one or more insurer to mediate insurance products and where the insurer is responsible for purely economic losses that customers may suffer. A linked intermediary need no licence to conduct business. The insurer is responsible for the intermediary and shall notify the person for registration.
On the basis of their registration in the home state, the insurance intermediary will be able to do business in other member states by way of the freedom to provide services or by establishing a branch.
Furthermore, the disclosure requirement for insurance intermediaries is extended. For example, the customer shall be informed of the price for the intermediation services. Advice shall be adjusted to the individual customer and the intermediary shall suggest a suitable solution. Excluded from the new act are several situations where the consumer protection is deemed not to be so important, for example where an insurance policy is linked to a certain product (travel services or goods).
The new act is proposed to come into force on 1 April 2005.
The Insurance Business Act
New Solvency System
A government committee presented in September 2003 a report proposing a new Swedish solvency system for insurance companies.
The changes proposed to the Swedish Insurance Business Act aim to strengthen policyholder protection by increasing transparency and enhancing incentives for insurance undertakings to identify, estimate and mitigate their risks. Policyholder protection will be augmented by regulations, in order to ensure that the risks involved in insurance undertakings are more clearly reflected in the demands made of these enterprises. The disclosure of a realistic financial position will also improve the platform for supervision and enhance market discipline.
The proposal conforms to international developments in the field, most importantly the ongoing Solvency 2 project (a corresponding reform of regulation in the European Union). Changes are also required in the regulation of undertakings at a national level and these are also being made - in parallel with the Solvency 2 project - in other EU member states. The proposal is compatible with the main principles of the Solvency 2 project as well as current EU directives, and should be regarded as a natural transition from the existing regulation toward the implementation of the new EU directives in Sweden.
The core of the proposal consists of three independent components which must be considered together:
- realistic valuation of insurance liabilities (technical provisions);
- amended asset restrictions and valuation of assets covering the technical provisions; and
- assessment of risk expressed as a safety margin.
The report is expected to lead to changes of the relevant legislation during 2006.
New Insurance Business Act
Furthermore, the government appointed a committee during 2003 to review some of the most important rules in the existing Insurance Business Act. The committee shall propose a new insurance business act. The guiding principles for the committee are the following:
- The new act shall exclude or minimize any conflict of interest between shareholders and life policyholders.
- The new act shall contain corporate governance rules that aim to reduce the risk for conflict of interest.
The report shall also contain a proposal for implementation of the EU-Directive regarding institutions for occupational retirements provision.
The committee is to present its first report in September 2004 and its final report in August 2005.
Strengthen the Rights of Policyholders
In March 2004 the government presented a bill proposing changes in the Insurance Business Act. Even these changes aim to strengthen the rights of policyholders in life insurance companies. The bill is a result of several events that have occurred on the Swedish insurance market during the last year. Conflict of interest actions taken by several companies in the insurance sector have started a public discussion regarding the situation of policyholder rights in life insurance companies.
The core of the proposal consists of different components:
- The independence of the board of directors in life insurance companies shall be strengthen, disqualification rules shall be wider and the policyholders role within the companies shall be clarified.
- The life insurance companies shall be obliged to issue internal guidelines regarding conflict of interest, the investment guidelines shall cover all assets and the possibilities for SFSA to issue different kind of sanctions shall be increased.
- The new act regarding financial advice to consumer shall also cover life insurance products and the National Board of Consumer Complaints shall in the future deal with life insurance cases.
The memorandum will lead to changes of the relevant legislation as of 1 July 2004.
Transfer of Insurance policy
In June 2004 the government presented a memorandum proposing a right for policyholders to transfer its pension savings from one insurance policy to another insurance policy or to an individual pension savings account. The new rule is proposed to be applicable to new policies and policies that have been renewed after the new rule have come into force.
Deduction of premiums
In September 2003 the European Court of Justice (ECJ) delivered a preliminary ruling regarding the Swedish tax rules relating to insurance contracts, which distinguish between pension insurance and endowment insurance and apply a different tax regime to each.
The ECJ stated that the provisions on tax deductions for premiums paid under an occupational pension policy, which require the insurance company to be established in Sweden, are not compatible with the rules on freedom to provide services within the European Union (Article 49 of the EC Treaty). The ECJ found that the Swedish tax regime may have had a deterrent effect on Swedish employers that want to obtain occupational pension insurance outside of Sweden, as well as on insurance companies that want to offer their occupational insurance policies in Sweden. The ECJ thus concluded that the provisions in the Income Tax Act on tax deductions for premiums paid under a pension policy are not compatible with the rules on freedom to provide services within the European Union.
The Swedish Supreme Administrative Court has come to the same result as the European Court of Justice regarding the possibility of tax deduction for premiums paid by an employer under a policy issued by an insurance company established in another EU member state.
The immediate consequence of the rulings is that an insurance policy issued by an insurance company established in another EU member state, or in a country which has adopted the EEA Agreement, may not be treated differently from a policy taken out in Sweden. Premiums paid by an employer under such a policy are therefore deductible, under the same conditions. The ruling also implies that the corresponding provisions for individuals conflict with the EC Treaty on the same grounds.
Prohibition to reduce payments
In June 2004 the government presented a memorandum proposing important changes of the tax legislation. The Swedish tax legislation regarding pension insurance has a prohibition for insurer to reduce payments from a pension insurance policy during the first five years of the payment period. Historically, the legislation has been interpreted in a way that an insurer is prohibited to reduce the amount guaranteed, but not the amount that corresponds to the policyholders’ surplus. This means that Swedish life insurers historically had the possibility to re-allocate any amount from the policyholders’ surplus. This procedure have been recommended (and enforced) by the SFSA.
To be able to conduct their business in accordance with the future tax legislation and the Insurance Business Act the insurers must change their products or their procedures regarding payments. We may see products where payments during the fist five years will be lower than before or where an insurer guarantees the surplus as conditional surplus (the policyholder will carry the financial risk).
The proposal is expected to lead to changes of relevant legislation on 1 January 2005 and be applicable to insurance policies that are issued after that date and policies with payments starting after 31 December 2006.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.