The controversial prohibition on passing on commission forbids brokers and insurers from granting or promising special remuneration to policyholders, insured persons or beneficiaries under an insurance contract. In short, it prohibits insurers and brokers from passing on commission.
This prohibition has a long history in Germany, having existed for almost a century. Until recently, it was commonly acknowledged that the prohibition did not apply to reinsurance. Further, according to the legislature, the prohibition was upheld during the implementation of the EU Insurance Distribution Directive into national law over the past three years.
However, following the above legislative changes, it is unclear whether reinsurance remains excluded from the prohibition as neither the revised Insurance Supervision Act nor the Industrial Code contain a clearly worded exemption.
The prohibition ultimately aims to protect consumers by preventing them from paying more attention to granted commission than to the most suitable insurance product.
The prohibition was introduced into German law in 1923. It initially applied only to health and life insurance, but later applied to legal expenses insurance and (since 1982) indemnity and casualty insurance. As the decrees on which the prohibition for named insurance branches were based made no mention of reinsurance, it was commonly acknowledged that reinsurance was not subject to the prohibition.
The prohibition has been criticised for almost as long as it has existed. For instance, critics have argued that competition can be distorted by fixing the commission (and thus the prohibition on passing on commission) at the expense of consumers. However, the prohibition itself is not the only controversial aspect – its legal basis has also faced scrutiny.
Until 2016, the prohibition was based on the Decree on the Prohibition of Special Compensations and Beneficiary Contracts in Non-life Insurance 1982, which was considered ineffective in many cases due to a lack of certainty and concerns under European law (the prohibition did not exist in other European countries). Consequently, whether the prohibition on passing on commission should be upheld when implementing the EU Insurance Distribution Directive into national law became a controversial matter.
Ultimately, the legislature decided "for the sake of consumer-protection" to:
- retain the prohibition without any changes; and
- eliminate any doubts in respect of its legal effectiveness.
Therefore, when introducing the prohibition to sub-constitutional law, by way of the explanatory memorandum to the Insurance Distribution Directive Implementation Act, the legislature expressly anchored the previously applicable prohibition on passing on commission in a "legally secure" way, instead of merely regulating it by decree. At no point did the legislature express its will to change the principles of the prohibition.
However, neither the newly introduced Section 34d(1)(4) of the Industrial Code, which prohibits commission payments by insurance intermediaries and became effective in 2018, nor the revised Section 48b of the Insurance Supervision Act, which regulates the prohibition for insurers and became effective in 2017, explicitly exclude the prohibition in reinsurance cases. Granted, changing the principles of the prohibition was not the legislature's intention.
While the Federal Financial Supervisory Authority published a comprehensive statement concerning the prohibition at the end of 2018, reinsurance (and its exemption) was not addressed.
Therefore, whether reinsurance is excluded from the prohibition in Germany remains uncertain.
Reinsurance may remain exempt from the prohibition on passing on commission because reinsurance remuneration is excluded from the definition of 'distribution remuneration' under the newly defined terms of Section 34b of the Insurance Supervision Act.
As Section 48b refers to "special remuneration", which can be neither granted nor promised, it could be argued that due to the definition of distribution remuneration, which excludes reinsurance remuneration, reinsurance is unaffected by the prohibition. In other words, it would not make sense to withdraw the supervision of distribution remuneration in reinsurance on the grounds of a definition on the one hand, but to supervise it in view of the prohibition on passing on commission on the other hand.
Nevertheless, this would remedy the uncertainty only with respect to insurers. Intermediaries are not subject to supervision under the Insurance Supervision Act; the prohibition on passing on commission has been codified for them in the Industrial Code. Another juridical balancing act would be required in order to derive an exception from this prohibition. For instance, reference would need to be made to the corresponding application of Section 48b of the Insurance Supervision Act, as provided in Section 34b(1)(5) of the Industrial Code, and thus to the exception for reinsurance, as reinsurance distribution remuneration is not subject to supervision.
Ultimately, the legislature's aim of anchoring the previously applicable prohibition on passing on commission in a legally secure manner has not been achieved.
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