According to the Latvian Law on Insurance and Reinsurance Distribution (hereinafter, “the Law”), insurance distribution is defined as: “the provision of recommendations, offering of insurance, preparation of necessary documents for the conclusion of an insurance contract, explanation of the terms and conditions of the insurance contract, including rights and obligations stipulated in the insurance contract, performance of other actions necessary for the conclusion of the said contract or provision of services, as well as provision of information on one or several insurance offers, based on criteria selected by the client through a website or mobile application intermediary.” Several entities specified by law, including insurance brokers, insurance agents and insurance supplementary service intermediaries, can engage in insurance distribution.
Insurance agents are physical or legal persons who engage in the distribution of insurance on behalf and in the interests of an insurance commercial entity or a foreign branch. Agents are affiliated with a specific insurer and receive a commission fee from that insurer for all of the policies sold.
Insurance brokers, on the other hand, engage in the distribution of insurance on behalf and in the interests of the client and, unlike agents, are not tied to any specific insurer. Therefore, brokers can offer clients a wider range of insurance products from various insurers. Brokers typically earn a commission fee from insurers for all of the policies sold.
Since 2019, when the Law came into effect, only legal entities can be insurance brokers. Before the introduction of the latter, both natural persons and legal entities could be insurance brokers. These changes were primarily made due to the fact that since 2005, the supervisory authority had not registered any individual brokers. At the same time, in order to ensure insurance broker companies are financially stable and secure legal entities, the Law sets a minimum share capital requirement for insurance brokers of not less than EUR 15,000.
Insurance supplementary service intermediaries are physical or legal persons who distribute only insurance that complements the goods or services they offer. Such intermediaries include, travel agencies offering travel insurance, car dealers offering vehicle insurance, and ticket trading platforms that provide the opportunity to insure purchased tickets.
Therefore, the main difference between these ‘types’ of insurance distributors is how they distribute insurance - on behalf of the insurer, on behalf of the client, or as a complement to their own service or product.
The Law also sets different requirements for insurance distributors seeking to start operations. To become an insurance broker, a company must meet the requirements specified by law regarding the education, knowledge, and skills of the employees involved in insurance distribution. Additionally, the company must register itself in the insurance broker registry maintained by the supervisory authority before commencing any operations.
Insurance agents also have specific requirements regarding the education, knowledge, and skills of the employees involved in insurance distribution. However, unlike insurance brokers, agents must register themselves in the insurance agent registry maintained by the specific insurer whose insurance product they plan to distribute.
Although insurance supplementary service intermediaries have fewer requirements, according to the Law, they are nevertheless still required to register themselves in the insurance supplementary service intermediary registry maintained by an insurer or broker. Additionally, to ensure the protection of clients’ interests, certain basic requirements must be met to provide clients with clear and accurate information about the offered insurance product.
Taking into account the fact that insurance brokers operate in the interests of their clients by offering them various insurance products to avoid potential conflicts of interest, ensuring fair competition amongst insurers, protecting the interests of clients, the Law provides for a broader range of requirements for insurance brokers. It is advantageous for consumers to have insurance products distributed through various distribution channels and with the assistance of intermediaries who collaborate with insurance companies in many different ways.
Note, however, according to the requirements of Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution, which are incorporated into the law, entities distributing insurance are required to apply similar consumer protection rules. This ensures that consumers receive the same level of protection regardless of the distribution channel. Considering the activities necessary for insurance distribution are closely related to the processing of personal data, insurance distributors must also comply with the applicable regulatory acts governing the protection and processing of personal data, ensuring technical and organizational measures to ensure secure and compliant data processing.
It is important to further note that until 1 January 2023, the Financial and Capital Market Commission supervised the insurance market. As of 1 January 2023, the Financial and Capital Market Commission has been integrated into the Bank of Latvia, which has taken over all the functions of supervision and promotion of development in the financial and capital market, as well as regulatory authority functions. Therefore, the Bank of Latvia now provides for the supervision over insurance distribution activities in addition to its other functions defined by law.
Before becoming engaged in insurance distribution for an additional source of income or when choosing the most suitable insurance distributor, it is important to understand the key differences between the legal entities (as defined by the Law) that perform insurance distribution activities and the applicable legal obligations imposed by regulatory acts (depending on each distribution model).
At the same time, it is worth mentioning, activities such as providing information for advertising purposes as an ancillary service within other core activities, solely providing information to potential policyholders about insurers or to insurers about potential policyholders, without undertaking additional actions to assist in concluding or executing an insurance contract, are not considered insurance distribution and are therefore not subject to the restrictions and requirements set forth in the Law. Similarly, for example, consultations provided within the professional activities of tax specialists, accountants, or lawyers regarding insurance products or issues related to insurance distribution, or any other activities whose purpose is not to assist the client in concluding or executing an insurance contract, are not considered fall within the definition of insurance distribution under the Law.