Slovak insurance brokers suffer from legislation gap

In a country where who you know matters just as much as what you offer, the insurance brokerage industry has been especially susceptible to deals between 'old comrades', a trend which has undermined the ability of foreign brokerage firm to do business in Slovakia. The solution, according to brokerage experts, is to create a law that would regulate the insurance brokerage industry, thus weeding out illegitimate and unprofessional firms.

Over one hundred insurance brokerage firms have been registered in Slovakia in the past eight years. However, only a small number of them meet international requirements. The Slovak Association of Insurance Brokers (SAMP) asserts that most native insurance brokers are commission hunters with no real know-how, carpetbaggers who are just trying to get a piece of the lucrative insurance pie.

A new deal

Few Slovaks before 1989 would have known what an insurance broker was. To date, no law has ever properly defined the rights and responsibilities of insurance brokers. To remedy this, SAMP recently completed a proposal on a new Law on Insurance Brokers. But doubts remain over whether the proposal will ever be passed because of disagreements between the brokerage industry and financial experts on who should oversee the industry.

In the meantime, brokers have to make do with an ambiguous paragraph from a 1991 Czechoslovak law on insurance that deals with brokerage firms as follows: "The law does not define the concept of mediating activity [in the system of insurance]."

"When they were putting the law together in 1991, they knew almost nothing about the role of an insurance broker," said Ivica Chačaturianová, Secretary General of SAMP. "It was mostly because they didn't have any real experience."

This lack of a clear definition has set giant foreign brokerage firms against their tiny Slovak competition. Foreign brokerage firms do not claim that all Slovak brokers are bad, but that there are enough rotten apples in the barrel to merit action.

"Not all [brokerage] firms meet the basic prerequisites of professionals," said Eva Gránska, Director of Marsh & McLennan Slovakia, one of the largest brokerage firms in the world with representatives in 90 countries. "We see mainly companies without foreign know-how, founded recently on a local basis."

Vladimír Rančík, Secretary General of the Slovak Association of Insurance Companies (SAP), agreed with Gránska's assessment. "Quality is not as high as required," he said. "Slovak firms first of all look at the commission they can get, and only after that do they care about other services connected with their work."

But smaller Slovak brokerage firms deny any wrongdoing and instead claim that giant brokerage firms are trying to squeeze them out. "We don't have the same opportunities as foreign firms, but we run our business honestly," said Karol Babušek, Executive Director of Bados, s.r.o., a Slovak local insurance broker located in Galanta, 40 km east of Bratislava. "Slovakia's 'wild capitalism' will always try to destroy the little firms."

However, Babušek did agree that the brokerage business was out of control. "It's full of corruption. Everybody's trying to get as much of the pie as possible," he said.

Babušek cited commissions as a prime example, and explained that there was no industry-wide standard for commissions in different areas of insurance. "Let's say on a scale between 10 to 15%, brokers want to gain 15, for any kind of insurance," Rančík explained. Although he was not able to say whether the new law proposal would provide specific conditions for the setting of commissions, he said that the important thing was to "teach insurance companies, and the brokers as well, how to work."

Broken down

Rančík said that insurance brokers not only acted as mediators in insurance deals, but also prepared contracts, constantly meeting clients and maintaining permanent communication with them. SAMP and SAP want the new law to make clear these aspects of the business in addition to setting rules on commissions.

Both associations are trying to reach a consensus with the Finance Ministry, which would determine who supervises insurance brokers. The Ministry presently controls only insurance companies, but SAMP would like it to control the whole system of insurance, including brokers.

But the Finance Ministry is reluctant to take on an added responsibility which it doesn't think it can handle. "The Finance Ministry won't be able to guarantee control over the brokers, so there should be a specialized authority created to secure it," said Rudolf Hečko, Head of the Department of Supervision over the Insurance Industry at the Finance Ministry. According to Hečko, the primary problem is not who should supervise brokers, but how Slovakia will meet European Union (EU) requirements for insurance brokerage firms.

Chačaturianová and Rančík countered by saying that their proposal was based on EU countries' regulations, and was compatible with EU norms. "The law proposal was consulted with insurance company deputies, lawyers, foreign associations of insurance brokers and other experts," said Rančík.

Local firms aren't all that excited about the EU norms. "The EU has some requirements, which are applicable for them," said Babušek. "Here we have different conditions, connected with specific economic problems, as well as unstable laws, which don't last more than two years. We do not have a well-built relationship between clients and brokers."

Although the Slovak insurance industry is anxious to apply the new law as soon as possible, Rančík is convinced that it will take another two years to get to parliament.

However, Hečko believes that it will be submitted next year. "The Ministry wants to push these things forward, because it wants to make the situation [in the insurance industry] clear," Hečko said. "Everything will also depend on the new government and the new parliament, on their approach to the matter, but it's clear that the Ministry will have to deal with it very soon," he added.