This country-specific Q&A gives a pragmatic overview of the law and practice of insurance & reinsurance law in the Denmark.
It addresses topics such as contract regulation, licensing, penalties, policyholder protection, alternative dispute resolution as well as personal insight and opinion as to the future of the insurance market over the next five years.
This Q&A is part of the global guide to Insurance & Reinsurance. For a full list of jurisdictional Insurance & Reinsurance Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/insurance-reinsurance
How is the writing of insurance contracts regulated in the jurisdiction?
The main source of law specifically relevant for insurance contracts is the Danish Insurance Contracts Act, which sets out certain rights and obligations of the parties to an insurance contract. The Act applies unless the parties to the contract agree otherwise. However, a number of the provisions in the Act are mandatory and hence cannot validly be derogated from. The Act holds a number of general provisions that apply to all insurance contracts, and a number of special provisions that only apply to certain types of insurances, e.g. life insurance, accident insurance and health insurance.
Apart from the mandatory provisions in the Danish Insurance Contracts Act, insurance contracts are subject to the general principles of Danish contract law, according to which the parties to a great extent enjoy the freedom of contract, allowing the parties to agree on the terms and conditions governing their relationship.
As the Danish Insurance Contract Act does not hold any provisions concerning the formation of insurance contracts, the Danish Contracts Act, which is the general statute governing the formation of contracts, applies. In brief, contracts, including insurance contracts, are formed under Danish contract law on the basis of an offer and an acceptance. The insurance policy constitutes the contract, which holds the terms and conditions that the parties have agreed upon. It is worth noting that the fact that the policyholder does not react to an offer from the insurance company will not in itself substantiate a contractual obligation. However, after the insurance period has started, insurers may have an interest in changing the policy terms, and in such instances Danish courts have accepted that under certain circumstances, the revised policy terms are binding on the policyholder even in the absence of an explicit acceptance.
Are types of insurers regulated differently (i.e. life companies, reinsurers)?
Both life and non-life insurers are regulated in the Danish Insurance Contracts Act.
To some extent, the financial sector, including insurance companies, are also regulated by the Danish Financial Business Act. As a result of the Danish implementation of the EU Solvency II Directive (effective since 1 January 2016), insurance companies are divided into two groups with different; “Group 1” insurance companies and “Group 2” insurance companies. Where “Group 1” must comply with the full requirements resulting from the implementation of the EU Solvency II Directive, “Group 2” must only comply with simplified, national solvency regulation and changed investment rules that are based on the EU Solvency II Directive.
The Danish Insurance Contracts Act does not apply to reinsurers. Rather, reinsurance contracts are generally considered regular commercial contracts subject to the general principles of Danish contract law and other legislation, depending on the particular issue at hand.
Are insurance brokers and other types of market intermediary subject to regulation?
Insurance brokers, agents and other types of intermediaries are regulated by the Danish Insurance Mediation Act, and they must be recorded in a public register. In brief, the Act sets out certain educational requirements, and a license issued by the Danish Financial Supervisory Authority (DFSA) is required to do business in Denmark. Intermediaries established in other EEA countries may generally passport their license through their home country regulator.
The authorised supervisory body is the DFSA, which is an authority under the auspices of the Minister for Economics and Business Affairs. The primary task of the DFSA is supervision of financial businesses in Denmark, including insurance companies and insurance intermediaries doing business in Denmark.
Is authorisation or a licence required and if so, how long does it take on average to obtain such permission?
According to Section 11(1) of the Danish Financial Business Act, undertakings which carry out insurance activities, including reinsurance activities, in Denmark, shall be licensed by the DFSA as insurance or reinsurance company. Insurers established in other EEA countries may generally passport their license through their home country regulator, whereas insurers from non-EEA countries may generally not. Accordingly, non-EEA insurers are generally required to set up an insurance company or establish a branch in Denmark and obtain a license to be able to carry out insurance activities in Denmark.
To obtain a license, a detailed application must be filed with the DFSA, detailing capital, financial forecasts, etc. How long it takes to obtain a license depends on the specific circumstances, but 3-4 months on average is probably a fair rule of thumb.
Are there restrictions over who owns or controls insurers (including restrictions on foreign ownership)?
It may be a criminal offence to acquire or increase control in an insurance company authorised in Denmark without the prior approval of the DFSA. According to the Danish Financial Business Act, approval by the DFSA is required when:
- Acquiring 10% or more of the shares or voting power in an undertaking (or its parent company) or where it is able to exercise significant influence over the undertaking,
- increasing the shareholdings or voting power in an undertaking (or its parent company) above 20%, 30% or 50%, or
- turning the undertaking into a subsidiary or into another company.
The approval may be given if a number of criteria are fulfilled, among these whether the entity in question is regarded as ”fit and proper” to own such holdings (see also question 13 below).
There are no legislative restrictions on foreign ownership of insurance companies.
When a chairman or member of the board of an insurance company are appointed or changed, the chairman and/or the member of the board must notify the DFSA of the person’s experience and knowledge regarding the employment.
Is it possible to insure risks without a licence or authorisation? (i.e. on a non-admitted basis)?
Yes, non-licensed foreign insurers may lawfully cover risks in Denmark, but importantly they are not allowed to market their products in Denmark, and intermediaries are prevented from facilitating the writing of insurances offered by non-licensed foreign insurers.
What penalty is available for those who operate without appropriate permission?
It is generally a criminal offence to undertake a regulated activity in the Denmark without permission.
If an insurance or reinsurance company fails to comply with the legal requirements, the DFSA may issue warnings, impose injunctions and fines, and, in severe cases, the DFSA is also empowered to revoke licenses. If the DFSA detects illegal activity, it will report the business to the State Prosecutor for Serious Economic and International Crime, which is a special unit with the public prosecutor that investigates and prosecutes cases concerning particular economic crimes.
How rigorous is the supervisory and enforcement environment?
Following the implementation of the EU Solvency II Directive in 2016, the supervision and enforcement environment of insurance companies in Denmark has become increasingly tougher. Withdrawal of insurance companies’ licenses is, however, still very unusual in Denmark, and it has only been seen effectuated in very severe cases.
How is the solvency of insurers (and reinsurers where relevant) supervised?
Danish insurers and reinsurers are obliged to perform their own supervision and self-reporting of their solvency, cf. The Danish Financial Institutions Act (implementing the EU Solvency II Directive).
In addition, the EU Solvency II Directive sets out requirements for the supervision of the solvency of insurance companies. The EU Solvency II Directive requires companies to hold both a minimum capital requirement (see question 10 below) and a solvency capital requirement. In Denmark, the DFSA has the task of monitoring and ensuring that insurance companies comply with the EU Solvency II Directive.
The DFSA supervises the solvency of the insurers and reinsurers through risk assessments.
What are the minimum capital requirements?
The minimum capital requirements for Danish insurance companies are based on the EU Solvency II Directive. The minimum requirements are as follows:
- Non-life insurance companies: EUR 2.5 million
- Life insurance companies: EUR 3.7 million
- Re-insurance companies: EUR 3.6 million
- Captive reinsurance companies: EUR 1.2 million
In addition to the minimum capital requirements, more specific capital requirements are stipulated in chapter 10 of the Danish Financial Institutions Act.
Is there a policyholder protection scheme?
Yes, the Danish Guarantee Fund for Non-life Insurance Companies is a fund which provides cover for policyholders in case of a non-life insurance company’s bankruptcy. In brief, the Guarantee Fund will in case of bankruptcy step in and provide cover and reimburse prepaid premium. The guarantee scheme generally applies to private insurances (consumer insurances) taken out with insurers that have been granted license from the DFSA to carry out insurance business in Denmark, or with foreign insurers which have passported their license through their home country regulator. In addition to the guarantee scheme, the minimum capital requirements set out in the EU Solvency II Directive (question 10), and the fit and proper requirements of the senior managers (question 13), leads to some protection of the policyholders.
How are groups supervised, if at all?
Under the EU Solvency II Directive, groups are subject to supplementary supervision in addition to the solo supervision of individual insurance companies. The EU Solvency II Directive sets out the circumstances in which group supervision is triggered.
In the event of group supervision, the participating insurance companies are required to calculate a group solvency capital requirement. The group's own funds must be transferable and fungible across the group. All related companies and all risks within the group must be included in the group solvency calculation.
In addition, group-wide governance, reporting and intra-group transaction and risk concentration monitoring shall apply.
Do senior managers have to meet fit and proper requirements and/or be approved?
"Fit and proper" requirements apply to the CEO of an insurance company and to the members of the board. In addition, owners of qualified holdings of the company's share capital or votes must be fit and proper to own such holdings (question 5).
The DFSA shall be notified of the fulfilment of the fit and proper requirements when a CEO or member of the board are appointed or changed.
Are there restrictions on outsourcing parts of the business?
Yes, the EU Solvency II Directive provides for specific rules (and restrictions) in terms of outsourcing.
In accordance with the EU Solvency II Directive, in cases where an insurer outsources part of its business, the insurer will remain fully responsible for discharging all of its obligations under law, regulation and administrative provisions. Specifically, the outsourcing of an important or critical activity or function must not lead to any material impairment in the quality of the undertaking’s system of governance, any increase of the operational risk, any impairment of the ability of the regulator to monitor compliance of the company or undermining of continuous and satisfactory service to policyholders.
The DFSA supervises the outsourcing activities and must be notified of any outsourcing activity.
How are sales of insurance supervised or controlled?
Sales of insurances are supervised by the DFSA, as per above. In addition, supervision and control is also performed by different Ombudsmen, e.g. the Danish Consumer Ombudsman, which is an entity that focuses on consumer protection.
Marketing and sales activities are subject to various general legal requirements under the Danish Marketing Act. Furthermore, private policyholders have a right to complain to the Danish Insurance Complaints Board and the Danish Consumer Complaints Board.
Are consumer policies subject to restrictions? If so, briefly describe the range of protections offered to consumer policyholders.
Danish insurance companies are required to observe consumer protection regulation. The Insurance Contracts Act provides quite detailed mandatory regulations to benefit the insured. These include, inter alia, regulation regarding insurance premium, limitation periods, duty of disclosure and right of cancellation.
In addition, Danish courts may generally at their own discretion set aside any contractual provisions and terms fully or partly if the court deems them to be manifestly unfair. Thus, Danish contract law prohibits the use of unfair contract terms in consumer agreements. A term will generally be considered unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer. Certain terms are in particular likely to be considered unfair, e.g. high cancellation charges or penalties.
Are the courts adept at handling complex commercial claims?
Disputes adjudicated before the Danish Courts do to a significant extent include complex commercial claims. Consequently, the courts are generally adept at handling complex commercial claims, which is particularly true for the Maritime and Commercial Court, The High Courts and the Supreme Court.
Is alternative dispute resolution well established in the jurisdiction?
The use of arbitration is well established in Denmark as an alternative to litigation, and due to a frequent use of arbitration clauses in commercial insurance policies, many coverage disputes are referred to arbitration rather than to the courts.
Mediation is not used to a significant extent in Denmark, and it is rare that insurance disputes are mediated in Denmark.
What are the primary challenges to new market entrants?
Generally, the Danish insurance market is well-functioning and there are no real formal challenges to new market entrants. However, there is a quite high level of competition in the Danish insurance market even though it is dominated by relatively few large insurers that collectively hold more than 50 per cent of the market share in most areas.
In addition to competition challenges, the Danish insurance market is also a highly regulated market. Especially in the light of the EU Solvency II Directive, the costs of ascertaining compliance with the regulation can pose a challenge to new market entrants.
To what extent is the market being challenged by digital innovation?
The Danish market is certainly being challenged by digital innovation. The market is by many in the industry expected to be transformed by digital innovation such as telematics devices, distributed ledgers and connected devices. As a consequence, insurers on the Danish market must be prepared to adapt to new distribution channels (mainly cloud-based). Insurance companies that cannot invest on developing in this direction may lose substantial business opportunities.
Over the next five years what type of business do you see taking a market lead?
The next five years are likely to be a period of change. Technological changes, both in the way insurance products are written, sold and administered, and also more generally in the way individuals live their lives, are likely to unfold in the next five years. Due to the technological changes, cyber threats have become a new huge challenge. Insurers that can offer credible solutions to both mitigate and manage cyber threats and adapt to the changing risk environment are more likely to take a market lead than those insurers on traditional product lines.
In addition, M&A insurance products, in particular Warranty and Indemnity insurances, have become increasingly popular on the Danish market, and this appears to be a growing trend that will develop further in the years to come.