This country-specific Q&A gives a pragmatic overview of the law and practice of insurance & reinsurance law in France.
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?
Writing insurance is thoroughly regulated in France. Insurance companies that write insurance contracts in France operate within a specific legal and regulatory framework, which stems from a number of key legal sources (chief amongst which are the French Insurance Code and the French Mutual Code) and is heavily influenced by European Regulations. This framework regulates all the main aspects of the industry, from the licensing of insurance companies and the prudential and financial requirements to which they are subject to the distribution and content of insurance contracts.
An independent administrative authority called the APCR (Autorité de Contrôle Prudentiel et de Résolution) is responsible for licensing and supervising insurance activities (as well as reinsurance and banking activities). It also issues guidelines, relating to best practice, and can hand down sanctions, in instances where insurance companies have fallen foul of their obligations.
The formation and content of individual insurance contracts are also subject to regulation, namely by way of a body of specific requirements, which are set out in the French Insurance Code and intended to promote transparency and ensure that parties to an insurance contract appreciate the precise nature and extent of the cover provided under the contract and their respective obligations in connection with the said contract. This legal framework inter alia governs:
- insurers’ duty to provide information and advice to the insured before the execution of contract,
- the way the risk is disclosed during the underwriting phase (i.e. by way of a questionnaire that is prepared by the insurer and completed by the potential insured), or
- substantive and formal requirements by which all insurance contracts must abide (for instance, certain types of clauses are mandatory and must be included in all insurance policies, whereas other types of clauses, such as exclusion clauses or warranty forfeiture clauses, are unenforceable unless they meet strict requirements as to their wording or layout).
Are types of insurers regulated differently (i.e. life companies, reinsurers)?
A single (re)insurance company cannot, as a rule, simultaneously write certain categories of insurance. Insurers cannot, for instance, concurrently offer life and non-life insurance, unless these activities are subject to separate managements, and reinsurers must limit their activities to reinsurance and related activities. In turn, these broad categories of activities are subject to distinct regimens: life insurance, non-life insurance and reinsurance are governed by different provisions of the French Insurance Code and are regulated differently, in particular as regards consumer protection and the provider’s duty to advise and inform.
Moreover, all undertakings are not regulated by the same Codes. By way of example, insurance companies are regulated by the French Insurance Code, whereas mutual insurance companies are regulated by the French Mutual Code.
However, despite the differences highlighted above, certain regulatory requirements are either common to all types of (re)insurance activities or dealt with by distinct but comparable regulatory frameworks. There is, for instance, a great degree of unity regarding the licensing of undertakings or capital requirements.
Are insurance brokers and other types of market intermediary subject to regulation?
The four categories of insurance intermediaries listed in the French Insurance Code (brokers, insurance agents, tied agents, tied subagents) must be registered with ORIAS, the French Register of Insurance Intermediaries. They must be of good repute and meet certain minimum requirements regarding their professional qualifications. Insurance intermediaries must also be insured for their professional liability and meet financial guarantee requirements.
Though they are also regulated by the ACPR, like insurers, unlike insurers, insurance intermediaries are not subject to capital, governance or accounting requirements.
The new Insurance Distribution Directive, which is currently scheduled to come into force on 1 October 2018, should introduce important changes to the French insurance intermediation industry, specifically in relation to:
- intermediaries’ duties to inform potential insureds and provide advice on insurance products, which will now have to meet more exacting standards, and
- transparency, which is further promoted by new rules intended to provide policyholders with a greater degree of information regarding intermediaries’ remunerations and intended to prevent conflicts of interests.
Is authorisation or a licence required and if so, how long does it take on average to obtain such permission?
Insurance companies need to have a license in order to underwrite insurance related to risks situated in France. Licenses are not general, but granted for specific classes of insurance activities, which are listed in article R.321-1 of the French Insurance Code.
Reinsurers also need to have a license to carry out reinsurance and related activities in France but, unlike insurers, reinsurers can write both life and non-life business.
The French insurance regulatory body, the ACPR, is responsible for reviewing applications and granting licenses. When electing whether to grant licenses, the ACPR takes the following criteria into account:
- the technical and financial resources of the company,
- the honorability, expertise and experience of the individuals responsible for the firm’s management,
- the shareholders and capital structure, and
- the Minimum Capital Requirement (MCR) and Solvency Capital Requirement (SCR) required by the Solvency II Regulation.
The ACPR has six months to communicate its answer to the applicant. If no answer is provided at the end of this six-month period, the license is deemed to have been granted. In the event of a refusal from the ACPR, the applicant can lodge an appeal before the French supreme administrative court (“Conseil d’Etat”) within the two months following the refusal’s notification.
Insurers based in other EU Member States can operate in France thanks to the European passporting mechanism, pursuant to the freedom of establishment and freedom of services EU regulations, which have been implemented in France.
To operate in France, insurers situated outside the European Union will usually need to obtain a general authorisation from the ACPR, as well as a special approval for a general representative to be based in France.
Are there restrictions over who owns or controls insurers (including restrictions on foreign ownership)?
A prior notification must be made to the ACPR (by the acquiring and the transferring parties) and authorizations need to be obtained in instances where the envisaged changes in share ownership would lead to:
- the proportion of voting rights held by the buyer or the seller rising beyond or decreasing below certain thresholds, namely 10%, 20%, 33% or 50%, or
- the acquisition or transmission of a subsidiary by one of the parties, or
- a significant change in management.
The following criteria will be taken into account by the ACPR when considering whether to allow the envisaged change in ownership:
- the reputation and the financial strength of the acquiring party, the reputation and experience of the person who will be in charge of the business, the undertaking’s ability to fulfil the French Insurance Code requirements and the absence of reasonable grounds for suspecting money laundering, and
- whether the envisaged transaction calls into question the conditions to which the license is subject (if this proves to be the case, the ACPR will inform the parties within sixty days of the application’s submission).
The ACPR may either agree to, or refuse, the contemplated change in ownership. It can also grant conditional approval, subordinated to one of the parties taking certain steps.
Where the envisaged transaction involves a company situated outside the EEA, the ACPR will need to inform the European Commission, whose approval is also necessary (the European Commission has three months to indicate whether it opposes or approves the change in ownership).
Is it possible to insure risks without a licence or authorisation? (i.e. on a non-admitted basis)?
The French Insurance Code prohibits non-authorized insurers from insuring risks situated in France.
There are, however, some exceptions, regarding for instance :
- insurance and reinsurance companies whose registered office is in an EEA state (provided they are licensed in their home jurisdiction), or
- inward reinsurance transactions which are carried out on the margin of an insurer’s direct insurance activity.
What penalty is available for those who operate without appropriate permission?
Writing insurance without the appropriate permission is a criminal offence, punishable by a prison sentence of up to three years and a fine of up to €75.000 for natural persons or €375.000 for legal entities. Legal entities may also face sanctions from the ACPR and can, moreover, be temporarily or definitively prohibited from conducting business in France.
The policyholder may also risk criminal fines of up to €4.500 for contracting with a foreign insurer that is non-admitted to insure French risks, except for marine and air insurance or where a specific derogation is granted by the ACPR (in instances where the same cover is not offered by insurers admitted to operate in France).
Conducting insurance intermediation without permission is also an offence, which may be punishable by a fine of up to a €6.000 and a prison sentence of up to 2 years.
An insurance policy issued by a non-admitted entity will be deemed to be null and void. The ensuing nullity cannot, however, be raised against the insureds, the policyholders or the beneficiaries, provided they acted in good faith and believed the entity at issue was authorized to write insurance in France.
How rigorous is the supervisory and enforcement environment?
The French regulatory body, the ACPR, has two missions, namely: (i) the preservation of the stability of the financial system, and (ii) the protection of the clients, insureds, policyholders and beneficiaries of the insurers, reinsurers and intermediaries who operate under its control.
To these ends, the ACPR is empowered, inter alia, to:
- grant licenses,
- issue professional rules applicable to all insurance undertakings,
- investigate insurance undertakings, and
- hand down possible sanctions, such as warnings, reprimands, prohibitions from carrying out certain operations, temporary suspensions of entities’ directors and officers and partial or total withdrawal of entities’ licenses. The ACPR can also impose fines of up to 100 million euros or 10% of the entity’s annual turnover. It should be noted that the ACPR’s sanctions are published on its website and are not anonymized, which naturally constitutes an additional symbolic sanction and a significant deterrent.
Moreover, and as indicated above, certain violations of the applicable regulatory framework constitute criminal offences and can give rise to significant sanctions.
In light of the above, there can be little doubt as to the fact that the supervisory and enforcement environment is indeed a rigorous one.
In recent years, the ACPR mainly focused its efforts on professional requirements (especially for insurance intermediaries), unclaimed life insurance policies, insurers’ duties to inform and advise potential insureds, corporate governance, unlawful writing of insurance contracts and anti-money laundering procedures.
How is the solvency of insurers (and reinsurers where relevant) supervised?
The ACPR is responsible for verifying that (re)insurers operating in France meet their solvency requirements, in accordance with the three pillars system set out in Solvency II. These three pillars are:
- Pillar 1 provides the methodology thanks to which one calculates the technical provisions and capital requirements by reference to the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR);
- Pillar 2 sets out the detailed self-assessment that (re)insurers need to perform in relation to their own capital needs (the “Own Risk and Solvency Assessment” or ORSA). The ORSA report, which is submitted to the ACPR for review, is then used internally to ensure that appropriate risk management systems and governance are put in place;
- Pillar 3 imposes a reporting and disclosure duty upon (re)insurance companies in relation to the financial risks they hold, their capital adequacy, and the risk-management measures they have adopted.
What are the minimum capital requirements?
The minimum capital requirements (MCR), which is defined by Solvency II by reference to the Solvency Capital Requirement (SCR), constitutes the minimum financial threshold under which a (re)insurer’s financial resources should not fall. In France, (re)insurers’ MCRs :
- are subject to an absolute floor (€2.5 million for non-life insurance undertakings; €3.7 million for life insurance undertakings; €3.6 million for reinsurance undertakings, and €1.2 million for captive reinsurance undertakings);
- must correspond to 25% to 45% of the solvency capital requirement (SCR);
- are calculated taking into account technical provisions, subscribed premiums, capital at risk, deferred taxes and administrative costs;
- are calibrated to ensure a 85% confidence level over a one year period, and
- are reported to the ACPR on a quarterly basis.
Is there a policyholder protection scheme?
Policyholder protection schemes have been put in place, so as to protect policyholders in the event that an insurance company becomes insolvent or loses its license (thereby causing it to be wound-up). The schemes are effectively constituted of (i) the possible transfers of the insolvent insurance company’s portfolio to another insurer and/or (ii) the intervention of various financial guarantee funds (though it should be borne in mind that not all types of insurance will necessarily be able to benefit from both these schemes).
The portfolio transfer scheme protects life insurance policyholders and is not available for non-life insurance contracts (one appreciates the rationale for providing such a scheme specifically for life insurance policies, given the extended periods of time during which such policies are usually kept). Whether the transfer scheme is finally conducted is left at the discretion of the ACPR, which can either allow it to go ahead or refuse and set a date for the termination of the impacted contracts.
Guarantee funds may also intervene, in certain circumstances, so as to provide policyholders with compensation. There is, for instance, a guarantee fund that specifically protects life insurance policyholders (“fonds de garantie contre la défaillance des sociétés d’assurances de personnes”), as well as a guarantee fund that protects policyholders that have taken out mandatory insurance policies (“fonds de garantie des assurances obligatoires de dommage”). It should be noted, in relation to the latter, that if the said guarantee fund has had to provide compensation for bodily injury or property damage, owing to the insolvency of the policyholder’s insurer, then it would be subrogated into the rights of the victim, much as would have been the case for the original insurer.
How are groups supervised, if at all?
Solvency II provides for the supervision of groups of insurance companies. Group supervision applies to groups that have at least one insurance company operating within the European Union.
Groups are supervised by a single group supervisor, who is appointed in accordance with Article 247 of the Solvency II Directive. If the parent company is situated outside of the European Union, the ACPR will verify whether the group supervisor applies a control equivalent to that of the EU. Otherwise, the ACPR will oversee the group supervision on the EU parent company.
Group supervision is comparable to the supervision imposed upon single entities, in that it requires steps to be taken and systems to be implemented at group level in relation to capital requirements, risk concentration, intra-group transactions and governance.
Do senior managers have to meet fit and proper requirements and/or be approved?
Senior managers must meet fit and proper requirements, which take into account good repute, competency, required experience and the absence of any criminal records.
Insurance and reinsurance companies seeking licenses and already-licensed undertakings making changes to its senior management need to provide information to, and get approval from, the ACPR regarding the following individuals:
- any person who effectively runs the (re)insurance undertaking (i.e. CEO, deputy chief executive officers, and, when appropriate, the members of the board of directors), or
- any person responsible for key functions (such as risk management, internal auditing, compliance and actuarial services).
Are there restrictions on outsourcing parts of the business?
Since 1 January 2016, the externalization of certain critical operational functions or activities – such as risk management, compliance, internal auditing or actuarial functions – are subject to specific regulatory requirements, pursuant to Solvency II.
Outsourcing must be subject to:
- a written outsourcing policy,
- a contract between the insurance undertaking and the service provider (which must include mandatory, standardized provisions),
- a prior notification to the ACPR, and
- verifications, by the undertaking, that the service provider has:
- the ability, the capacity and authorizations required by law to deliver the required functions or activities satisfactorily,
- the necessary financial resources to perform the additional tasks in a competent and reliable way, as well as the necessary human resources, and
- adequate contingency plans enabling it to deal with emergency situations or business disruptions.
These rules also apply in case of intra-group outsourcing, especially where the service provider is in a different geographical region.
How are sales of insurance supervised or controlled?
Insurance companies who market insurance in France are subject to legal and regulatory requirements that aim to ensure that consumers and potential insureds are provided clear and fair information regarding the insurance products they are offered. For instance:
- the conclusion of insurance contracts is subject to the provision, by the insurer, of specific pre-contractual documents informing the potential insureds of their rights and obligations, as well as the exact extent of the proposed cover, and
- the advertising of insurance products is subject to the control and oversight of the ACPR.
In addition to the above requirements, by which insurers must abide, the ACPR includes several supervisory departments (such as the “Contrôle des pratiques commerciales” and the “Pôle commun assurance banque épargne”), whose missions are to monitor insurers and their business practices, so as to ensure compliance and verify that consumers are treated appropriately. The ACPR also issues “best practice” guidelines and has the power of handing down sanctions against offending insurers.
Finally, one can expect that from the 1 October 2018 onwards, insurance distribution supervision will be strengthened, as the Insurance Distribution Directive will come into force and introduce new obligations, such as:
- a requirement that insurers provide insurance intermediaries with standardized “Insurance Product Information Documents” regarding their non-life products and “Key Information Documents’ regarding their insurance-based investment products, or
- the necessity, for insurers, of maintaining, operating and reviewing a specific process for the approval of each and every insurance product, as a result of new product oversight and governance requirements.
Are consumer policies subject to restrictions? If so, briefly describe the range of protections offered to consumer policyholders.
Policies concluded with consumer are regulated by:
- the French Insurance Code, which:
- sets out a standard legal regim that already has somewhat of a pro-consumer bias, in that it contains strict guidelines regarding the wording and layout of certain key clauses (i.e. exclusion clauses or warranty forfeiture clauses), non-compliance with which results in the said clauses being deemed unenforceable;
- contains provisions that specifically provide consumers with heightened protection, which were recently strengthened by the 17 March 2014 law on Consumer Protection, which inter alia enables insureds to terminate their insurance contracts any time during the coverage period (rather than exclusively at the annual renewal date) or cancel certain types of insurance (insurance contracts concluded at a distance or offered in conjunction with other goods and services) during an initial 14 day period.
- the French Consumer Code, also contains provisions that apply to insurance contracts, according to which:
- the interpretation of ambiguous contractual terms must always be made in the consumer’s favor, and
- clauses that create a significant imbalance between the rights and duties of the parties may be declared null and void by the Courts (which will, inter alia, take note of the recommendations emitted by the Unfair Terms Commission (“Commission des clauses abusives”), which regularly identifies standard insurance contract clauses it deems to be unfair).
- the French Insurance Code, which:
Are the courts adept at handling complex commercial claims?
French courts are adept at handling complex commercial matters.
Depending on a number of variables (such as the identity of the parties or possible jurisdiction clauses), commercial disputes can either be heard before commercial courts, which are staffed by non-professional judges who are usually weathered business people, or before civil courts, which are staffed with professional judges. Both types of courts are familiar with complex commercial cases.
French courts have an important degree of specialization and sophistication as a result of the way jurisdictions are organised. Indeed, the civil courts of major cities have specialized sections that concentrate on particular types of disputes and areas of the law (i.e. insurance, construction, finance etc.).
French jurisdictions are used to handling complex international matters (whether French law or foreign laws apply) and French courts increasingly have specialized international sections (where evidence and testimonies can be given in foreign languages and certain aspects of common law procedure may be introduced), such as the international section of the Paris commercial Court, or the international section of the Paris Court of appeal, which was recently created on 7 February 2018. France’s ability to deal with complex international matters is not, moreover, limited to state courts, as Paris has long been one of the world’s preeminent centres for international arbitration.
Is alternative dispute resolution well established in the jurisdiction?
Alternative dispute resolution is well-established in France, whether in the guise of arbitration, mediation or conciliation, and it is increasingly promoted by the French legislator and the provisions of the French Civil Procedure Code.
The world of (re)insurance moreover possesses industry-specific ADR avenues and forums, such as the Insurance Ombudsman, that was recently created by the French Federation of Insurance, who may assist the parties regarding insurance disputes, or the French Reinsurance and Insurance Arbitration Center (CEFAREA), which has significant expertise in relation to (re)insurance arbitration and mediation.
What are the primary challenges to new market entrants?
The primary obstacles to new market entrants are linked to the market landscape and the legal and regulatory framework that govern the writing of insurance in France.
The French insurance market is a mature and competitive market. A limited number of large actors, that have consolidated through successions of mergers and acquisitions, dominate the market and would constitute significant competition for possible new entrants.
From a regulatory perspective, new market entrants must also consider ever-growing EU regulations (regarding inter alia solvency requirements and access conditions), as well as the fact that the sale of insurance contracts in France is highly-regulated – factors that new market entrants would have to consider, as they naturally generate significant internal compliance costs.
To what extent is the market being challenged by digital innovation?
The digitalization of the French insurance industry is already underway and will bring about interesting changes in the near future. Connected objects and smartphone apps, to name the most obvious, represent promising new ways of having a better and quicker access to both consumers and data, which can be relied upon to better target potential clients and assess / price risks with greater accuracy.
As is often the case with technological innovation, this technology has great potential for both strengthening the position of certain major and long-established market participants (who are developing insurtech products and funding or acquiring startups) and causing market disruption, due to the arrival of innovative outsiders, who may try to significantly alter consumer experience and replicate, to an extent, what Uber and Airbnb have respectively accomplished in the urban transport and hotel industries.
These opportunities will, however, come hand in hand with new challenges, such as new regulatory requirements (like the processing of personal data European Regulation, which will come into force in May 2018), and new risks, principally in the form of cyber risks (ransomware, identity theft, tech-enabled financial fraud etc.).
Over the next five years what type of business do you see taking a market lead?
At this juncture, there is significant demand from insureds for cyber risks and financial lines insurance. This reflects a certain number of wider trends, such as the increasing digitalization of our day to day lives, or the increasingly demanding regulatory environment businesses are faced with (coupled with the significant development of “white collar crime” prosecutions in the last decade).
Medium term, however, product liability business should develop significantly, as the budding trend of tech-driven automation (driverless cars, robots etc.) will tend to shift liability from individuals to manufacturers.