Hungary: New Insurance Regulations

Hungarian Parliament has passed Act LX of 2003 on Insurers and Insurance Activities (the "2003 Insurance Act"). The 2003 Insurance Act will come into force upon Hungary's accession to the European Union (which is expected to occur on 1 May 2004) and will replace the old Act XCVI of 1995 on Insurance Institutions and Insurance Business. The aim of the 2003 Insurance Act is to harmonize Hungarian insurance law with EU law, thus increasing the efficiency of the insurance market; introducing guarantees to protect the interests of market participants (especially the clients); and strengthening regulatory control, without imposing any limits on the participation of insurers in the market.

The 2003 Insurance Act defines some new concepts, such as a branch office, a third country, a Member State in which obligations have been undertaken, and a Member State in which services have been provided. It also introduces some new institutions, established by way of the fourth Directive on car liability insurance (2000/26/EC), such as a compensation body, claims representative, information centre, etc.

The 2003 Insurance Act specifies the organisational forms in which insurers will be able to operate in Hungary. In addition to the already existing operations which require settlement in Hungary, a new provision is that, if an insurer based in one Member State wishes to have an office in another Member State of the EU, it may operate that office in the form of a branch office or such insurer may, without establishing a branch office, sell its products through cross-border services, on the basis of the single passport principle. The branch office of an insurer is not a legal entity and, as opposed to the branch office of an insurer of a non Member State country, it is not obligatory to register such a branch office in the company register.

The main changes to the provisions concerning the other participants of the insurance market will affect insurance intermediaries. The 2003 Insurance Act provides for dependent and independent insurance intermediaries and introduces a unified registration system for the intermediaries.

The rules regarding the investment of technical reserves will undergo significant changes: the names for investment products and the specification of their proportions will be based on EU Directives. The types of assets in which the reserves can be invested will be extended, such assets having to be in the territory of any of the Member States. Investment rules and limits can only be applied to technical reserves and the investment of working capital will not be restricted. The restriction on the investment of the technical reserves of insurers is justified by the specific characteristics of insurance activities. On the basis of the EU Directives, the 2003 Insurance Act determines the maximum number of high-risk investment products, or of investment products that are difficult to liquidate.

The auditor of insurers will have to be a registered auditor, i.e. registered in the list of auditors of insurers kept by the Hungarian insurance regulator. For the clients' protection, there are clear and strict provisions regarding when and what kind of information the insurer has to provide to the clients when conducting its business. This has special significance for insured private individuals, who have less capability to enforce their interests. The 2003 Insurance Act determines the scope of undisclosed insurance information and regulates the conditions concerning business secrets and personal data protection. It contains strict provisions on the handling of data in order to ensure the increased protection of the personal rights of contracting or aggrieved persons.

The rules of the regulatory system will change fundamentally. In accordance with the single passport principle, the activities of an insurer are supervised by the regulator of the Member State the insurer is based in. However, if the activities of the insurer, operating through a branch office or within the framework of cross-border activities, conflict with the law of that Member State, the regulator of that Member State can also take certain measures. For example, if a UK insurer had a branch office in Hungary, and the UK insurer, through its branch office, carried out activities in conflict with Hungarian law, then the Hungarian regulator will be able to take measures to remedy the situation.

The 2003 Insurance Act does not permit the initiation of bankruptcy proceedings against insurers and adopts EU Directive 2001/17/EC on liquidation proceedings and the voluntary dissolution of insurers. A new provision, not prescribed by the Directive but not in conflict with it either, is that, similar to the regulations concerning financial institutions, only a non-profit company established by the regulator can be appointed as a liquidator or an administrator of an insurer. Only the costs associated with liquidation have priority over the financial obligations of the insurer arising from the insurance agreement.