Insurance Distribution Directive (IDD)

Insurance Distribution Directive (IDD)

Important developments:

Bipar answer to EIOPA consultation paper on technical advice on possible delegated acts concerning the insurance distribution directive (Oct 2016)


Background

On 20 January 2016, after a four-year process, the two EU legislators, the Council of the EU (the Heads of State and Government) and the European Parliament, officially signd the Insurance Distribution Directive (IDD). The IDD entered into force on 23 February 2016 and Member States have until 23 February 2018 to implement it. The IDD aims at "ensuring a level playing field between all participants involved in the selling of insurance products and at strengthening policyholder protection". The IDD repeals the Insurance Mediation Directive (IMD) and also the IMD 1.5 (IMD as amended by MiFID II). The IDD is a minimum harmonisation Directive. In other words, Member States, as they transpose the Directive into national law, cannot do less than what is required under the Directive but they may introduce additional measures if they deem it necessary to ensure the protection of consumers in their market.


"In short, we hope that this Directive will help intermediaries to compete in a fair market, to sell services more easily across borders and build relationships with their clients on the basis of transparency and trust."

-Lord Hill, Commissioner for the Directorate-General for Financial Stability,
Financial Services and Capital Markets Union,
at BIPAR mid-term meetings, January 2015.


Why an IMD revision?

Insurance intermediaries already registered under the IMD will be given 3 years after the entry into force of the IDD, to comply with their respective and relevant provisions of national law implementing professional and organisational requirements.

The IDD empowers the Commission to adopt Delegated Acts to specify various regulatory requirements of the IDD on a variety of issues (Product Oversight and Governance Arrangements, Management of Conflicts of Interest, Inducements, etc). On 24 February 2016 the European Commission requested EIOPA for its technical advice on the preparation of IDD Delegated Acts. The Delegated Acts are expected to be adopted in 2017, a few months before the expiry of the deadline for national implementation for Member States. This may cause problems to Member States. EIOPA has also started its work on technical standards (e.g. the format of the Product Information Document) and on other level 3 measures.


IMD to IDD: key provisions and changes

  • The IDD covers the distribution of not only non- life and life products, reinsurance products, but also insurance-based investment products (IBIPs).
  • The IDD applies to insurance distributors, that is to say insurance intermediaries and also to direct writers, i.e. to insurance undertakings which sell insurance products directly. The IDD (unlike the IMD) also expressly applies to certain activities conducted through price comparison websites.
  • The IDD applies to ancillary intermediaries: they are service providers and distributors of goods who distribute insurance products on an ancillary basis. The insurance products they distribute must be complementary to the goods or the services they are selling. And they must not cover life assurance or liability risks unless that cover complements the product or service which the intermediary provides as his principal professional activity. It is interesting to note that credit institutions or investment firms cannot fall under the definition of ancillary intermediaries. It means that when carrying out insurance distribution activity, those firms have to be entirely registered under the IDD.

Those ancillary intermediaries are excluded from the IDD where the insurance they sell covers the risk of breakdown, loss of or damage to the goods or non-use of the service or covers damage to or loss of baggage and other risks linked to travel booked with that provider; and where the amount of the premium for the insurance product does not exceed €600. In circumstances where the insurance is complementary to the good or service and the duration of that service is equal to or less than three months, the amount of the premium paid per person should not exceed €200.

Trying to limit the impact of the exemptions on consumer protection, the IDD states that any insurer or intermediary using the services of an exempted insurance intermediary will have the obligation to ensure that the latter complies with a series of information and conduct requirements.

BIPAR position: BIPAR welcomes the IDD much wider scope that ensures a level playing field and adequate consumer protection. From a consumer protection perspective, exemptions from the IDD scope could have been further limited. The IDD scope fails to cover – and therefore to correctly regulate and supervise - the insurance distribution activities of many ancillary intermediaries.


Product Oversight and Governance (POG)

The IDD introduces product oversight and governance requirements for insurance undertakings and intermediaries which manufacture insurance products (a process for the approval of each insurance product, identified target market consistent with intended distribution strategy, review of insurance products, information of distributors). It also includes some requirements for insurance distributors who propose products that they did not manufacture. POG requirements do not apply to insurance products which consist of insurance of large risks. The Commission is empowered to adopt Delegated Acts to specify the IDD principles on POG.

BIPAR position: BIPAR believes that it is important to pay particular attention to the product design and governance and to ensure that products on offer in the EU market are fit for consumers' needs. ln this respect manufacturers' POG arrangements setting out measures and procedures aimed at designing, monitoring, reviewing and distributing products for customers, can play an important role to avoid mis-selling. The value or benefit in an insurance distributor being expected to obtain information on the product approval process an insurance undertaking has gone through to manufacture the product - as requested by the IDD - is questionable.


New information requirements

  • For the sake of better consumer protection, insurance distributors will have to act honestly, fairly and professionally in accordance with the best interests of their customers. In particular, they cannot make any arrangements by way of remuneration or sales target that could provide an incentive to recommend a particular product to a customer when they could offer a different product that would meet the customers’ needs better.
  • Before the conclusion of the contract, consumers will be provided with clear information about the professional status of the person selling the insurance product and about the nature of remuneration which he will receive. This does not apply for large risks and for reinsurance distribution activities. Member States may limit or prohibit the acceptance or receipt of fees, commissions or other monetary or non-monetary benefits paid or provided to insurance distributors by any third party, or a person acting on behalf of a third party, in relation to the distribution of insurance products.
  • The IDD introduces a detailed standardised Product Information Document (PID) for all non-life insurance products. The PID is intended to be a pre- contractual and stand-alone document which aims to allow consumers to make an informed decision. The PID must be drawn up by the manufacturer of the insurance product. It shall be provided by the insurance distributor and shall contain information about the type of insurance, a summary of the cover, the means of payment of premiums and the duration of payments, the main exclusions, the obligations at the start, during the contract and in case of a claim, the term of the contract and the means of terminating the contract. The standardised presentation format of the PID will be developed by EIOPA through an «Implementing Technical Standard».
  • Where advice is provided, the insurance distributor has to provide the customer with a personalised recommendation explaining why a particular product would best meet his customer’s demands and needs. Member States can make the advice mandatory for the sales of any insurance products. Important to note is that the Directive explicitly states that distributors operating under FOE/FOS in Member States where advice is mandatory, will have to comply with that stricter provision when concluding contracts with consumers having their habitual residence in that Member State.

BIPAR position: The disclosure of clear, meaningful and relevant information at contract level will help consumers to make informed decisions when purchasing insurance products. For non-life insurance and for pure risk life insurance, any additional disclosures would, however, result in distortion and weakening of competition of which ultimately consumers will be the victim. It would also lead to a distraction of consumers away from the relevant information regarding their insurance policy such as levels of coverage, levels of service, policy exclusions or total premium.


Cross-selling rules

The IDD introduces new rules regarding cross-selling: it requires in principle that where the insurance product is the ancillary product to a good or service, the good or service should be allowed to be purchased separately from the insurance. The IDD does not prevent the distribution of insurance products which provide coverage for various types of risks (multi-risk insurance policies). The IDD also requires that where the insurance product is the main product and is sold with an ancillary product or service that is not insurance, the customer is informed of whether the components can be bought separately.


Cross-border activities

More clarification is given in the IDD on the division of competence between the home and host Member States. Broadly speaking, when the intermediary is passporting on a FOS basis, its home Member State is responsible for ensuring compliance with all IDD requirements. When the intermediary is operating on a FOE basis, the host State concerned is responsible for ensuring compliance with IDD information and conduct of business requirements. Its home Member State is responsible for everything else.


Continuous Professional Development (CPD)

The IDD requires Member States to have mechanisms to assess knowledge and competence of intermediaries, employees of intermediaries and of undertakings based on at least 15 hours of CPD per year, which could include courses, e-learning, mentoring etc. The nature of the products sold and the role of or the activity carried out by the person following the training have to be taken into account.

Member States may require that the successful completion of the training and development requirements is proven by obtaining a certificate.

BIPAR position: BIPAR promotes CPD but it must be noted that CPD requirements have the potential to be a demanding charge for micro operations and SMEs in particular. The real impact will depend on how these requirements are implemented at national level.


IBIPs regime

  • The IDD contains a specific chapter with additional requirements for insurance-based investment pro- ducts (IBIPs) distributed by insurance undertakings and intermediaries, meaning that they come on top of the requirements in the general part of the Directive.
  • Intermediaries and undertakings have to take (proportionate) arrangements to prevent conflicts of interest from adversely affecting the interests of their customers and must take steps to identify conflicts of interest. If the taken arrangements are insufficient to ensure that the risk of damage will be prevented, there is a requirement of disclosure of the general nature or sources of conflicts of interest in good time before the conclusion of the contract.
  • For IBIPs, there will also be a Key Information Document (KID) according to the PRIIPs Regulation. The IDD does not contain a provision as the one in MiFID II on independent advice linked to a ban on com- mission. Instead, IDD leaves it to Member States that for independent advice, they may require the assessment of a sufficiently large number of products available on the market that are adequately diversified.
  • The IDD allows benefits if there is no detrimental impact on the quality of the service and it is not against the criteria to act honestly, fairly, professionally, and in accordance with the best interests of customers. The IDD explicitly foresees the possibility for Member States to go beyond (e.g. prohibition of commissions, re- turn to the client). Member States have the possibility of introducing mandatory advice. Any stricter requirements have to be respected in case of FOS and FOE.


Implementation

Member States have until 23 February 2018 to implement the IDD. As the IDD is a minimum harmonisation Directive, Members States may introduce additional measures at national level that may lead to unnecessary administrative burden and would have a negative effect on the Single Market. BIPAR will monitor the IDD implementation in the EU Member States and will assist its member associations, for example, in case of wrong implementation of the text. In this context BIPAR will issue regular updates on the IDD implementation, article by article.


Preparation of IDD Delegated Acts - BIPAR response to EIOPA online survey

Delegated Acts are expected to be adopted in 2017. On 24 February 2016 the European Commission requested EIOPA for its technical advice on the preparation of IDD Delegated Acts by 1 February 2017. Anticipating that request, in January 2016, EIOPA launched an informal online survey to involve market participants and stakeholders at an early stage seeking their input for the development of its technical advice on Delegated Acts under the IDD, which will be consulted on at a later stage. In April 2016 EIOPA also adopted preparatory Guidelines on POG arrangements by insurance undertakings and insurance distributors, addressed to competent authorities and dealing with how to proceed in the preparatory period leading up to the transposition of the IDD regarding the application of Delegated Acts on POG. A Consultation Paper was launched in 2015 on the preparatory Guidelines to which BIPAR responded (see article on ESAs).

In its response to the EIOPA survey on Delegated Acts on POG, BIPAR explained that:

  • EIOPA should avoid laying down too prescriptive requirements on POG without paying due attention to the resulting costs and administrative burden that could ultimately get passed on to consumers.
  • Too prescriptive rules could result in a less innovative, less flexible, less consumer-friendly market.
  • It is important that the EIOPA technical advice does not lead to an overlap with the IDD point of sales rules.
  • Article 25 places POG requirements mostly on ‘‘insurance undertakings, as well as intermediaries which manufacture any insurance product’’ and not on intermediaries that do not manufacture products.
  • EIOPA should not go beyond the intended requirements of Article 25.

In its response to the EIOPA survey on IDD Delegated Acts on conflicts of interest, inducements and suitability/ appropriateness tests, BIPAR recalled that:

  • In a highly competitive market, remuneration should not be supervised and regulated in too many details. A pure fee-based market, for example, would exclude many people from access to any level of advice or assistance in their search for an appropriate insurance product, as has been the practical experience in Member States that have prohibited commission payment approaches.
  • It is important to ensure that any future European policy on conflicts of interest for intermediaries mediating IBIPs does not have any unintended side effects, does not result in less choice for consumers and does not jeopardize intermediaries’ activities and business models.
  • Disclosure can play an important role in tackling conflicts from commission payments or third-party payments. For insurance-based investment products there is a need for transparency of all costs which may have an impact on the return of the investment, and this on a level playing field basis.
  • Regarding reporting requirements, BIPAR explained that intermediaries are mainly micro to small entrepreneurs and that requirements have to be proportionate. One should avoid the duplication of unnecessary information as this leads to customer confusion and legal uncertainty.
  • On the different steps that insurance intermediaries and undertakings distributing IBIPs products might reasonably be expected to take within an effective organizational and administrative arrangement designed to identify, prevent, manage and disclose conflicts of interests and
  • On the circumstances and situations to take into account when determining which types of conflicts of interest may damage the interests of the customers or potential customers of an insurance intermediary or undertaking.
  • On the conditions under which payments and non- monetary benefits paid or received by insurance intermediaries or undertakings in connection with the distribution of IBIPs may have a detrimental impact on the quality of the relevant service to the customer
  • On the circumstances and situations to take into account when determining whether an insurance distributor or undertaking paying or receiving inducements complies with its obligation to act honestly, fairly and professionally in accordance with the best interests of the customer. An exemplary enumeration of circumstances where third party payments and benefits are generally considered acceptable could be published.

Commission's request for technical advice on possible Delegated Acts concerning the IDD.


Product oversight and governance

EIOPA is invited to provide technical advice on detailed POG arrangements for insurance undertakings and insurance intermediaries manufacturing and distributing insurance products in order to avoid and reduce, from an early stage, potential risk of detriment to customers' interest.


Conflicts of interest (IBIPs)

EIOPA is invited to provide technical advice:

The technical advice should be consistent with the Delegated Acts expected to be adopted under MiFID II.


Inducements (IBIPs)

EIOPA is invited to provide technical advice:

The technical advice should be consistent with the Delegated Acts expected to be adopted under MiFID II.


Assessment of suitability and appropriateness and reporting (IBIPs)

EIOPA is invited to provide technical advice:

  • On the information to obtain when assessing the suitability or appropriateness of IBIPs for customers, whereby a distinction has to be made between the situation when advice is provided and when it is not; on the criteria to assess non-complex IBIPs;
  • On the content and format of records and agreements for the provision of services to customers;
  • On the content and format of periodic reports to customers on the services provided.
  • By 23 February 2018, EIOPA shall undertake an evaluation of the structure of insurance intermediaries’ markets.


Next steps

On 4 July 2016, EIOPA issued its consultation paper on its draft technical advice and invited comments by 3 October 2016. EIOPA will submit its final technical advice to the European Commission by 1 February 2017. Based on the EIOPA advice, the European Commission will then draft and adopt the 4 Delegated Acts (DA). It is likely to do so by the summer 2017. After adoption by the Commission, the EP and Council have scrutiny rights. DA are binding for Member States, which will have to implement them by February 2018, the IDD implementation deadline.

Gabriel Bernardino, Chairman of EIOPA, said: "The Insurance Distribution Directive is a significant milestone to strengthen consumer protection in Europe. This work goes hand in hand with the fact that EIOPA places consumer protection at the very centre of its strategic objectives. It is now important to specify the new requirements underlying the IDD, to ensure a consistent application across Member States and, as a result, achieve a common level of consumer protection across the European Union. EIOPA actively seeks a discussion with all market participants on how these goals can best be accomplished"

EIOPA reports on IDD implementation - Commission's review of the IDD.

  • By 23 February 2020, and at least every two years thereafter, EIOPA shall prepare a report on the application of the IDD.
  • By 23 February 2021, the Commission has to submit a report assessing whether the scope of the IDD remains appropriate with regard to the level of consumer protection, the proportionality of treatment between different insurance distributors and the administrative burden imposed on competent authorities and insurance distribution channels.
  • By 23 February 2021, the Commission will also have to review the IDD. The review shall include a general survey of the practical application of IDD rules.

Text available here.

Last update 25/07/2016

For more recent news concerning this dossier, please contact your national association.

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