Advising on insurance supervisory law is exciting and allows the participation in most creative strategic and economic processes. Let's have a look at the current hot topic, the IDD transposition: On 23 February 2018, the Insurance Distribution Directive (EU) 2016/97 dated 20 January 2016 ("IDD") will supersede the Insurance Mediation Directive 2002/92/EC ("IMD"). Accordingly, the EU Member States have to implement the IDD provisions in their national laws by the same date and the re-/insurers have to get ready for complying with the new legal requirements:
1. Scope and Exemptions
The IDD applies to any person carrying on the activity of "distributing insurance" and "distributing reinsurance". Significantly, it now governs the activity of distribution whether carried out directly by a re-/insurer or through an intermediary. The IDD recognises two types of distributors: re-/insurance intermediaries (agents and brokers) and – being a key shift from IMD which only covered intermediary sales – re-/insurance undertakings and its employees (cf. Article 2 para. 1 (2) and (5) IDD). The new terminology of "insurance distribution" and "reinsurance distribution" encompasses much of the same activities as "mediation" under the IMD, including advice, preparatory work for the conclusion of contracts of re-/insurance, concluding such contracts and assisting in the administration and performance of such contracts, in particular in the event of a claim (cf. Article 2 para. 1 (2) IDD).
Activities which do not constitute re-/insurance distribution under the IDD (cf. Article 2 para. 2. IDD) include the provision of information on an incidental basis in the context of another professional activity, the professional management of claims on behalf of a re-/insurance undertaking and loss adjusting and expert appraisal of claims, and the mere provision of information about potential policyholders to intermediaries or re-/insurance undertakings, or vice versa, where the provider does not take any additional steps to assist in the conclusion of a re-/insurance contract.
2. Professional and Organisational Requirements
Re-/insurance undertakings and their employees shall not be required to register under the IDD (cf. Article 3 para. 1 sentence 2 IDD). Re-/insurance distributors (including employees of re-/insurance undertakings carrying out re-/insurance distribution activities) shall possess appropriate knowledge and ability in order to complete their tasks and perform their duties adequately. Article 10 para. 2 IDD requires the Home Member States to also ensure that re-/insurance distributors comply with continuing professional training and development requirements based on at least 15 hours of professional training or development per year, taking into account the nature of the products sold, the type of distributor, the role they perform and the activity carried out within the re-/insurance distributor. It may be required that successful training or development is demonstrated by obtaining a certificate. Furthermore, Article 10 para. 3 IDD requires that employees of re-/insurance intermediaries and re-/insurance undertakings are of good repute (as a minimum, they must have a clean criminal record and not have been previously declared bankrupt).
To ensure compliance with the requirements, re-/ insurance undertakings shall approve, implement and regularly review their internal policies and appropriate internal procedures. Re-/insurance undertakings shall identify a function to ensure the proper implementation of the endorsed policies and procedures, and they shall establish, maintain and keep up-to-date records of all the relevant documentation regarding the application of said requirements. Re-/insurance undertakings shall, upon request, make available the name of the person responsible for said function to the home Member State competent authority.
3. Sanctions and Measures
Article 32 IDD requires that sanctions and administrative measures are published and notified to EIOPA. A breach of Articles 10 or 16 IDD shall be sanctioned by an order from the home Member State competent authority requiring the responsible natural or legal person to cease the conduct and to desist from a repetition of that conduct, and in case of a re-/ insurance intermediary the withdrawal of its registration shall be foreseen. Member States may empower authorities to provide for additional sanctions or other measures and for levels of administrative pecuniary sanctions which are higher (Article 33 para. 4 IDD). Fines are foreseen in relation to the distribution of insurance-based investment products (Article 33 para. 2 IDD).
4. IDD provisions applicable to insurance distribution only
The following IDD provisions are only applicable to insurance distribution, not to reinsurance distribution:
- Conflicts of interest: According to Article 17 IDD insurance distributors are subject to an overarching duty to act honestly, fairly and professionally in the best interests of their customers. More specifically (but excluding distribution activities in relation to the insurance of large risks), the IDD imposes that insurance distributors cannot remunerate or assess the performance of their employees in a way that conflicts with their duty to act in the customer's best interests. The IDD wording precludes any remuneration arrangement that could incentivise the sale of a particular product to a customer when a different product would better meet the customer's needs.
- Information about the insurance distributor (Articles 18, 19 and 21 IDD): There are obligations on both the intermediary and the insurer to provide information about themselves in good time before the conclusion of an insurance contract. Such information includes details about the firm, the basis of its service, complaints procedures and in the case of an intermediary, on behalf of whom the intermediary is acting. Intermediaries are also required to disclose any 10% or more direct or indirect links to an insurer, the "nature" of the intermediary's remuneration (i.e. commission or fee based), and whether it has entered into exclusive distribution agreements with insurers. In case of direct sales by insurance undertakings they must also disclose the nature of any remuneration received by employees of the insurance undertaking in relation to that insurance contract.
- Advised and non-advised sales standards and information (Articles 20, 23 IDD): Insurance distributors must disclose whether or not they provide advice on the basis of a "fair and personal analysis". If advice is provided, customers must be provided with a personalised recommendation. Moreover, the IDD requires a standardised insurance product information document ("IPID") to be provided to the customer before the conclusion of the insurance contract, on paper or another durable medium. EIOPA technical standards establish a template IPID to use. For investment-based insurance contracts, firms should refer to PRIIPs Regulation (Regulation 1286/2014).
- Cross-selling (Article 24 IDD): IDD requires that distributors that offer an insurance product together with an ancillary product or service (which is not insurance) must provide customers with an adequate description of the component parts of any package and the costs and charges of each component. In addition, when an insurance product is ancillary to any goods or services and packaged with them, the distributor must offer their customers an opportunity to purchase the component goods and services separately. In the currently ongoing transposition processes of the Member States we see especially for the distribution of PPI products new statutory requirements being introduced in various EU countries such as Germany and Italy.
- Insurance-based investment products (Articles 26 to 30 IDD): The IDD imposes additional requirements on the distribution of insurance-based investment products by insurers and insurance intermediaries: Such firms shall maintain and operate effective arrangements to manage conflicts of interests and when the conflict cannot be prevented, it must be disclosed in good time before conclusion of the insurance contract. In addition, the firm must provide the customer with risk warnings regarding the product/investment strategy proposed, (where advice is given) the firm shall provide the customer with a periodic assessment of suitability and detailed information about costs and related charges associated with both the product and the method of distribution (i.e. the cost of investment advice given and any third party payments) and their effect on the investment return. Firms providing advice must carry out a suitability assessment, and non-advised sales must be subject to an appropriateness test.
- Product Oversight and Governance (Article 25 IDD): Insurers or intermediaries which manufacture insurance products shall maintain, operate and review proportionate and appropriate product approval processes. In particular, these processes must identify target markets for each product, the risks for that target market and map out an appropriate distribution strategy. Insurance undertakings then have an obligation to monitor the product to ensure it remains consistent with its target market. Details of the manufacturer's product approval process and target market shall be provided to distributors, who themselves have an obligation to obtain such information and to understand the characteristics of the product.
5. German IDD Transposal Bill
With the German IDD Transposal Bill dated 29 June 2017, the German legislator has mainly carried out a one-to-one transposition of the IDD provisions into German laws. However, the German legislator has not adopted the definition of the employees to be classified as re-/insurance distributors in terms of Article 10 IDD, as the German definition in Sec. 48 para. 2 VAG merely refers to "the employees directly or significantly involved in insurance distribution" leaving much room for interpretation. Stricter provisions were introduced in respect of PPI products sold in the context of group insurance contracts: In future, the group policyholder has to provide the customers the same information, including the IPID, as is to be provided to a policyholder in a bilateral insurance contract. One week after the customer has declared access to the PPI group insurance contract, the customer is to be instructed again in respect of the contractual right to withdraw from the insurance coverage and is to be handed out the IPID once again.
Further details will be regulated in a ministerial ordinance and a Circular Letter of the German insurance regulator BaFin announced to be release later this year. Many insurers are already on the home stretch to get ready for IDD, and compared to the last big project called Solvency II it is not really less work!