WHAT IS IDD ?
The European Insurance Distribution Directive (IDD) is a next step in the harmonization of the European Insurance market. This directive (Directive 2016/97/EU) was published in the Official Journal of the European Union on the 2nd of February 2016 and replaces the current Insurance Mediation Directive of 2002.
The directive provides an updated and harmonised legal framework containing rules applicable for the distribution of insurance and reinsurance products, including insurance-based investment product (PRIIP’s). It includes important requirements on:
- Registration of insurance distributors & cross-border activities
- Professional knowledge & competence and organisation
- General principles on demands and needs of customer
- Conduct of business rules – Transparency and Conflict of Interest
- Insurance Product Information Document (IPID) for Non-Life products
- Product development and governance
- Additional requirements for insurance-based investment products
WHAT IS THE TIMING OF IDD ?
The IDD has been transposed in the Belgium legislation by the 23rd of February 2018 (2017040465 and 2017013378 published in “Belgium Staatsblad / Moniteur Belge”). The involved parties need to comply to this new regulation by 1st of October 2018.
WHAT IS THE UNDERLYING OBJECTIVE OF IDD ?
The IDD focus on a better protection of the consumer and retail investors being insurance products and insurance-based investment products. It’s is also about an identical protection – transparency – independent where and how they close an insurance policy.
Therefore the directive aims at:
- Imposing the same rules for all distribution channels including direct sales by (re-) insurance companies. This means a level playing field for all involved parties in the sales and distribution of insurance products;
- Improving the protection of the consumer;
- Providing more transparency by the insurance distributors in terms of price and costs of their products, better and more comprehensive product information and improved rules of conduct, especially when providing advice;
- Imposing a generalized product (development) supervision and governance to guarantee that all insurance products being sold and distributed are line with the needs and demands of their specific target market.
- Stimulating a single European market for Financial services.
WHO AND WHAT IS IMPACTED BY THE IDD DIRECTIVE ?
The scope of the directive is the Insurance and Reinsurance distribution. This includes all activities related to:
- advising on, proposing, or carrying out other preparatory work until the conclusion of insurance contracts;
- assisting in the administration and performance of such contracts, in particular in the event of a claim.
All parties involved in the distribution of insurances – as defined above – that are impacted by the directive. This includes (further referred in the article as Insurance Distributors):
- Insurance companies / Insurance undertaking
- Re-insurance companies
- Intermediaries (brokers, agents) in insurance and re-insurance, including price and product comparison websites
- Parties / companies selling insurance complementary to a product or service (f.e. car rental companies and travel agencies)
Also different types of insurance are subject of the IDD including:
- Non-Life Insurance products
- Life Insurance and Insurance-based Investment products
With the IDD coming in place, all parties selling insurance will have to be registered and follow the rules (unless they meet certain conditions f.e. in case of an ancillary activity where the premium does not exceed a certain amount and the risks covered are limited).
WHAT ARE THE MAJOR REQUIREMENTS OF THE DIRECTIVE ?
Below you will find a quite extensive summary of the different chapters and articles of the IDD directive. The complete text of the Insurance Directive can be found on https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32016L0097.
REGISTRATION OF INSURANCE DISTRIBUTORS & CROSS-BORDER ACTIVITY
Insurance, reinsurance, and ancillary insurance intermediaries need to be registered with or under the supervision of a competent authority in their home Member State.
The registers should specify the names of the natural persons within the management who are responsible for the (re-)insurance and further indicate the Member States in which the intermediary conducts business.
An online registration system should be established allowing the registration form to be completed directly online.
EIOPA will publish on its website a single up-to-date electronic register containing all insurance distributors notifying their intention to carry on cross-border business.
Any insurance distributor who intends within the territory of another Member State:
- to carry on business for the first time – freedom to provide services – or
- to establish a branch or permanent presence within – freedom of establishment -need to inform the competent authority of its home Member State.
This information should be communicated within one month to the competent authority of the host Member State acknowledging its receipt without delay.
The competent authority of the home Member State will then inform the insurance distributor in writing that he can start doing business in the host Member State provided he complies with the legal provisions.
PROFESSIONAL KNOWLEDGE, COMPETENCE & ORGANIZATION
Insurance distributors and their employees need to:
- possess appropriate knowledge and ability in order to complete their tasks and perform their duties adequately;
- comply with continuing professional training and development of at least 15 hours per year in order to maintain an adequate level of performance;
Home Member States should have in place a mechanisms to control and assess this knowledge (f.e. a successful completion of the training to be proven by a certificate);
Natural persons involved in insurance distribution should be of good repute and have as a minimum a clean criminal record;
Insurance distributors should hold professional indemnity insurance covering the whole territory of the Union or some other comparable guarantee against liability arising from professional negligence;
Following necessary measures and controls should be taken to protect customers against the inability of the insurance distributor to transfer premium, amount of claim or reimbursement to the appropriate party:
- premiums paid by the customer to the intermediary are treated as having been paid to the undertaking;
- reimbursements and amount of claims paid by the undertaking to the intermediary are not treated as having been paid to the customer until actually received;
- the intermediary need to have the financial capacity amounting to 4 % of the sum of annual premiums received;
- customers payments be transferred via strictly segregated customer accounts not be used to reimburse other creditors in the event of bankruptcy;
- set up a guarantee fund be set up.
Insurance and reinsurance undertakings should approve, implement and regularly review their internal policies and appropriate internal procedures to ensure compliance including to keep up-to-date records of all the relevant documentation.
Appropriate complaint handling mechanisms and procedures must be set up including procedures for the settlement of disputes between customers and insurance distributors concerning the rights and obligations.
DEMANDS AND NEEDS OF THE CUSTOMER
Prior to the conclusion of an insurance contract, the insurance distributor should:
- specify, on the basis of information obtained from the customer, the demands and the needs of that customer;
- provide the customer with objective information about the insurance product in a comprehensible form to allow that customer to make an informed decision;
- ensure that any contract proposed is consistent with the customer’s insurance demands and needs.
Where advice is provided prior to the conclusion of any specific contract, the insurance distributor should:
- give advice on the basis of an analysis of a sufficiently large number of insurance contracts available on the market;
- provide the customer with a personalised recommendation explaining why a particular product would best meet the customer’s demands and needs.
CONDUCT OF BUSINESS RULES – TRANPARENCY & CONFLICT OF INTEREST
Insurance distributors always act honestly, fairly and professionally in accordance with the best interests of their customers.
Before the conclusion of an insurance contract, an insurance intermediary makes the following disclosures to customers:
- His identity and address
- Whether he provides advice about the insurance products sold;
- The compliant and redress procedures;
- The register where he has been included and the means for verifying this;
- Whether he represents the customer or acts on behalf of the insurance undertaking;
- Whether he has a holding representing 10 % or more of the voting rights or of the capital in a given insurance undertaking or vice versa;
- Whether he gives advice on the basis of a fair and personal analysis;
- Whether he is under a contractual obligation to conduct insurance distribution business exclusively with one or more insurance undertakings;
- The nature of the remuneration received in relation to the insurance contract;
- The amount of the fee if payable directly by the customer.
IPID – INSURANCE PRODUCT INFORMATIOM DOCUMENT – NON-LIFE
Prior to the conclusion of a contract the insurance distributor should provide the customer with the relevant information about the insurance product in a comprehensible form including the insurance product information document (IPID) to allow the customer to make an informed decision.
The manufacturer of the non-life insurance product must draw-up a standardised insurance product information document (IPID) for each insurance product being developed and distributed. He need to provide this document on paper or on another durable medium to all parties involved in the distribution of these insurance products.
The insurance product information document need to be presented and laid out in a way that is clear and easy to read, enabling the customer to understand the content and make a comparison between different similar non-Life insurance products.
The insurance product information document (IPID) is a standardised document – standards provided by EIOPA – and must contain the following information:
- name of the manufacturer and member state where he is located
- information about the type of insurance;
- a summary of the insurance cover, including the main risks insured, the insured sum and, where applicable, the geographical scope and a summary of the excluded risks;
- the means of payment of premiums and the duration of payments;
- main exclusions;
- obligations at the start and during of the contract;
- obligations in the event that a claim is made;
- the term of the contract including the start and end dates of the contract;
- the means of terminating the contract
- a clear reference to the complete pre-contractual and contractual information
When an insurance product is offered together with an ancillary product or service which is not an insurance, the insurance distributor should inform the customer whether it is possible to buy the different components separately and, if so, provide an adequate description, costs and charges of each of the different components.
Where an insurance product is ancillary to a good or a service which is not insurance, the insurance distributor should offer the customer the possibility of buying the good or service separately.
PRODUCT DEVELOPMENT & GOVERNANCE
Before it is marketed or distributed to customers, insurance undertakings, as well as intermediaries which manufacture any insurance product for sale to customers, should maintain, operate and review a process for the approval of
- each insurance product,
- or significant adaptations of an existing insurance product.
The product approval process should:
- specify an identified target market for each product;
- ensure that all relevant risks to such target market are assessed;
- ensure that the intended distribution strategy is consistent with the target market;
- take reasonable steps so the insurance product is distributed to the target market.
The insurance undertaking should regularly review the insurance products it markets,
- to assess at least whether the product remains consistent with the needs of the identified target market and;
- whether the intended distribution strategy remains appropriate.
They should also make available to distributors all appropriate information on the insurance product and the product approval process, including the identified target market of the insurance product.
ADDITIONAL REQUIREMENTS FOR INSURANCE-BASED INVESTMENT PRODUCTS
An insurance distributor should maintain effective arrangements and take steps to prevent and identify conflicts of interest adversely affecting the customers interests.
If these arrangements are not sufficient to prevent risks of damage to the customer interests, the insurance distributor should clearly and in sufficient detail disclose the nature or sources of these conflicts before the conclusion of an insurance contract.
Provide appropriate information to the customer prior to the conclusion of a contract with regard to the distribution of insurance-based investment products and to all costs and related charges. That information should include at least the following:
- Whether a periodic assessment of the suitability of the recommended products;
- Appropriate guidance on and warnings of the risks associated with the insurance-based investment products or investment strategies proposed;
- Information about all costs and charges in aggregated form, including the cost of advice, to allow the customer to understand the effective return of the investment.
The information should be provided in a comprehensible form so customers are able to understand the nature and risks concerning the insurance-based investment product offered and take investment decisions on an informed basis.
When providing advice with the objective to recommend insurance-based investment products that are suitable for the customer, the insurance distributor should also obtain following necessary information regarding the customer’s:
- Relevant knowledge and experience in the investment field
- Financial situation including that person’s ability to bear losses
- The customers investment objectives, including his risk tolerance,
When no advice is being provided, the customer should at least give the information regarding his relevant knowledge and experience in the investment field.
If the customer do not give the requested or sufficient information the insurance distributor should warn the customer he can’t determine whether the product envisaged is appropriate for him.
When providing advice the insurance distributor will, prior to the conclusion of the contract, provide the customer with a suitability statement on a durable medium specifying the advice given and how the advice meets his preferences and objectives.
The insurance distributor should establish a record including the document(s) agreed between him and the customer that set out the rights and obligations of the parties, and the other terms on which the services will be provided to the customer.
He should also provide the customer with adequate reports on the service provided on a durable medium, including periodic communications, the nature of the service provided and the costs associated with the transactions and services undertaken.
In case of a periodic assessment of suitability, the periodic report will also contain an updated statement of how the insurance-based investment product meets the customer’s preferences, objectives and other characteristics of the customer.
By Yves Leurquin consultant at Initio