The IDD (level 1 text) introduces new rules on insurance distribution. It came into force on 23 February 2016 and must be implemented into the national laws of the EU Member States by 1st July 2018. As for the application date, the Member States have to apply the national rules from 1st October 2018 at the latest.
The IDD repeals the Insurance Mediation Directive (IMD) and is a minimum harmonisation Directive. In other words, Member States, as they transpose the IDD 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. Insurance intermediaries who are already registered under the IMD have until February 2019 to comply with their respective and relevant provisions of national law implementing IDD knowledge and ability requirements (IDD Articles 40 and 10.1).
The IDD seeks to improve regulation in the retail insurance market and create more opportunities for cross-border business, to establish the conditions necessary for fair competition between distributors of insurance products and to strengthen consumer protection, in particular with regard to the distribution of insurance-based investment products (IBIPs).
In 2018, empowered by the IDD, the Commission adopted two Delegated Regulations (level 2 texts) that further specify some of the IDD provisions with regard to Product Oversight and Governance (POG) and with conflicts of interest, inducements, assessment of suitability and appropriateness and reporting for IBIPs products. The Commission also adopted one implementing technical standard (ITS) regarding a standardised format of the Product Information Document (PID) and regulatory technical standards (RTS) reviewing the minimum amounts of PII/financial capacity. EIOPA developed the draft Delegated Regulations, ITS and RTS. The IDD also empowers EIOPA to adopt various level 3 measures and to carry out other reports and studies.
Originally, Member States were required to implement the IDD into national law by 23 February 2018 and to apply it from that date. However, because of the legal uncertainty triggered by the delay in the finalisation of the two IDD Delegated Regulations (level 2 texts), the industry, and, in particular, SME insurance intermediaries, could not begin implementing the significant structural changes that the IDD necessitates before December 2017. Further to requests from the insurance industry and, in particular, from BIPAR and its member associations, the EU co-legislators agreed to postpone the deadlines for implementation and application of the IDD as follows:
On 21 September 2017 the European Commission adopted one IDD Delegated Regulation on Product Oversight and Governance (POG) and another on conflicts of interest, inducements, assessment of suitability and appropriateness and reporting for IBIP products.
The two Delegated Regulations were supposed to apply from 23 February 2018 along with the IDD, following scrutiny by the European Parliament and the Council. However, the Commission decided to align the application dates of the two IDD Delegated Regulations on POG and IBIPs with the one of the IDD and to, therefore, postpone the application of the texts to 1st October 2018. Having requested it, BIPAR welcomed this decision as it believed that these delays were necessary to allow the insurance distribution sector, which consists of many SMEs, to better prepare for the correct and effective application of the IDD in the interest of consumers and intermediaries.
The two IDD Delegated Regulations are binding for Member States.
The rules of the POG Regulation (POG rules) initially address manufacturers developing insurance products. According to the POG rules, manufacturers must, in particular, maintain, operate and review a product approval process, which must be set out in a written POG policy. Moreover, the POG rules concern distributors who advise on or propose insurance products manufactured by others. According to the POG rules, the distributors must, in particular, put in place product distribution arrangements to ensure that they possess the information they need to sell the product in line with the POG policy set by the manufacturers.
The IDD provides, in addition to the standards established for all insurance products, a set of specific requirements applying to the distribution of insurance-based investment products (“IBIPs”) in particular. The Delegated Regulation supplementing the IDD with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products (IBIPs Regulation) introduces generalised and directly applicable requirements into EU insurance distribution law concerning the management of conflicts of interest, inducements and the assessment of suitability and appropriateness and reporting to customers with regard to IBIPs.
BIPAR responded to EIOPA and the Commission's respective consultations on the draft POG and IBIPs Regulations in 2017. The application of the two Delegated Regulations within the national legislation will trigger some important changes for the insurance distribution industry. This is why BIPAR decided to work with the law firm CMS in order to help its member associations to better inform their members on the two texts and in November 2017 it issued two notes on the POG and IBIPs Delegated Regulations drafted by CMS for BIPAR.
Under IDD Article 20, prior to the conclusion of a contract, the insurance distributor (i.e. the intermediary or the insurer or the ancillary intermediary) is required to provide the customer with the relevant information about a non-life insurance product in a comprehensible form. This relevant information must be provided by way of a standardised insurance product information document (IPID) on paper or another durable medium. The manufacturer of the non-life insurance product is required to draw up the IPID. The IPID will not replace the contractual documentation that is provided with an insurance policy.
On 11 August 2017, the Commission adopted its Implementing Technical Standard (ITS) for the IDD Insurance Product Information Document (IPID). The ITS was published on 12 August in the Official Journal of the EU and entered into force on the twentieth day following its publication. This ITS, based on the EIOPA draft ITS on the IPID, has been adopted by the Commission as an Implementing Regulation, i.e. binding and directly applicable in all EU Member States.
The objective of the IPID is to provide relevant information about the product to allow the customer to take an informed decision The ITS deals with the format of the IPID whereas its content is specified in Article 20 of the IDD that states that the IPID must contain the following information: 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 where claims cannot be made; obligations at the start of the contract; obligations during the term 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 and the means of terminating the contract.
With regard to the type of customer covered by the IPID, the IDD only refers to “customers” in general (with large risks being excluded, Article 22). It is interesting to note that in its consultation paper on the IPID ITS, EIOPA states that "Ultimately, it will be down to Member States under IDD to determine which types of "customers" the IPID should be provided to. In reality, however, it is difficult to envisage the benefits of the IPID being provided to commercial customers and EIOPA was asked to carry out "consumer" testing, meaning that retail customers are the more obvious target of this work”. In its response to the EIOPA consultation on the draft ITS, BIPAR totally agreed and supported the EIOPA approach. In this respect, BIPAR encouraged its member associations to contact their national governments to ensure it is clarified at Member State level that the IPID should only apply to consumers (i.e. retail customers and not commercial customers), as suggested by EIOPA.
EIOPA is required under the IDD (Article 10.7) to develop draft RTS which adapt the base euro amounts for PII and financial capacity of insurance intermediaries. On 1st February 2018 EIOPA published a consultation paper on its draft RTS. Based on a review carried out by EIOPA which takes account of changes in Eurostat's European index of consumer prices, the proposed new amounts are for the PII, EUR 1 300 370 applying to each claim and in aggregate EUR 1 924 550 per year for all claims and EUR 19 510 for the financial capacity. EIOPA has to submit the draft Regulatory Technical Standards to the European Commission by 30 June 2018 which is expected to adopt it (amended or not) by the summer of 2018.
In its consultation paper, EIOPA asked for industry feedback on the proposed new figures and their possible impact on intermediaries. EIOPA also requested feedback on whether PII is seen by market participants as a barrier to enter the insurance intermediaries market and on evidence of any potential market failure with regards to PII. In its response to the EIOPA consultation, BIPAR explained that a very large majority of BIPAR member associations consider that the proposed new figures are adequate and appropriate. In many markets most insurance intermediaries hold or will hold PI cover with significantly larger limits of indemnity than the minimum proposed by EIOPA RTS. Some BIPAR member associations believe that it is important that the minimum amounts reflect the exposure to the insurance intermediary, particularly those with larger risk profiles.However, in a few countries, the increased amounts proposed by EIOPA may pose problems for insurance intermediaries. BIPAR added that competition and supply-side measures should be encouraged, to improve the diversity of insurers and products available to intermediaries. In some markets there seems to be very few insurers offering PII to insurance intermediaries.
On 4 October 2017 EIOPA issued its Guidelines for the assessment of IBIPs that incorporate a structure making it difficult for the customer to understand the risks involved.
EIOPA is also currently working on its Q&As on the IDD and its implementation measures that should be published in July 2018. Q&As are a practical convergence tool to support common supervisory approaches and practices.
Other reports/works to be carried out by EIOPA
Member States have until 1st July 2018 to implement the IDD and by 1st October 2018 to apply it. Over the last 12 months, the Commission has organised workshops on the implementation of the IDD with experts from the Member States' competent authorities to carry out a state of play of the IDD implementation. On 23 and 24 October BIPAR organised a Workshop in IDD implementation in Brussels for its member associations.
According to the European Commission, Estonia, Finland, Hungary, Poland and the Slovak Republic are the five countries so far that have communicated their full IDD transposition measures to them, whereas Belgium, Germany and Lithuania have communicated them partially.
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 issues regular updates on the IDD implementation.
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, i.e. insurance intermediaries, insurance undertakings and ancillary intermediaries. The IDD (unlike the IMD) expressly applies to certain activities conducted through price comparison websites.
The IDD applies to ancillary intermediaries, i.e. service providers and distributors of goods who distribute insurance products on an ancillary basis. 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 on a pro rata annual basis. 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.
Limiting the impact of the exemptions on consumer protection, the IDD states that any insurer or intermediary using the services of an exempted ancillary insurance intermediary will have the obligation to ensure that the latter complies with a series of information and conduct requirements.
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 and information of distributors).
It also includes some requirements for insurance distributors who propose products that they do not manufacture (to have adequate arrangements to obtain appropriate information on insurance products, to understand the characteristics and identified target market of each insurance product)
POG requirements do not apply to insurance products which consist of insurance of large risks.
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 customer’s 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 Insurance Product Information Document (IPID) for all non-life insurance products.
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 Freedom of Establishment (FOE)/Freedom of Services (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.
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 adapted insurance product. EU Member States should not avail themselves of the option given in the IDD to 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. In any case, any decisions of Member States to go beyond the IDD should always be under the condition of a level playing field between all distribution channels, non-distorted competition and proportional administrative burden.
The IDD introduces new rules regarding cross-selling: 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 (i.e. ban on tying). The IDD does not prevent the distribution of insurance products which provide coverage for various types of risks. The IDD 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.
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.
All intermediaries are subject to relevant “general good” provisions that the host State may impose.Any Member State which possesses additional “general good" type rules will need to ensure that these are made publicly available.
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 (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.
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 them. 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 commission. Regarding independent advice Member States 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, return 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.
For more recent news concerning this dossier, please contact your national association.