The Insurance Mediation Directive contains requirements for EU Member States’ regulation of insurance intermediaries. The new Insurance Distribution Directive enhances this regulation, with a particular focus on practices for selling insurance products.
The Insurance Distribution Directive (IDD) seeks a level playing field between participants in insurance sales in order to improve consumer protection, market integration and competition.
The directive is a minimum harmonisation directive, so Member States can adopt stricter provisions if they wish. Consequently, it will not lead to the removal of restrictive requirements already in place in EU Member States.
The current scope of the delegated regulations that have been made under the IDD will still apply to the UK after leaving the EU.
Functions have been transferred from EU entities to appropriate UK bodies, replacing cross references to EU legislation with the relevant UK measures which implement those provisions, and removing other EU references which are no longer appropriate.
Scope – The directive applies to insurance and reinsurance “distribution” (hence the new of “Insurance Distribution Directive”). Insurance and reinsurance distribution may be carried out by insurers and reinsurers as well as intermediaries, so the scope of EU regulation has been widened.
General principle - there is an obligation on Member States to ensure that, when carrying out distribution, insurance intermediaries, insurance and reinsurance undertakings always act honestly, fairly and professionally in accordance with the best interests of their customers.
Registration – the directive continues the requirement that insurance and reinsurance intermediaries must be registered by an authority in their home Member State. It does not require insurers and reinsurers and their employees to be registered in order to carry on distribution. Intermediaries must be able to register on-line and the registers should be accessible electronically.
Professional development – there is a requirement for at least 15 hours of professional training or development per year for employees of intermediaries and insurers and reinsurers carrying out distribution activities. This will apply to “relevant” managers responsible for distribution and to persons directly involved in distribution. Member States may allow evidence of continuous training and development through the successful completion of an exam.
Remuneration – The directive requires Member States to lay down rules ensuring that intermediaries, insurers, and reinsurers do not remunerate or assess the performance of employees in a way that conflicts with their duty to act in the best interests of customers.
Furthermore, before a contract is concluded, an intermediary must disclose to customers the nature and basis (i.e. fee, commission, other type or a combination) of their remuneration. The directive requires pre-contractual disclosure of the amount of fees payable directly by the customer (or the method for calculating it) but does not mandate disclosure of the amount of any commission received. The distribution of insurance of “large risks” and reinsurance are exempt from these disclosure requirements.
Provision of information – there are requirements to disclose information to customers before a contract is concluded. The new requirements are lengthier and, for non-life insurance, require the customer to be given a standardised insurance product information document (IPID), summarising the main features of the proposed contract.
Product oversight and governance – there are rules requiring insurers and reinsurers, as well as intermediaries who “manufacture” insurance products for sale to customers, to have processes in place to approve every insurance product and to review it regularly, to ensure that it continues to meet consumer needs and that the distribution strategy remains appropriate. The product approval process must specify an identified target market of customers for each product and ensure that all relevant risks are assessed.
Coverholders – the directive will not prevent insurance undertakings from giving delegated authorities to insurance intermediaries. The information disclosure requirements require coverholders to provide more information than they do at present, for example, that they are acting on behalf of an insurance undertaking.
The IDD entered into force on 23 February 2016. It was due to be implemented by Member States by 23 February 2018. However, the EU agreed an amendment to the directive which delayed the transposition date until 1 July 2018 and the application date until 1 October 2018. The UK has transposed the Directive into UK law.
Application of the new directive to the Lloyd’s market
The new directive applies to any EU insurance intermediaries through or with whom Lloyd’s underwriters carry on business, including Lloyd’s brokers and coverholders and other EU intermediaries in the chain between Lloyd’s underwriters and customers. Reinsurance intermediaries are included in the directive’s scope. Managing agents and their service companies dealing with customers will be subject to the directive.
As noted above, there are differences between the old and the new directives and managing agents and intermediaries should ensure that they are compliant with the new requirements. Nevertheless, the Lloyd’s market is already subject to the conduct requirements of the FCA and the new directive is unlikely, of itself, to cause major changes to the ways Lloyd’s underwriters distribute insurance in the EU.
It is widely expected that a further IDD Review will be published by the European Commission in 2021.