Implementation of the EU Insurance Distribution Directive
Guidance for non-UK EEA coverholders regarding the implementation of the EU Insurance Distribution Directive.
The EU Insurance Distribution Directive 2016/97 (“IDD”) entered into force on 22 February 2016. EU member states are required to transpose it into national legislation by 1 July 2018 and to apply it to insurers and insurance distributors by 1 October 2018. IDD will replace and repeal EU Insurance Mediation Directive 2002/92/EC (“IMD”). IDD, like IMD, is a minimum harmonisation directive, which means that EU/EEA member states are obliged to transpose the directive but they are free to adopt stricter provisions if they wish. Member states are also free to transpose and apply IDD prior to the above dates.
IDD introduced some new terminology and concepts and these are explained below.
Product manufacturers and distributors
A product “manufacturer” is usually the insurer. However, an insurance intermediary will be the manufacturer if it has a decision making role in designing and developing an insurance product. This means that it autonomously decides on the essential features and main elements of an insurance product, including coverage, price, costs, risks, target market and circumstances in which claims will be paid, and these features are not substantially modified by the insurer. Insurance intermediaries that have the ability to apply different coverage options or clauses or offer discounted rates on products are not manufacturers.
A product “distributor” is an insurer or insurance intermediary that advises on, or proposes, insurance products that they do not manufacture.
Responsibilities of product manufacturers and distributors
Product manufacturers and product distributors have different product oversight and governance responsibilities in the distribution process. Product manufacturers are required to do the following in respect of non-life insurance mass risks (not large risks or reinsurance):
- To maintain, operate and review a product approval process in place for new products and significant amendments to existing insurance products, before they are marketed or distributed to customers. The product approval process must:
- Be proportionate and appropriate to the complexity and nature of the insurance product;
- Ensure that the design of products takes into account the interests of customers, that it does not adversely affect customers and that it prevents or mitigates detriment to customers;
- Support a proper management of conflicts of interest;
- Specify the identified target market for each product (and if necessary the market that the product is not intended for);
- Assess the risks to the target market;
- Include appropriate testing of the product;
- Select distributors that have the necessary knowledge, expertise and competence to understand the characteristics of the product and the target market;
- Regularly monitor whether the product is being distributed in accordance with the distribution strategy for the product and take remedial action if it is not;
- Be documented in the manufacturer’s product oversight and governance policy, which must be made available to relevant employees.
- To regularly review their insurance products, via the product approval process, including whether the target market and the distribution strategy remain appropriate. To take appropriate action when the product is not or is no longer aligned with the target market.
- To draft and produce the Insurance Product Information Document (“IPID”). This is a pre-contractual information document that contains relevant information about the insurance product in order to enable the customer to make an informed decision about purchasing a policy.
- To make all appropriate product information available to distributors, including the product approval process, the identified target market and distribution strategy.
Product distributors are required to do the following:
- To have adequate arrangements in place to obtain all appropriate product information from the manufacturer in an efficient manner, including the product approval process and the target market, for each insurance product that it distributes;
- To understand the characteristics of the insurance product and its target market for each insurance product that it distributes;
- To document its product distribution arrangements in writing and make it available to relevant employees;
- To provide the manufacturer with the data it needs for its reviews of the insurance product;
- To inform the manufacturer when the product is not, or is no longer, aligned with the target market and, where appropriate, to amend their distribution strategy for the insurance product;
- To give the IPID to the customer before the conclusion of the contract. This only applies if it is the insurance intermediary that has direct contact with the customer.
The European Commission has published the standard format for the IPID and there are strict requirements regarding its structure and Rich-Text-Rich-Text-content, which cannot be changed. The IPID must comply with the following requirements:
- It must be a maximum of two pages in length., and can only be longer if this can be justified by the manufacturer;
- It should not contain all the terms and conditions that are in the policy wording;
- It must be drafted in plain language and must contain the main information that the customer needs to make an informed decision about purchasing a policy.
A new IPID should be given to the customer for each new period of insurance. Lloyd’s does not intend to publish an IPID template for managing agents and coverholders to use because the format has already been prescribed by the European Commission. Links to the IPID template are below.
Action to be taken by EEA coverholders outside the UK
- It is very important that all parties in the distribution chain are clear about who the product manufacturer is and that this is agreed before the product is distributed. Coverholders that transact non-life insurance mass risks in the EEA should contact the relevant lead managing agent to discuss and agree who the manufacturer is, based on the guidance above.
- Once the manufacturer has been agreed it should be documented on the binding authority agreement by adding LMA5312 by an endorsement.
- Coverholders that are manufacturers should prepare IPIDs for the products they manufacture that are for non-life insurance mass risks in the EEA.
- Coverholders should start preparing and establishing their product oversight and governance frameworks, as applicable to their role as manufacturer or distributor.
Further guidance from Lloyd’s
Lloyd’s is monitoring the transposition of IDD into national law in EU/EEA member states. Lloyd’s will update the Intermediary regulation section of Crystal for EU/EEA member states prior to the application of new insurance distribution legislation in each territory. However, the updated Rich-Text-content will only cover areas of insurance distribution regulation that are relevant to the relationship between managing agents and coverholders and it will not cover areas that are the sole responsibility of insurance intermediaries.