Insurance Distribution Directive agreed
EU institutions have agreed the final text of the Insurance Mediation Directive 2, now renamed the Insurance Distribution Directive (IDD). This article updates you on some of the provisions included in the final text and the impact this will have on the Lloyd’s market.
The Insurance Mediation Directive contains requirements for EU Member States’ regulation of insurance intermediaries. The new IDD will enhance this regulation, with a particular focus on practices for selling insurance products. It seeks a level playing field between participants in insurance sales in order to improve consumer protection, market integration and competition.
The new directive, like the existing 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.
- Scope – the existing directive applies to insurance and reinsurance mediation. The new directive applies to insurance and reinsurance “distribution” (hence the new title 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. In specified circumstances, “ancillary insurance intermediaries” – intermediaries whose principal activity is not insurance distribution, distributing insurance that is complementary to a good or service - are excluded from scope.
- General principle –there will be 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 new directive continues the existing 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 existing directive does not regulate intermediaries’ remuneration. The new 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 – as under the existing directive, there will be 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 (PID), 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 new 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 is expected to enter into force in December 2015 or January 2016. Its provisions must be given legal force in each Member State within the two years following. Therefore IDD is likely to be implemented by December 2017 – January 2018.
Impact on the Lloyd’s market
The new directive will apply 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 review their business processes to ensure that they will be 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.