The new revised Insurance Distribution Directive (IDD) replaces the 2002 Insurance Mediation Directive (IMD) and will cover the entire distribution chain of insurance. The IDD will be submitted to the European Parliament for a vote and to the European Council for final adoption.
If adopted, it will be published in the Official Journal of the European Union in the next few months. The distribution of insurance products varies between different Member States. In some Member States, consumers prefer to buy their insurances through brokers, while in others, most consumers turn directly to the insurance companies.
The hand of the Financial Conduct Authority (FCA) is obvious in the drafting of the Directive. Some changes will affect the UK and require changes to UK law. However, the changes are unlikely to be radical.
The scope of the new Directive has been widened to apply to insurers and reinsurers as well as intermediaries carrying out insurance and reinsurance distribution. It has three main objectives:
- to improve insurance regulation in a manner that will facilitate market integration;
- to establish the conditions necessary for fair competition between distributors of insurance products; and
- to strengthen policyholder protection, in particular with regards to life insurance products with an investment element.
Aims of the Directive
More specifically the Directive is aimed at:
- extending the scope of application to insurance and reinsurance distribution which may be carried out by insurers and reinsurers as well as intermediaries, including proportionate requirements for those who sell insurance products on an ancillary basis;
- However “ancillary insurance intermediaries” – intermediaries whose principal activity is not insurance distribution, (i.e. distributing insurance that is complementary to another sale or service) are excluded from scope.
- identifying, managing and mitigating conflicts of interest;
- strengthening administrative sanctions, as well as measures to be applied in the event of a breach of key provisions;
- enhancing the suitability and objectiveness of insurance advice;
- ensuring that sellers' professional qualifications match the complexity of the products they sell; and
- clarifying the procedure for cross-border market entry.
There are specific requirements that firms will have to carry out:
- Under the Directive there is a requirement for those involved in insurance distribution to work a minimum of 15 hours per year of continuous training;
- Before the contract is concluded, an insurance intermediary will have to disclose to customers the nature and basis (i.e. fee, commission, other type or a combination) of their remuneration;
- Firms will have to provide 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 effect in the UK is that this will require disclosure to all types of customers. The question is how the FCA will integrate this into UK law. Will they force full upfront disclosure of commissions, or not? And for MGA’s who do not deal with consumers, what disclosure will be required?
- Firms that sell insurance as a package will be required to offer the same insurance on a stand-alone basis; and
- Insurers and insurer intermediaries will be required to maintain an internal product approval process that assesses if the needs of the target market are being met through the product offering and in turn if the distribution strategy remains effective.