Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) ("IDD") sets a new European legal framework for insurance distribution. The IDD has to be implemented in the member states until 23 February 2018 and first steps have been made in this direction.
Updated European rules on insurance distribution
The IDD, as published on 20 January 2016, is the result of a great deal of debate including also a name change from the envisaged IMD 2 (Insurance Mediation Directive) to IDD.
The Directive aims, overall, to afford greater protection to customers and in particular consumers and to achieve further harmonisation in insurance distribution throughout the member states. It now explicitly also refers to the distribution of reinsurance.
The IDD only provides minimum standards, meaning that the member states may implement stricter rules where they consider it necessary for consumer protection reasons – a flexibility that may in the end turn out to be contrary to the goal to achieve a broad level of harmonisation and market integration in insurance distribution.
The Directive's cornerstones in particular are as follows:
- The IDD does not only apply to insurance intermediaries in the strict sense, but also to insurance distributors. The provisions are intended to apply not only in cases where a customer obtains insurance coverage via an intermediary but also where insurance coverage is taken out with the insurer directly or via comparison portals (except e.g. websites hosted by public authorities or consumer organisations which do not aim at insurance to be taken out).
- The publication of prices and costs shall be more transparent. Insurance intermediaries have to state the nature of their remuneration. They have to disclose whether they are to receive a financial incentive for the sale of a product. There is, however, no obligation to disclose the amount of a commission payment. Similar rules apply for insurers which have to state which remuneration is granted to employees for insurance distribution. The Directive does not provide for a general ban on commission payments. Pursuant to the Directive, it may rather be chosen whether there shall be a commission (paid by the insurer) or fee (paid by the insured) as remuneration. However, the nature of remuneration must not be in conflict with the objective to obtain suitable insurance coverage for the customer.
- New provisions on transparency and business conduct aim to ensure that the customers take out insurance coverage that is really needed. Further, besides general status information, insurance distributors need to advise whether consultation is offered as well. A product information sheet tailored to the relevant insurance shall be used for all insurance products.
- In cases where products are sold accompanied by an insurance policy (cross-selling), the customers shall be able to choose whether they wish to purchase the main product with or without insurance.
- The requirements as regards the qualification of insurance intermediaries are raised and specified. Insurance intermediaries will be obliged to undergo further and regular training. Insurers shall offer training for their distribution staff.
- New rules on product oversight and governance are installed. Insurers and intermediaries that manufacture insurance products for sale to customers shall maintain, operate and review a process for the internal approval of each insurance product, or significant adaptions of an existing insurance product, before it is marketed or distributed to customers. This does not apply to large risk insurance products. While this does not constitute a formal external authorisation requirement for products, meaning basically General Insurance Terms and Conditions, it does lead to enormous administrative burdens for the affected insurers and intermediaries in the conception of insurance products.
- There is now a tougher sanctions regime, including e.g. personal liability of directors and officers of legal entities.
- Special rules are provided for insurance based investment products.
In the course of the implementation on an European level, the European Commission is to provide technical advice on four subjects in order to specify the Directive (e.g. a standardised format for the product information sheet). On 4 July 2016, the European Insurance and Occupational Pensions Authority (EIOPA) published a Consultation Paper on its draft technical advice to the European Commission on possible delegated acts concerning the IDD. This public consultation follows the request of the European Commission for technical advice of 24 February 2016. EIOPA intends to submit its technical advice to the European Commission in February 2017. The European Commission will then decide on how the IDD shall be interpreted. It is quite striking that the EIOPA paper provides very detailed regulation proposals whereas the Directive shall actually define general minimum standards.
Germany: Highly controversial approach of implementation
On 21 November 2016, the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) published a first draft of an IDD Implementation Act which is much discussed since. Nevertheless, on 18 January 2017, the German Cabinet adapted the draft with basically only one significant change.
The implementation mainly affects the German Commercial Code (Gewerbeordnung) which is the law governing insurance intermediation but also the German Insurance Supervisory Act (Versicherungsaufsichtsgesetz) and the Insurance Contract Act (Versicherungsvertragsgesetz) to the extent there is insurance distribution by insurers.
Major issues are as follows:
- In Germany there will continue to be a differentiation between two types of insurance intermediaries: insurance agents (Versicherungsvertreter), acting on the side of the insurer, and insurance brokers (Versicherungsmakler), acting on the side of the insured. In addition to that, a new concept of honorary insurance consultants (Honorar-Versicherungsberater) is implemented. Authorization may only be granted as either insurance agent, insurance broker or honorary insurance consultant.
- Subject of major discussions is the issue of remuneration. Pursuant to the draft IDD Implementation Act, insurance intermediaries may obtain remuneration for their intermediation services only from the insurers. Only for consultation services (i.e. not intermediation services) provided to business customers, insurance brokers may obtain a fee from such business customers themselves. On the other hand, honorary insurance consultants may only receive remuneration from their customers and must not obtain an economic advantage / contribution from insurers. In case the honorary insurance consultant mediates insurance coverage which includes contributions, he must immediately ensure that the contributions are paid to the insured. Criticisms expressed are e.g. based on the argument that that the draft goes beyond the scope of the Directive, which allows services for fee as long as this is agreed upon with the customer in advance. Insurance brokers see themselves at a considerable disadvantage arguing that this would create the impression that an assignment to the insured's or insurer's side depends on the nature of payment (fee or commission) and that only honorary insurance consultants which are paid by the insureds act on their side – an assumption entirely in contrast with the concept of insurance brokers under German law so far. Further, an exemption from this principle was demanded at least for the commercial / industrial sector. Here, it is quite common that insurance brokers are paid by the customer and net premiums offered. The customer should be able to choose the compensation model. Following these criticisms, the draft as adapted by the German Cabinet on 18 January 2017 provides for such an exemption for the industrial sector – the only significant change to the draft while passing the German Cabinet. However, some industry associations are still claiming that this exemption does not go far enough. Finally, there is seen an unjustified advantage for honorary insurance consultants due to there not being a rule on cancellation liability regarding life insurance contracts affecting them – in contrast to the intermediaries. Also, there are no provisions that deal with a status change from insurance intermediary to honorary insurance consultant neither is the nature of fee that can be obtained sufficiently specified (currently the provisions seem to allow also a success fee which is most likely not intended).
- Much debated is the issue of a ban on passing on commissions. According to the draft Implementation Act, insurance intermediaries must not grant or promise insureds or beneficiaries a special compensation in relation to an insurance contract, meaning in particular that they must not pay forward the commission received in whole or in part (Provisionsabgabeverbot). A rather surprising development since the majority of experts expected that the ban on special compensations – previous provisions on that were highly controversial and subject to court decisions – would be dropped in the course of the IDD implementation. It is argued that granting or promising compensations would set the customer's focus on short-term cash incentives rather than to satisfy the customer's long-term needs. Further, the fear is that not having such ban would have negative impact on consultation quality. It remains to be seen what the implications for the practice are, e.g. how models of FinTechs where commission is not forwarded to the customer but donated to a good cause will be treated in the light of such ban.
What comes next:
Comments to the Draft Implementation Act could be sent to the competent Ministry until 12 December 2016. In total, three Federal Ministries were involved in reviewing the statements and could already provide for amendments before submitting the draft to the Federal Government. The German Cabinet adopted the draft with some changes on 18 January 2017 and afterwards submitted it to the Federal Council. A first reading with the Federal Council is scheduled for end of March 2017. The final decision will be on the German parliament, which is supposed to decide on the Implementation Act at the beginning of July 2017.
Considering the major discussions and comprehensive statements, it is still possible that there will be certain amendments to the draft in the further legislative process. However, it is hard to predict what the final outcome will be. Taking into account that basically no expert expected there to be a ban on special compensations and this now being provided for, it is hard to imagine that this will be withdrawn completely again. Also, an updated draft will most likely still not allow for complete flexibility in relation to services against fee. However, the exemption for the industry sector is already an expected adjustment due to major criticism. Further, it remains to be seen which adaptions will be made to the Insurance Mediation Regulation (Versicherungsvermittlerverordnung), which further specifies the legal framework for insurance intermediaries (e.g. details on registration and mandatory insurance coverage).
There is still a way to go.