It comes as no surprise to insurance and re-insurance undertakings as well as distributors of insurance products, that the year ahead will be characterised by significant regulatory changes and developments. In juggling their regulatory and compliance efforts, it can be tempting to just sit back and wait for things to settle down. Yet, in view of the magnitude of the changes, players in the insurance sector must avoid being paralyzed by uncertainty and must make a conscious effort to invest money and effort in preparing for the regulatory changes ahead.
Whilst the regulatory reforms impacting the insurance sector are numerous, the Insurance Distribution Directive (“IDD”) and the Packaged Retail Investment and Insurance Products (“PRIIPs”) Regulation are definitely top of the agenda for regulators and market players alike. The overarching aims of these reforms centre around transparency, fairness, consumer protection and harmonisation. Indeed both the IDD and PRIIPs command enhanced public disclosure and more robust governance structures, as they force market players to thoroughly consider the management of conflicts of interest and conduct of business matters, whilst enforcing tougher sanctions and maintaining stricter competency and training requirements.
Insurance Distribution Directive
The IDD, which come into effect on 23 February 2018, applies to any natural or legal person who is established in a Member State or who wishes to be established there in order to take up and pursue the distribution of insurance and reinsurance products. The scope of the IDD extends beyond that of its predecessor – the Insurance Mediation Directive – to also cover any information supplied through the media which allows customers to conclude an insurance contract, and to capture not only the typical ‘insurance intermediaries’ but also the insurance and reinsurance undertakings themselves when distributing insurance and re-insurance products.
Significant changes to professional and organisational requirements are expected as a result of the IDD, particularly in terms of knowledge and competence, but also systems and controls relating to conduct of business obligations. Those subject to the IDD will have to comply with onerous disclosure requirements when advising customers or otherwise supplying information on a nonadvised basis. Information disclosed to customers will also have to cover remuneration, inducements, crossselling, and conflicts of interest.
Under the IDD, manufacturers of insurance and reinsurance products shall maintain, operate and review a process for approval thereof or significant adaptations of an existing product before it is marketed or distributed to customers. Distributors of such products must also establish product distribution arrangements containing appropriate measures and procedures to obtain from the manufacturer all appropriate information on the insurance products they intend to offer and to fully comprehend those products. Additional requirements apply to manufacturers and distributors of insurancebased investment products (“IBIPs”), in terms of extended disclosure requirements as well as more onerous controls around suitability and appropriateness assessments. The IDD introduces a new regime for Ancillary Insurance Intermediaries (“AIIs”). For the purposes of the IDD, AIIs are not considered to be insurance intermediaries but are treated as a specific type of intermediaries operating under specific conditions. The appointment of an AII by an authorised insurance or re-insurance undertaking or agent will be conditional on the completion of a fit and proper test, as well as a knowledge and ability test, to be carried out by the undertaking/agent.
The PRIIPs Regulation will require, as of 1 January 2018, the manufacturers of PRIIPs or the re-manufacturer thereof to prepare a Key Information Document (“KID”). PRIIPs include, inter alia, life insurance products whose surrender values are determined indirectly by returns on the insurance company’s own investments or even the profitability of the insurance company itself. Persons advising on, or selling, a PRIIP are therefore required to provide retail investors with the KID in good time before those retail investors are bound by any contract or offer relating to that PRIIP. This document should be made available on to retail investors and made available on the website of the manufacturer or remanufacturer of the product to which it relates.
The implementation of the PRIIPs Regulation will require manufacturers and distributors of PRIIPs to consider the scope and content of the KID (particularly in terms of wording and performance modelling), whilst also reflecting on the process for putting together the KID and whether this would be automated or manual, and whether it would be performed in-house or otherwise outsourced. More importantly, engagement with all parts of the business is necessary in defining the roles and responsibilities as well as in providing the necessary training.
Products that fall within the definition of PRIIPs are subject to a prohibition or restriction by EIOPA and/or national competent authorities, where identified issues raise a significant investor protection concern, a threat to the orderly functioning and integrity of financial markets, or a threat to the stability of the whole or part of the financial system. The entities against which these powers can be applied include insurance undertakings, manufacturers of IBIPs, and persons advising on or selling IBIPs.
Solvency II: looking back to look ahead
Gabriel Bernardino, Chairman of EIOPA, has recently commented that, in his view, the European insurance industry is much stronger with Solvency II, particularly because the regime provides a clearer picture of capital adequacy as well as a more realistic basis to assess, mitigate and price risks. Further, Solvency II has forced the industry to become more transparent and upgrade its governance models, such that is better prepared to face the new challenges and to be on the front line in the necessary adaptation of its business models. Some market players have however criticised the regime for its complex capital models, whilst also highlighting persistent inconsistencies between Solvency II and IFRS, and noting how audits have become more intrusive and impactful as a result of Solvency II.
As the industry adapts to the Solvency II framework, it must also consider developments which are in the pipeline, which are set to be evolutionary as opposed to revolutionary. In particular, policymakers are looking to review the overall regime by 2020 with a view to making it more proportionate as well as enhance policyholder protection. Further, the market should expect another round of stress tests, whilst being prepared for a European Recovery and Resolution Framework, which is set to apply to all insurers and re-insurers .
The changes and developments that have rocked the insurance industry so far has encouraged most players to look for opportunities in disruption and engage in business transformation initiatives. Key themes have emerged around data analytics, block chain technology, InsurTech and system automa
The regulatory implications of these developments are numerous. In particular, data protection is an area that will require closer examination by regulators, as the volume of personal data handled by insurers increases, whether consensus was gained for the intended use becomes blurred. Moreover, operational risk management, market conduct and internal controls are likely to be subject to ongoing monitoring as dependency on data and technology heightens.
In the advent of these regulatory and market changes, insurers and distributors must not lose focus on the data quality, governance, reporting and capital management aspects of their business. More specifically, addressing culture, disclosure, product oversight, risk management, and training initiatives is key to achieving strategic and commercial objectives whilst also securing compliance with the current and future regulatory framework.
The market must not lose sight of domestic and European pronouncements on the IDD, PRIIPs, Solvency II and related measures, including national rounds of public consultation as well as guidance and technical standards being issued at a European level, which provide further insight into the implementation of certain aspects of these regimes.