Critical features of the Insurance Distribution Directive
On 20 January 2016, the joint European legislators finally approved the Insurance Distribution Directive No. 2016/97/EU (hereinafter, the “IDD”).
The aim of the IDD is the need to guarantee the uniformity of consumer protection, regardless of the entity proposing the acquisition of insurance products, as well as the need to harmonize treatment among operators and to curb any distortive effects of competition (Recitals 5 and 6).
According to the definitions and scope set out in Articles 1 and 2, the IDD is addressed to a series of persons not expressly included in the previous Directive 92/2002/CE: i.e. all subjects involved in the sale of insurance products. This provides for insurance undertakings, insurance distributors, insurance intermediaries, and further players of the insurance market, including:
- ancillary insurance intermediaries, who, for remuneration, take up or pursue the activity of insurance distribution on an ancillary basis, as secondary distributor;
- websites owners and managers offering a ranking of insurance products, when the customer is able to directly or indirectly conclude an insurance contract using the website.
On the basis of Article 1, paragraph 3, the IDD reintroduces exemptions based on: a) the kind of risk covered (breakdown, loss, damage and non-use, or damage to, or loss of, luggage, or risks linked to travel); b) the amount of premium paid or the insurance products (that shall not exceed EUR 600 calculated on a pro rata annual basis).
With regard to the subjects exempted from the application of the Directive, the IDD provides that each Member State shall ensure that insurance undertakings or insurance intermediaries: (i) inform customers of their identity, address and the manner in which claims are to be submitted; (ii) establish adequate mechanisms to ensure compliance with the obligations set out in Articles 17 and 24 of the IDD; (iii) provide customers with the information document relating to the insurance product in accordance with IDD Article 20, paragraph 5.
Furthermore, Article 19 of the IDD introduces – without distinguishing between life and non-life insurance products or the nature of risk – the intermediary’s obligation to provide information about the nature of its remuneration, i.e. whether it is calculated on an hourly basis or on a lump-sum basis.
With regard to the information to be provided prior the conclusion of an insurance contract, Article 20 of the IDD introduces two new documents: (i) a “personalised recommendation“, through which the insurance distributor shall explain why a particular product would best meet the customer’s demands and needs; and (ii) in relation to the distribution of non-life insurance products, a standardised insurance product information document on paper or on another durable medium.
Article 25, on product oversight and governance requirements, provides that insurance undertakings – and intermediaries which construct any insurance product for sale – shall maintain, operate and review a specific process for the approval of each insurance product, defining its contents and any significant adaptations, before the product is marketed or distributed to customers.
It is easy to understand that this process requires a deep analysis of an identified target market, a consistent distribution strategy, as well as a regular review of both the products and the procedure itself, in order to ensure that the product constantly meets market requirements.
In addition to the above, Chapter VI of the IDD is dedicated to the distribution of insurance-based insurance products, meaning those insurance products offering a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations. In particular, this Section is applicable only to insurance-based insurance products distributed by (a) an insurance undertaking or by (b) an insurance intermediary.
It has to be noted that these insurance-based financial products do not include: (i) non-life insurance products as listed in Annex I to Directive 2009/138/EC (Classes of non-life insurance); (ii) life insurance contracts where the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or disability; (iii) pension products which, under national law, are recognised as having the primary purpose of providing the investor with an income in retirement, and which entitle the investor to certain benefits; (iv) officially recognised occupational pension schemes falling under the scope of Directive 2003/41/EC or Directive 2009/138/EC; (v) individual pension products for which a financial contribution from the employer is required by national law and where the employer or the employee has no choice as to the pension product or provider.
This Section involves obligations relating to conflicts of interest, information to customers and the assessment of suitability and appropriateness of the products (cf. Articles 28, 29 and 30).
With regard to conflicts of interest, Member States shall ensure that insurance intermediaries and insurance undertakings take all appropriate steps to identify conflicts of interest between themselves, including their managers and employees, or any person directly or indirectly linked to them by control, and their customers or between one customer and another, that arise in the course of carrying out any insurance distribution activities.
Article 28, paragraph 2, provides that in case the organisational or administrative arrangements made are not sufficient to ensure that risks of damage to customer interests will be prevented, the insurance intermediary or insurance undertaking shall clearly disclose to the customer the general nature or sources of the conflicts of interest, promptly before the conclusion of an insurance contract.
Pursuant to Article 29, the information to customers shall include: (i) a periodic assessment of the suitability of the insurance-based investment products recommended to that customer; (ii) appropriate guidance on, and warnings of, the risks associated with the insurance-based investment products or in respect of particular investment strategies proposed; (iii) information on costs and charges, including the cost of advice – if any – and the cost of the insurance-based investment product, as well as the means of payment.
Furthermore, insurance intermediaries and insurance undertakings shall in any case be considered to have complied with their obligations under the Directive, where they pay or are paid any fee or commission, or provide or are provided with any non-monetary benefit in connection with the distribution of an insurance-based investment product or an ancillary service, to or by any party except the customer or a person on behalf of the customer only where the payment or benefit:
- does not have a detrimental impact on the quality of the relevant service to the customer; and
- does not impair compliance with the insurance intermediary’s or insurance undertaking’s duty to act honestly, fairly and professionally in accordance with the best interests of its customers.
Article 30 of the IDD also provides for the obligations concerning the assessment of the suitability and appropriateness of insurance-based investment products in the event of the provision or otherwise of advice. In particular, insurance intermediaries and insurance undertakings that provide advisory services, must: (i) reach the necessary information regarding customers’ knowledge and experience in the relevant investment field on the specific kind of product or service, their relevant financial situation and investment goals, and (ii) recommend to customers the insurance-based investment products that are suitable for those customers and that, in particular, are in accordance with their risk tolerance and ability to bear losses.
In case no advice is provided, the intermediaries and undertakings shall restrict their information request to the customer’s knowledge and experience.
Furthermore, the IDD allows Member States to introduce a simplified distribution system for insurance intermediaries or insurance undertakings, without providing any specific advice to the customer, in the following cases: (i) if the base of a product is a non-complex financial instrument, (ii) if the insurance distribution activity is started by the customer; (iii) if the customer has been informed that the insurance intermediary or the insurance undertaking is not required to assess the appropriateness of the product, and the customer has been informed that it does not benefit of such level of protection; (iv) if the insurance intermediary or insurance undertaking complies with its obligations with respect to conflicts of interest.
Finally, for the sake of clarity, it has to be pointed out that, pursuant to Article 42 of the IDD, Member States adopt any laws, regulations and administrative provisions necessary to comply with the IDD by 23 February 2018.
Davos China President Xi argued that protectionism was like closing oneself in a room to keep out the wind and the rain. The problem with this strategy, he said, was it also kept out the air and the light. Like all good politicians Xi is clever. He calls on the world to work against protectionism while practicing it himself. China is a closed market with the key sectors like capital (banking), communication, energy, mining, transport, and many manufacturing sectors exclusively in the hands of state owned enterprises operating within the confines of detailed five year plans which set targets the achievement of which determines success in society and in particular within the Communist Party of China. The market is closed to foreigners.
At his inauguration, newly appointed US President Trump heralded the new era of putting the US first, and first and first. On trade, Trump advocates a new approach of closing the US market to foreigners. In other words, the Trump way is pretty similar to the Xi way.
What both Trump wants, and Xi already has, is a system promoting specific businesses rather than creating a neutral market in which success is determined by fair competition. Trump wants to champion US enterprises and not the US market. Xi already does this at home in China. The worry today is that Xi is taking this business champion approach abroad so as to create global Chinese champions.
Trump and Xi have the same concept of power. It must be used to bring specific pre-identified gains that are mercantilist in nature and not based on vague ideas of comparative advantage and fair and free competition.
That leaves the EU as the only liberal open economy of any size. Commissioner Malmström recently said in Paris that the EU should not be naïve about China. She said this in the context of how the EU should reform its anti-dumping and anti-subsidy laws, the limited means that the EU has to counter unfair trade practices. The EU and its Member States must ask if it is naïve to leave itself defenceless at a time when it is the only entity standing for open and fair trade.
2017 will see the EU debating modernisation of the trade defence instruments and the Commission’s proposal to change the way the EU deals with trade from markets that are distorted. Parallel debates will begin in February in the two EU legislative chambers, the Council (the 28 Member States) and the Parliament. Many thought the debate was really just about China. Is it? The debate must be about having the appropriate tools to ensure that the EU market remains free and open and can counter unfairness before it undermines the only free and open market remaining.