NEWS
Category: LEGAL NEWS
New directive for the insurance distribution – Insurance Distribution Directive (IDD)
On 23 February 2016, the new directive for the insurance distribution (“IDD“ – Insurance Distribution Directive), adopted at EU level, came into force. It shall be implemented by the Member States within two years. The Austrian legislative landscape shall therefore adapt to the provisions of the IDD by 23 February 2018. Taking into consideration the major innovation of IDD, however, not only the lawmakers need to take an immediate action, but also the insurance intermediaries and insurance companies.
The following statements are intended to give an overview of the objectives as well as of the essential contentwise aspects of the IDD.
1. Objectives of the IDD & Implementation Requirement in Austria
The IDD strives to harmonize the national regulations of the individual Member States for insurance and reinsurance distribution. The aim is to achieve an improvement in consumer protection and to ensure that an appropriate consideration of the customer interests takes place during insurance distribution.
The path of minimum harmonisation was thereby chosen. The IDD thus stipulates a minimum content, which shall in any case be transferred to the national legal order. In addition, the Member States have certain margin for implementation; in particular, stricter regulations and extensive information requirements may be provided.
Whether in Austria there will come to an implementation of the exceeding provisions of the IDD, remains to be seen. Since the IDD regulates a multitude of different contents, for example, in terms of professional or supervisory character, the amendment of a number of relevant laws can be expected. Possible examples are, for instance, the Trade Regulation, the Brokers Act, the Commercial Agents Act, the Insurance Supervision Act and the Insurance Contract Act.
2. Material scope of application
The IDD applies to all forms of insurance distribution. Therefore, the consumers shall – independent from the specifically chosen distribution channel – be guaranteed an appropriate level of protection. Moreover, same competitive conditions shall be established between the distributors. According to this, not only insurance brokers and agents, but also explicitly insurance companies or travel agencies and car rental firms, which distribute insurance products, are covered by the IDD (recitals 5, 6) (Insurance distributor).
Due to this broad scope of application, the provisions of the IDD – unlike the previous legal situation – also apply to the direct distribution by insurance companies themselves (recital 7). This will be particularly affected by the increasingly important online distribution of insurance products. It is necessary to expect a considerable change in conversion expense for insurance companies, who distribute their insurance products directly via the Internet, particularly in the context of the extended information requirements which are still to be dealt with.
Under the scope of the directive also fall comparative portals, which contrast each other with different insurance products, insofar as insurance contracts can be concluded directly or indirectly (for example by linking to the website) (Article 2 paragraph 1). With that said, the question whether the mere use of advertising on a website, which pave the way for the conclusion of an insurance contract through linkage, will also lead to the applicability of the directive to the advertiser, will probably arise. The wording of the directive leaves an interpretation in this directive, so that from today’s point of view it can not be excluded that for online advertising of insurance products a new legal framework will also have to be taken into account.
Excepted from the scope of the IDD are, in particular, certain insurance intermediaries in secondary activity, mere consultants and members of other professional groups, who, in the course of their professional activity, occasionally provide advice on insurance cover or merely provide general information on insurance products without assisting the customer when concluding an insurance contract (Article 1 para 3, recital 13, 14).
3. Information requirements and rules of conduct
It has already been mentioned that, an extension of the information requirements, which shall be observed by insurance intermediaries, is brought by IDD. The background to this regulation is the consumer protection. Customers should be given the opportunity to make a well-informed decision. Specifically, the following catalog of (new) information requirements is given:
Best-interest-maxim: According to the IDD, the distributors of insurance products must always act honestly, upright and professionally, and in the best possible interest to their customers (Article 17). This requirement is expressly intended also for marketing communications, which must be clearly identifiable as such (Article 17 paragraph 2).
Personalised advice: Ínsurance intermediaries or companies, besides providing general information (eg, identity, address) on time before concluding the contract, must also clarify whether or not they offer advice on the offered insurance product, and whether they represent the customer or act on behalf of an insurance company (Article 18 lit a v). In the event of a consultation, a personal recommendation should be made to the customer, in which it will be explained, why a particular product best meets their needs and wishes; in principle, every insurance contract offered has to meet the wishes and needs of the customer (Article 20). Accordingly, personalised advice will have to be given to each customer. Especially in the case of more complex insurance products, this can lead to particularly far-reaching information and clarification obligations.
The provisions for the remuneration of insurance distributors correspond with this individual customer-oriented information obligation (Article 17 paragraph 3). These shall not be remunerated in a manner that conflicts with the duty to act in the best interests of the customers. An incorrect advise as a result of conflicts of interest should be avoided. In particular, by setting the remuneration or by setting sales targets, no incentives shall be created for the insurance distributor to recommend a specific insurance product to a customer, although he could offer a different product which is better suited to the customer‘s requirements. Therefore, insurers must, before the insurance contract is concluded, inform the customer of possible ownership structure of the insurance company as well as for the remuneration that he receives in connection with the offered insurance product (Article 17 paragraph 1 a).
The directive provides for exceptions from the obligation to provide information mainly only for the insurance of major risks (Article 22).
Coupling prohibition: If an insurance product is offered in package or in the same agreement, together with a by-product or an ancillary service, which is not an insurance policy, the insurance distributor has to inform the customer whether a separate acquisiton is possible (“cross-sales“). If this is the case, an adequate description of the individual products is made; the costs of the individual components must also be enclosed. If the insurance product constitutes a supplement to the other product (eg, mobile phone or tablet insurance), the sole acquisiton without an insurance product shall also be possible for the customer.
As a result, an increased and more complex consultancy fee for insurance distributors, which will also be relevant for insurance companies due to the inclusion of (online) direct distributions, can be expected. Currently existing uncertainties should be resolved in the context of implementation of national law. For example, it can be hoped that, the tension between the tied activity of an insurance agent for one (or several) insurance companies and the obligation under the IDD to act in the best possible interest of the customer, will be eliminated.
4. Information sheet on insurance products
When distributing non-life insurance products, a standardised information sheet for the concerned insurance product should be handed over to the customers on paper or another durable medium prior to the conclusion of the insurance contract (Article 20 paragraph 5).
The information sheet shall be prepared by the one who has designed the insurance product. As a rule, this obligation will therefore meet the insurance companies.
5. Product approval procedures
Insurance companies and intermediaries, who design insurance products for sale to the customers, have to implement a procedure for the approval of each individual insurance product as well as any substantial adjustment of existing insurance products, before they are distributed. For each product, a specific target market shall be defined and the risks for this target marked shall be identified. This shall thereby ensure that, the insurance product and the intended distribution strategy meet the needs of the selected target market. The results of this evaluation shall be examined regularly, i.e. even after launching the products (Article 25). Therefore, ongoing product tests are necessary.
Exceptions of the product approval procedure are again only major risks. In all other insurance categories, the procedure as described above will have to be implemented. This will also lead to considerable additional costs, especially for insurance companies in the context of product development.
In our view, the requirements of the product approval procedure contain some uncertainties. It is questionable, for example, at which time intervals the product tests should be carried out in order to meet the requirements of the regular review. Also the guidelines of the European Insurance and Occupational Pensions Authority (EIOPA) do not eliminate all intepretive problems. In this context too, there is a need for clarification by the legislation.
6. Insurance investment products
Special rules apply in part for insurance products (Articles 26 – 30). These are insurance products with a maturity or repurchase value that are exposed to market fluctuations (eg, life insurance). According to the IDD, in order to avoid conflicts of interests that can damage the customer’s interests, effective precautions must be taken. If, however, conflicts of interest can not be eliminated, the customer must be notified on time before the conclusion of the contract for the potential source of the conflict of interests.
When distributing insurance investment products, additional information requirements, which go beyond those already discussed above, shall be taken into account. These relate primarily to the costs of the insurance investment products and their bearing. The customer should be able to understand the total costs as well as the effect on the investment return. Such information shall be provided to the customer on a regular basis, at least anually, during the duration of the investment (Article 29).
7. Guidelines for the professional practice
According to the IDD, it shall be ensured that the insurance distributor has the appropriate knowledge and skills, which they need for the proper perfomance of their tasks (Article 10). In order to maintain an appropriate level of performance, a further education obligation of at least 15 hours per year is provided (Article 10). In this regard, control mechanisms shall also be established in order to be able to evaluate the knowledge and skills of the insurance distributors.
In order to ensure that these requirements are met, insurance companies shall issue internal guidelines and monitor them on an ongoing basis. For this purpose, a responsible person shall be appointed and the name of the competent authority shall be announced.
8. Sanction mechanisms and penalties
The directive encourages the Member States to ensure that infringements against IDD or the national implementing standards are punishable by effective, proportionate and dissuasive administrative measures or other measures. The national (supervisory) authorities should be given appropriate powers. The penalties shall be enforced against the members of the management or supervisory body of the company concerned. This would thus create a personal liability.
In principle, infringements must also be published immediately, whereby information on the type and nature of the infringement as well as on the responsible persons should also be made known.
In addition, high fines shall be imposed: for legal persons, a maximum penalty of at least EUR 5 000 000 or 5% of the total annual turnover of the undertaking, up to a maximum of double of the profits or losses prevented as a result of the infringement, as long as they can be quantified (Article 33 paragraph 2 e). For natural persons, the maximum fine is at least EUR 700 000 and the maximum double of the profits or losses prevented as a result of the infringement, as long as they are quantifiable (Article 33 paragraph 2 f).
Furthermore, an order should be adjusted, according to which, the prohibited conduct as well as the possibility of withdrawing the registration as an insurance intermediaries should be possible (Article 33 paragraph 3 a and b). The Member States are also free to include stricter sanctions.
9. Outlook
As mentioned at the outset, the Member States have only limited time to implement the provisions of the IDD. The innovations presented represent a minimum standard and will, therefore, in any event be transferred to the national legal systems. It is currently impossible to tell what will be adopted by the Austrian legislature. However, it is likely that the law applicable to insurance intermediaries and insurance companies as of 23 February 2018 will be more complex. Particularly in the context of the extended information requirements and the compulsory product approval procedure, there is already an urgent need for action for insurance intermediaries and companies in order to be able to adapt the internal processes in a timely manner and not to be exposed to the risk of being charged (personally) with sensitive fines.
BLS Attorneys at Law will be happy to advise you on all matters relating to insurance law, and will support you in the preparations for the IDD challenges.
Stefan Humer Philipp Scheuba Helmut Überbacher
