The Insurance Distribution Directive (“IDD”) recasts the Insurance Mediation Directive (“IMD I”). IDD must be transposed into Irish law by 23 February 2018, at which point IMD I will be repealed. IDD creates a minimum legislative framework for the distribution of insurance and reinsurance products within the EU and aims to facilitate market integration and enhance consumer protection.
Who does IDD apply to?
IDD applies to all participants in the sale of insurance and reinsurance products, which includes advising on these products. The purpose of this broad scope is to redress the imbalance between direct and intermediated sales, which existed under IMD I. Entities such as travel agents, car rental companies and price comparison websites are now included in its application, which covers 98% of the insurance and reinsurance market.
Certain activities are specifically excluded from the application of IDD including; claim management on a professional basis, loss adjusting, expert appraisal of claims and the mere provision of information where no additional steps are taken by the provider to assist in the conclusion of an insurance or reinsurance contract. There is also a carve-out for ancillary intermediaries offering connected insurance contracts below a certain threshold.
Key Changes introduced by IDD
Insurance and reinsurance intermediaries, including ancillary intermediaries, are required to register with the competent authority of their home Member State. A single electronic register will be set up by EIOPA, co-ordinating the registers of each Member State and maintaining a record of all intermediaries carrying on cross-border activity. This aims to simplify the procedure by which intermediaries may provide cross-border services or establish a branch or permanent presence in another Member State.
- Professional Development Requirements
IDD introduces minimum competency and professional knowledge requirements. Member States are required to establish mechanisms to assess the competence of insurance and reinsurance intermediaries and their employees, who will be required to undertake at least 15 hours of professional training or development per year.
- Consumer Protection
IDD introduces general consumer protection principles for all insurance distributors to act honestly, fairly and professionally and in accordance with the best interests of the customer. Insurance distributors may not incentivise or remunerate their employees in a manner that would conflict with their duty to act in the customers’ best interests. In addition, insurance intermediaries are required to disclose the nature of any remuneration received in relation to an insurance contract to the customer.
- Information and Conduct of Business Requirements
All communications addressed to customers must be clear, fair and not misleading and any insurance contract proposed must be consistent with the customer’s demands and needs. Prior to the conclusion of a contract, customers must be provided with a product information document. This will be a comprehensible and standardised document across the EU, which will enable customers to make an informed decision on the insurance product being proposed. Where advice is provided prior to the conclusion of an insurance contract, the insurance distributor must provide the customer with a personalised recommendation document detailing why a particular product best meets the customer’s specific requirements.
- Product Approval Process
Insurance undertakings and intermediaries that manufacture any insurance product for sale to customers are required to implement product oversight and governance procedures prior to distributing or marketing an insurance product to customers. A target market must be identified for each product to ensure that the relevant risks to that target market are identified, assessed and regularly reviewed. As “manufacturer” has not been defined in IDD, EIOPA has proposed that the product approval process requirements will extend to all intermediaries who design insurance products.
- Management of Conflicts
Insurance undertakings and intermediaries selling insurance based investment products are required to take reasonable steps to identify and prevent conflicts of interest arising in the course of any insurance distribution activity, which may adversely affect the customers’ interests. Where the steps taken by the insurance undertaking or intermediary are insufficient to ensure that the risk of damage to the customer can be prevented, they are required to disclose such conflict of interest to the customer before the contract is concluded.
- Professional Indemnity Insurance
Under IDD, insurance and reinsurance intermediaries are required to hold professional indemnity insurance for at least €1.25 million per claim, or €1.85 million in aggregate. This was previously €1 million or €1.5 million in aggregate under IMD I. Ancillary insurance intermediaries will also be required to hold professional indemnity insurance.
Under IDD, a legal person can be fined at least €5 million or up to 5% of total annual turnover or twice the amount of profits gained from the breach and a natural person can be fined at least €700,000 or twice the amount gained from the breach. Given the significant administrative sanctions which can be imposed, clients are advised to begin their preparations to comply with the requirements of IDD prior to it being transposed into Irish Law.