Minister for Finance and Public Expenditure and Reform Paschal Donohoe signed the EU (Insurance Distribution) Regulations 2018 (the IDD Regulations) into national law on 27 June 2018. The IDD Regulations transposed the EU Insurance Distribution Directive (IDD) (2016/97).
The implementation of the IDD Regulations was postponed until 1 October 2018 to provide the insurance industry with additional time to put in place the necessary organisational and technical changes required to ensure compliance. Most recently, the EU (Insurance Distribution) (Amendment) Regulations 2018 were introduced, which made minor amendments to the IDD Regulations.
This article reviews the key changes resulting from the IDD Regulations.
The IDD is a recast of the EU Insurance Mediation Directive (IMD) (2002/92/EC), which was transposed into Irish law by the European Communities (Insurance Mediation) Regulations 2005 (the IMD Regulations). The IDD aims to facilitate market integration and consumer protection by strengthening policyholder protections and ensuring a level playing field between operators in the market. Broadly, the IDD regulates the way in which insurance products are designed and sold by (re)insurance undertakings, intermediaries and ancillary intermediaries.
The IDD Regulations apply to all (re)insurance distributors, including (re)insurers, intermediaries and ancillary intermediaries (unless exempted). The scope is broader than that under the IMD Regulations.
Changes to Investment Intermediaries Act 1995
The IDD Regulations made several amendments to the Investment Intermediaries Act 1995 (IIA). A key amendment is the change to the definition of 'investment instruments' in Section 2 of the IIA. The term 'insurance policies' has been removed from this definition by the IDD Regulations. As a result, the Central Bank of Ireland recommends that, if an insurance intermediary holds its IIA registration solely for the purpose of providing insurance policies, in addition to its IDR registration, it should voluntarily revoke its IIA registration.
Suitability and appropriateness assessment and reporting to customers
The European Insurance and Occupational Pensions Authority (EIOPA) published its final report on guidelines under the IDD on 11 October 2018 on insurance-based investment products (IBIPs). The guidelines relate to 'execution-only' sales, which generally relate to IBIPs sold online or over the phone.
The regulations define 'IBIPs' as "an insurance product which offers a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations". Non-life products, certain pension products and other forms of life products are not IBIPs (eg, term assurance).
Under Regulation 42, undertakings and insurance intermediaries (but not ancillary intermediaries) must provide an assessment of suitability when providing advice on an IBIP. They must carry out an appropriateness assessment relating to sales where no advice is given, such as for execution-only sales.
Product oversight and governance requirements
Product oversight and governance requirements vary depending on whether the party is a manufacturer or distributor.
According to Regulation 38, insurance undertakings and intermediaries which manufacture any insurance product for sale to customers shall maintain, operate and review a process for the approval of each insurance product or any significant adaptations of an existing insurance product, before it is marketed or distributed to customers. Manufacturers are required to maintain, operate and review a product approval process. As part of this, manufacturers must identify a target market for each product and highlight the risks to such a target market. Manufacturers are required to ensure that insurance products are aligned with the needs and characteristics of the target market.
A (re)insurance distributor's product oversight and governance requirements are less onerous. Distributors must have product distribution arrangements in place containing appropriate procedures to obtain from the manufacturer all appropriate information on the products that they intend to offer to their customers. Distributors are required to regularly review product distribution arrangements and verify that products are being distributed to the target market.
There is evidence of entities which fall into both the manufacturer and distributor categories, something which the IDD provides for. Insurers are clearly manufacturers for the purpose of the IDD; however, intermediaries (eg, managing general agents) which have a significant influence in the design and development of the insurance product are essentially co-manufacturers. This results in these firms needing to comply with both the enhanced distributor and manufacturer requirements and having their roles clearly outlined in the agreement between the parties.
On the other hand, there are some intermediaries where their involvement in the design and development of the product is not as clear cut and their obligations would be determined only by a thorough analysis of the process and their obligations under the relevant arrangements. Such entities must carefully consider this to ensure additional compliance with the manufacturer requirements where it is necessary.
Insurance product information document
The IDD introduces the requirement to prepare and provide customers with an insurance product information document (IPID).
Insurance distributors must – prior to the conclusion of a contract, irrespective of whether any advice is given and whether the product forms part of a package – provide relevant information about the product in a comprehensive form.
The aim of the IPID is to enable customers to make an informed decision relating to the product and readily compare it against other similar products. This information must be provided by way of a standardised IPID, which must be drawn up by the insurance product manufacturer. The European Commission has prescribed detailed requirements relating to the content, design, structure and format of the IPID.
Of particular note is the fact that the IPID should be a standalone document and not cross refer to the policy, but must be under two to three A4 sheets in length. This has been challenging in respect of more complex products, as no distinction is drawn between products for this purpose.
An IPID is required not only for all new business but also for any renewals and online sales after 1 October 2018.
Connected contracts exemptions
An exemption exists for ancillary intermediaries offering connected insurance contracts below a certain threshold. Ancillary providers are excluded from the IDD Regulations entirely where the insurance is complementary to the goods or services supplied by the provider and the insurance covers:
- the risk of breakdown, loss of or damage to the goods or non-use of the service;
- damage to or loss of baggage and other risks linked to travel booked with that provider; and
- a product where the amount of the premium for the insurance product does not exceed €600.
In circumstances where the insurance is complementary to the good or service and the duration of that service is equal to or less than three months, the amount of the premium paid per person should not exceed €200. In addition, undertakings and intermediaries must provide certain information to customers where an exempted ancillary insurance intermediary is used.
While the implementation of the IDD Regulations has been effective in Ireland for only a number of months, at a European level, consultation has already begun on possible amendments to delegated acts under the IDD. On 26 November 2018 EIOPA published for consultation its draft technical advice on possible amendments to the delegated acts under the IDD concerning the integration of sustainability risks and factors. The proposed draft amendments under the IDD relate to conflicts of interest and product oversight and governance. Interested parties were invited to provide their comments to EIOPA by 30 January 2019 by responding to survey questions accessible through EIOPA's website.
On the transposition of the IDD, Minister of State for Financial Services and Insurance Michael D'Arcy stated that: "The Insurance Distribution Directive will benefit consumers and retail investors buying insurance products through greater transparency in the price and costs of insurance products. It is anticipated that the revised rules will lead to expanded business opportunities for insurance distributors, including greater options for cross-border sales".
A number of months in, it is too early to comment on whether the IDD Regulations have had this effect, but it is certainly their aim.
This article was first published in the International Law Office Insurance and Reinsurance newsletter, 30 April 2019.