Ancillary insurance intermediaries: when does the EU IDD regime apply in Ireland?

Under the IDD, an ancillary insurance intermediary must obtain registration as such in its home EEA member state. The requirement to register as an insurance intermediary under the IDD regime is clear where a person's principal business is, or includes, carrying on of activities such as advising on insurance contracts and assisting in the administration and performance of insurance contracts. However, the requirement to register under the IDD regime can sometimes be less clear where a person undertakes insurance contract related activities, but does so on a basis that it is not their principal business.

The consequences of getting this wrong can be stark. In Ireland, under the EU (Insurance Distribution) Regulations 2018 (IDR 2018), it is an offence for a person to undertake or to purport to undertake in Ireland the business of insurance distribution on an ancillary basis unless that person is registered as an ancillary insurance intermediary or is exempt from registration. A person who commits this offence would be liable on summary conviction to a fine not exceeding €5,000 or a term of imprisonment not exceeding 12 months (or both); or on conviction on indictment to a fine not exceeding €500,000 or a term of imprisonment not exceeding three years (or both).

When does the Insurance Distribution Directive apply?

From a customer-centric perspective, the European Commission notes that in order to guarantee that the same level of protection applies regardless of the channel through which customers buy an insurance product, either directly from an insurance undertaking or indirectly from an intermediary, the IDD regime is designed to cover not only insurance undertakings and insurance intermediaries, but also other market participants who sell insurance products on an ancillary basis.

This means that, if a business is proposing to sell insurance cover on an ancillary basis, it must carefully consider whether the IDD registration requirements apply.

Registration as an ancillary insurance intermediary is generally required, subject to some exceptions, where the following apply:

• the business will be carrying on insurance distribution (as defined under article 2 of the IDD) on an ancillary basis;

• it will be remunerated in consideration for carrying on that activity whether by way of commission, fee, charge or other payment, including an economic benefit of any kind or any other financial or non-financial advantage or incentive offered or given in respect of that activity;

• its principal professional activity is not insurance distribution;

• it will only distribute certain insurance products that are complementary to a good or service; and

• the insurance products concerned do not cover life insurance or liability risks, unless the cover compliments the good or service which the person provides as its principal professional activity.

Under the IDR 2018, an insurance undertaking may only use the insurance distribution services of a registered insurance intermediary, a registered ancillary insurance intermediary or an ancillary insurance intermediary which qualifies for the registration exemption. Failure by an insurance undertaking to comply with this requirement would constitute a contravention by it of the IDR 2018 and would expose it to the possibility of administrative sanction by the Central Bank of Ireland (CBI).  

Therefore, as part of an Irish head officed insurance undertaking's plan to distribute its insurance product through one or more third parties, I would recommend that it considers scrutinising whether third party concerned requires registration under the IDD regime.  

The ‘connected contracts’ exemption

From a perspective of Irish regulation, having met the IDD regime ancillary insurance intermediary conditions that are listed above, a person would not have to register with the CBI as an ancillary insurance intermediary if they come within the relatively narrow exemption under Regulation 3(2) of the IDR 2018. That exemption is sometimes referred to as the 'connected contracts’ exemption.

The European Commission notes that the IDD regime should not apply to a person that carries on insurance distribution as an ancillary activity where the insurance premium does not exceed a certain amount and the risks covered are limited. The Commission further notes, non-exhaustively, that such insurance can be complimentary to a good or to a service, including in relation to the risk of a non-use of a service expected to be used at a certain point in time (e.g. a train journey, a gym subscription or a seasonal theatre pass) and other risks linked to travel such as travel cancellation or loss of baggage.

For the registration exemption to apply, firstly, the person concerned would need to come within the IDD regime definition of ancillary insurance intermediary. For the avoidance of doubt, if the person does not meet that definition but nonetheless meets the IDD regime definition of insurance intermediary, the possibility of them relying on the exemption would be unavailable.

The person who meets the definition of ancillary insurance intermediary would then need to satisfy the following conditions:

• the insurance is complimentary to the good or service supplied by a provider and covers either the risk of breakdown, loss of, or damage to, the good or the non-use of the service supplied by that provider; or damage to, or loss of, baggage and other risks linked to travel booked with that provider; and

• the amount of the insurance premium paid for the insurance product does not exceed €600 calculated on a pro-rata annual basis or, where the duration of that service is equal to, or less than, three months, the amount of the premium paid per person does not exceed €200.

How does the exemption work in practice?

In a recent report on the application of the IDD (63-page / 1.4MB PDF), the European Insurance and Occupational Pensions Authority (EIOPA) seems to suggest that, based on its analysis, the ancillary insurance intermediary exemption is open to interpretation and by corollary an uneven application across each of the EEA Member States. An opinion is expressed in the report that more clarity on the exemption is necessary to ensure uniformity across the EEA in its application. In my view, regulatory guidance from EIOPA on this subject would be beneficial.

The lack of an IDD definition of "travel" is cited by one interviewee – an insurance law professor – as a problem area: for example, is the cable car journey, access and descent on the ski-slopes “travel” within the definition of the rules?. He also says it is unclear how the €600 threshold should be applied to multi-year insurance contracts. Further examples of possible ambiguity associated with the exemption criteria are mentioned. Insurance industry participants should read in full the sections of the EIOPA report that discuss the role of ancillary insurance intermediaries in the distribution of insurance products and associated risks to customers.

As part of its supervisory role under the IDR 2018 to monitor the market for ancillary insurance products which are marketed, distributed or sold in Ireland, the CBI recently completed a review of the use of IDR 2018 exempt ancillary insurance intermediaries. The Irish regulator is concerned that the sale of insurance on an ancillary basis could be of potential risk to customers, because they are often more focused on the purchase of the primary product (for example, the flight ticket or electronic gadget) and less on the ancillary insurance being offered to them. Similarly, EIOPA's 2020 Consumer Trends Report indicated concerns about cross-selling practices by ancillary insurance intermediaries. EIOPA said that the sale of ancillary insurance products is often accompanied by aggressive sales techniques and limited information about the cover is given to customers.

The CBI's analysis identified that the main insurance product lines distributed in Ireland through exempt ancillary insurance intermediaries are travel insurance, motor vehicle extended warranty cover, hire car personal accident insurance and gadget cover/accidental insurance.

The CBI's review identified several shortcomings with respect to oversight by insurance undertakings and intermediaries of exempt ancillary insurance intermediaries. Areas for improvement include:

• oversight of remuneration arrangements;

• recording of reasons for cancellation of insurance policies; and

• auditing and on-boarding of new ancillary insurance intermediaries.

The CBI concluded by emphasising that insurance undertakings and intermediaries should ensure that they have adequate procedures in place for overseeing all aspects of their relationship with exempt ancillary insurance intermediaries.

How can Irish insurers mitigate risk?

Looking at some of the terminology used in the exemption criteria, it may not always be beyond doubt that a person seeking to rely on the exemption can legitimately do so. Where a person purports to avail of the exemption on an honest but nonetheless mistaken belief that they qualify for the exemption, as noted above, under the IDR 2018, they may commit an offence and be subject to CBI sanction. An Irish head officed insurance undertaking or intermediary that uses the insurance distribution services of that person may also be subject to CBI sanction. There may also be associated reputational risk for one or more of the parties concerned.

Irish headquartered Insurance undertakings and insurance intermediaries must also ensure that any ancillary insurance intermediaries they use to distribute their products comply with the regulatory requirements outlined by the CBI in its review. For example, they must ensure that the exempt ancillary insurance intermediary informs the customer, prior to the conclusion of the insurance contract, about the regulated insurer’s own identity, address and complaints procedure. They must also ensure that the ancillary insurance intermediary has in place appropriate and proportionate arrangements to comply with the IDR 2018's information requirements and conduct of business rules, requirements on the cross-selling of insurance with a non-insurance ancillary product or service and requirement to consider the demands and needs of the customer before the proposal of the insurance contract.

Any insurance undertaking or intermediary that proposes to distribute insurance through a person that is purporting to rely on the exemption from registration should consider insisting on appropriate level of contractual confirmation and contractual protection from that person. The IDR 2018 oversight requirements should be put on a contractual footing at the same time.