The Insurance Distribution Directive: changes to the regulation of insurance intermediaries in the EU

It came into force on 22 February 2016 and updates the 2002 Insurance Mediation Directive (IMD), which set out a framework for regulating EU insurance brokers, agents and other intermediaries.

A review is expected to be carried out five years after the IDD came into force i.e. by 23 February 2021.
Like its predecessor, the IDD  is a 'minimum harmonising' directive and member states have been able to 'gold-plate' it by adding extra requirements to it when implementing it. That said, the IDD is intended to significantly raise the minimum standards of the IMD. On cross-border trade in particular, the introductory wording to the IDD refers to the fact that the European insurance market remains very fragmented despite the existing single 'passport' systems for insurers and intermediaries.

This guide sets out some of the main changes introduced by the new regime. As with the IMD, the IDD will apply equally to reinsurance distribution. However, for ease, this guide will refer only to 'insurance' distribution.

Extension of scope

Where the IMD applied to the regulation of insurance intermediaries, the new IDD applies to the wider regulation of insurance 'distributors'. This means that it applies to:

• all sellers of insurance products, including insurance undertakings that sell directly to customers: the IMD applied to insurance intermediaries only. However, in order to level the playing field between direct and intermediated sales, the new directive applies to all sellers of insurance products including those that sell directly to customers. This reportedly results in the IDD covering about 98% of the market, compared to about 48% of the market covered by the IMD. In the UK, the change does not significantly impact the market due to 'gold-plating' of the IMD - however, the new directive does contain specific information provisions that will likely add cost and complexity to insurers' direct sales processes.
• any person whose activities consist of assisting in the administration and performance of insurance contracts, including those acting on behalf of insurers - for example, claims management activities: the IMD only covered those acting on behalf of the policyholder. However, the new directive extends its application more widely to others who assist in the administration and performance of insurance contracts - for example, in the event of a claim. This may improve service provision for insurers as such firms will have better controls in place, but additional costs may be passed onto insurers. Firms now need to confirm that all such entities that they do business with are properly authorised and that their contractual arrangements reflect the change in regulation. Notably, the management of claims of an insurer/reinsurer on a professional basis, loss adjusting and expert appraisal of claims have been 'carved out' of the extended definition.
• ancillary insurance intermediaries: the scope of the new directive has also been extended to include 'ancillary' insurance intermediaries, although a lighter touch regime applies and member states are entitled to require that insurers and intermediaries take greater responsibility for ancillary intermediaries. Ancillary intermediaries must meet three conditions to avoid full regulation, including that the insurance products concerned must not cover life assurance or liability risks unless that cover complements the product or service which the intermediary provides as his principal professional activity.

Ancillary providers are excluded from regulation entirely where the insurance is complementary to the goods or services supplied by any provider, as long as that insurance covers the risk of breakdown, loss of or damage to the goods or non-use of the service, or damage to or loss of baggage and other risks linked to travel booked with that provider; and 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.

A similar 'connected contracts' exemption was set out in the IMD, although there are changes to the conditions that need to be met to rely on this test. Any person that does business on the basis of the exemption should confirm that they are still able to meet these conditions and do not need to be authorised.

• websites: the IDD confirms that insurance distribution takes place when websites or other media are used to provide information about insurance contracts in accordance with criteria selected by customers and there is a compilation of an insurance product ranking list, including price and product comparison, or a discount on the price of an insurance contract, and when the customer is able to directly or indirectly conclude an insurance contract using that website or other media.

Carve-outs

The definition of insurance distribution contains important carve-outs excluding certain activities from that definition for the purposes of the directive. The first two carve-outs were already included in the IMD, albeit with slightly different wording. The third carve-out is new. These are:

• the provision of information on an incidental basis to a customer in the context of another professional activity, if the provider does not take any additional steps to assist the customer in concluding or performing an insurance contract;
• the management of claims of an insurer on a professional basis, and loss adjusting and expert appraisal of claims;
• the mere provision of data and information on potential policyholders to insurance intermediaries or insurers, or of information about insurance products or an insurance intermediary or insurer to potential policyholders if the provider does not take any additional steps to assist the customer in concluding an insurance contract.

Freedom to provide services and freedom of establishment

The new regime simplifies the procedure for cross-border entry to insurance markets across the EU in a number of ways. Member states have to establish a 'single information point' providing public access to their registers for insurance, reinsurance and ancillary intermediaries. EU regulator EIOPA has established a website coordinating each of the member states' single information points.

Any member state which possesses additional 'general good' type rules must ensure that these are made publicly available. This principle, which is based on EU case law and was developed first in the context of free movement of goods and services, allows host states to impose additional regulatory measures if those measures serve a general good.

Although this is no formal definition, the Court of Justice of the European Union (CJEU) has acknowledged that areas including, but not limited to, consumer protection, social order, prevention of fraud and the protection of intellectual property could fall within the scope of the interest of the general good. EIOPA will publish links to the websites of the competent authorities of member states where information on general good rules is published, and will review their use in the context of the proper functioning of the market.

The IMB did not include provisions on the split of jurisdiction between home and host member state regulators. Under the new regime, any breaches of the directive will need to be referred back to the competent authority of the home member state in the first instance. There will also be clear areas in which the new regime will grant jurisdiction to the host member state regulator.

The home member state may agree that another member state will act as home member state if the distributor's primary place of business is located in that other member state.

Organisation and professional requirements

The new regime requires stricter and more specific professional requirements. EU member states have to establish and publish mechanisms to effectively control and assess the knowledge and competence of insurance and reinsurance intermediaries and employees of insurance and reinsurance undertakings and employees of insurance intermediaries. This is based on at least 15 hours of professional training or development per year, taking into account the nature of the products sold, the type of distributor, the role they perform and the activity carried out within the insurance or reinsurance distributor. Home member states may require that the successful completion of the training and development requirements is proven by obtaining a certificate.

The IDD sets a minimum professional indemnity insurance requirement for intermediaries of at least €1.25 million per claim or €1.85m in aggregate, unless such insurance or comparable guarantee is already provided by an insurance or other undertaking on whose behalf the intermediary is acting. This was €1m or €1.5m under the IMD. Ancillary insurance intermediaries are required to hold professional indemnity insurance.

Information requirements and Conduct of Business Rules

The new regime introduces two general principles, providing that insurance distributors must "always act honestly, fairly and professionally in accordance with the best interests of customers"; and that all information must be "fair, clear and not misleading". Some have commented that this may be the beginning of EU-level principles-based regulation.

There are detailed requirements about the information that insurance distributors must disclose to customers before the conclusion of an insurance contract including, but not limited to, identity, address and registration detail. The requirements are different depending on whether the business is an insurer, intermediary or ancillary insurance intermediary.

Remuneration disclosure requirements for insurance intermediaries include disclosure of:

• the nature of remuneration received in relation to an insurance contract;
• the basis of the remuneration – that is, whether it is in the form of a fee paid by the customer, a commission included in the insurance premium, an economic benefit of any kind offered or given in connection with the insurance contract, or a combination of these. Where the fee is payable directly by the customer, intermediaries must disclose the amount of the fee or, where this is not possible, the method for calculating it;
• if any payments, other than ongoing premiums and scheduled payments, are made by the customer under the insurance contract after its conclusion, the insurance intermediary is obliged to make the disclosures after each of these payments.

Remuneration is defined in the Directive as meaning: "any 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 insurance distribution activities".

In the UK, intermediaries acting as the agent of the insured have already been obliged to provide information on remuneration to consumers under common law principles, and under Insurance Conduct of Business (ICOBS) rules in respect of commercial customers. However, consideration will have to be given to the new requirement to always provide consumers with the nature and basis of remuneration, and the manner in which these disclosures will be made.

The remuneration disclosure requirements for insurers in the IDD include disclosure of the nature of the remuneration received by their employees in relation to the insurance contract. In addition, if any payments other than ongoing premiums and scheduled payments are made by the customer under the insurance contract after its conclusion, the insurer is obliged to make the disclosures after each of these payments.

Remuneration disclosure requirements for ancillary insurance intermediaries in  the IDD include only the nature of the remuneration received in relation to the insurance contract. The IDD also includes new requirements where information is provided by email or via a website.

Cross-selling and bundled products

Amongst other things, the new regime provides that when an insurance product is offered together with another service or in a package or as a condition for the same agreement or package, the insurance distributor must inform the customer whether it is possible to buy the different components separately. If so, it must provide an adequate description of the different components of the agreement or package as well as separate evidence of the costs and charges of each component.

Insurance PRIIPs

The IDD includes additional specific and stricter requirements in relation to packaged retail insurance-based investment products (PRIIPs).