Ready, Set, IDD!
The IDD – Insurance Distribution Directive aims to enhance transparency regarding product information, price and costs and a number of other benefits for consumers and retail investors as well as to establish fair competition for insurance distributors such as banks, insurance and pension companies. However, the IDD implementation is a challenge for Insurance distributors, as EU countries have to incorporate the IDD into national law by 23 February 2018.
On 20 December 2017, the European Commission proposed to push back the application date of the Insurance Distribution Directive (IDD) seven months to 1 October 2018. However, EU countries are still required to transpose the IDD into national law by the original date, 23 February 2018.
The IDD is following the wave of other regulatory changes such as MiFID II and PRIIPs Regulation that intend to strengthen consumer protection, improve the competitive landscape of the European insurance industry and reduce cross-sectoral inconsistencies.
Insurance distribution covers to sell, propose to sell or advice on or carry out other work before concluding an insurance contract – including dealing with claims after an insurance event.
In the EU, the insurance mediation directive (IMD) previously governed the sale of insurance products; however, it only applied to brokers and other insurance intermediaries.
The IDD recasts the IMD fully and widens the scope to all sellers of insurance products, including insurance companies that sell directly to consumers.
*POG – Product Oversight and Governance, *IPID – Insurance Product Information Document
Under the new IDD framework, consumers and retail investors buying insurance products will benefit from a number of changes, whereas the insurance distributors such as banks, insurance and pension companies ought to benefit from fair competition and an improved legal framework for cross-border business.
A number of changes from the IMD include, but are not limited to:
- Expanding the scope from agents and brokers by adding all sellers of insurance products, including insurance manufacturers who sell directly to customers and market participants who sell insurance on an ancillary basis.
- Introducing Product Oversight and Governance (POG) where an approval process for each insurance product should be defined as proportionate to the nature of the insurance products about to be sold. It should incorporate the identification of the target market, the risk assessment and assure that the distribution strategy is aligned with the identified market. Regular reviews should also be performed to check that products remain effectively distributed and are consistent with the objective of the respective target markets. This requires manufacturers to put all product-related information deemed necessary at the distributors’ disposal.
- Greater transparency of the price and the costs of the insurance distributor’s products, so that it is clear to consumers what they pay for.
- Better and more comprehensible information, so that consumers can make informed decisions, with a simple, standardised Insurance Product Information Document (IPID) for non-life insurance products.
- When insurance products are offered in as a package along with another good or service, e.g. when a new car is sold at a bargain price together with a motor insurance, consumers will have the choice to buy the main good or service without the insurance policy.
- Rules on transparency and business conduct to prevent consumers from buying products they do not need.
It is a significant, urgent and challenging task for Danish banks and insurance and pension companies to be compliant with the IDD. The directive involves a number of new initiatives to ensure transparency when it comes to companies' remuneration policy and product development, regular control of their own products in relation to customer needs and requirements for objective marketing and continuing training of individuals.
Experience shows that e.g. a two-day IDD gap analysis workshop helps to identify urgent compliance gaps effectively.