Getting ready for the Insurance Distribution Directive
The impact on insurance companies, intermediaries and customers
On the 20th of January 2016 the Insurance Distribution Directive (IDD) was adopted, which will come into effect on the 23rd of February 2018. But how will this affect insurance companies, intermediaries and customers?
On the 20th of January 2016 the Insurance Distribution Directive (IDD) was adopted. This directive will replace the Insurance Mediation Directive (IMD) and will come into effect on the 23th of February 2018. On the 6th of September, the law implementing IDD in the Netherlands was sent to parliament. The European Insurance and Occupational Pensions Authority (EIOPA) has been given the responsibility to supervise on a European level and has therefore provided guidance in a consultation paper and technical standards. The Autoriteit Financiële Markten (AFM) will supervise in the Netherlands whether requirements of the IDD are adhered to by entities to which the IDD applies in the Netherlands.
The key objectives of the IDD are:
• Protection of customers and fair competition within the insurance market; and
• Create a level playing field in the European market between every insurance distributor and intermediary.
The directive is comparable to and contains elements also included in the MIFID II directive for investment firms.
What is IDD?
The directive will apply to the insurance companies and intermediaries. EU member states will have to implement the directive in their national laws and regulations, such as the Financial Supervision Act (Wet op het Financieel Toezicht) in the Netherlands. For some elements of the IDD, EU member states are free to implement more stringent requirements. The Netherlands will maintain the current provision ban. The IDD will apply as of the 23rd of February 2018. This means that the insurance companies and intermediaries should act accordingly and in a timely fashion.
Significant changes ahead
The IDD comes with several major changes. What will these changes mean for your organisation and what should be addressed? It is important to realize that the scope of the IDD will not only cover the insurance companies, but also intermediaries, who often sell insurance products in conjunction with a good or service. Car rentals or travel agencies as well as comparison websites that offer insurance products, for example, will therefore also be covered by the directive.
Conflicts of Interest
Conflicts of interest management will now be subject to higher standards, which will be further detailed in the delegated acts. Insurance companies and intermediaries must ensure that any potential conflicts of interest between themselves and their customers are prevented during distribution activities. Therefore a conflict of interest policy should be prepared. If conflicts of interest cannot be sufficiently managed, the general nature or sources of the conflict should be disclosed to the customer. In any case, in the interest of the customer’s protection, appropriate information must always be available to customers before signing the insurance contract.
Insurance companies and intermediaries should ensure the evaluation and compensation of its employees do not lead to conflicts of interest. To that end, the insurance company and intermediary should develop, adopt and regularly review policies and procedures relating to conflicts of interest. This in order to avoid any detrimental impact on the quality of the relevant service to the customer, and to ensure that the customer is adequately informed about fees, commissions or benefits.
Product Oversight and Governance (POG)
IDD also introduces product oversight and governance requirements for insurance companies and intermediaries similar to MiFID II. The approval process for each insurance product should be defined as proportionate to the nature of the insurance products that are about to be sold to customers. It should incorporate the identification of the target market, the risk assessment, and should assure that the distribution strategy is aligned with the identified market. Regular reviews must also be performed to check whether products remain effectively distributed and consistent with the objective of the respective target markets. This requires insurance companies to share all product-related information deemed necessary with their intermediaries.
If an ancillary product or service, which is not insurance based, is offered together with an insurance product, then the distributor and intermediary must inform the customer about the components, costs, charges, and risks of each component. The customer must be informed whether it is possible to buy these components (product or service) separately.
Insurance Product Information Document (IPID)
The IDD introduces a detailed standardized Insurance Product Information Document (IPID) for all non-life insurance products. This IPID is to be used by both the insurance company and the intermediary. The IPID is intended to be a pre-contractual and stand-alone document which aims to allow consumers to make informed decisions. The IPID has to be short, comprehensible, accurate and not misleading.
Assessing the Suitability and Appropriateness of IBIPs
The suitability assessment is conducted by insurance companies and intermediaries that provide advice to customers on insurance-based investment products (IBIPs). This enables them to recommend IBIPs that are suitable for the (potential) customer. This advice has to be consistent with the customer’s investment goals, financial situation, its ability to bear losses, and its knowledge/experience level. In case an insurance company or intermediary provides investment advice recommending a package of services or products bundled, the overall bundled package must be suitable.
When no advice is given, an Appropriateness Assessment should be performed to determine whether the customer has sufficient knowledge and experience to understand the underlying risks of the product. However, for some insurance products an exemption to this requirement will apply. Where a bundle of services or products is envisaged, the assessment must consider whether the overall bundled package is appropriate.
Continuous Professional Development (CPD)
Competency and continuous professional development will need to be ensured by all insurance companies and intermediaries, proportionally to the complexity of the products sold, as well as the distribution nature. The directive foresees a training requirement of 15 hours per individual per year.
Tackling the challenges
Deloitte understands that the Insurance Distribution Directive raises a number of questions. You will for example wonder:
- What will I have to do to train my employees to understand and work with the IDD?
- How does IDD impact my organization? To what extend will I have to change my processes and how can I utilize my information systems to support these changes?
- How do I determine the correct target market for my products?
- What information will I have to show my customers regarding the cost structure of my products?
- What is an Insurance Product Information Document? What information will I have to share with my customers?
- How do I assess whether an IBIP is suitable for a customer?
- How can I control, ensure and monitor that the products I have sold to my customers are still suitable to them?
Deloitte leverages experience in the market and its international network to help your organization. For example, extensive knowledge of the strongly related MiFID II is present within Deloitte. We can support you with:
- Training and development of your employees in order to understand and work with the new IDD requirements
- Performing a gap analysis, in which the IDD requirements will be compared with your current processes and supporting information systems. Workshops and interviews will be held to support this analysis, after which you gain insight into the level of compliance and the required follow-up actions;
- Defining appropriate target markets and grouping customers accordingly;
- Determining what cost structure information has to be shared with the customer and utilizing analytical capabilities to create further insight into the cost structure of products;
- The development of the Insurance Product Information Document for your products;
- Develop frameworks to facilitate assessment of suitability of a product for an individual clients;
- Implementing a monitoring process, which will be used to determine if products still fit the customer needs.