The IDD – levelling the playing field or simply another administrative challenge for insurers?
The latest in a raft of new legislation affecting the insurance industry is the Directive on insurance distribution ((EU) 2016/97) (Insurance Distribution Directive (IDD)). The IDD amended and replaced the Insurance Mediation Directive (2002/92/EC) (IMD) as of 1 October 2018. The IDD is an example of yet another move towards the trend for the open and transparent placement of insurance which commenced with the introduction of the Consumer Insurance (Disclosure and Representations) Act 2012, the Third Parties (Rights against Insurers) Act 2010, and the Insurance Act 2015.
What is it about?
The IDD is designed to improve EU regulation in the insurance market by forcing a level playing field among all participants involved in the sale of insurance products (including insurance based investment products such as bonds, as well as general insurance products). The IDD aims to ensure that those purchasing insurance products benefit from the same level of protection, regardless of the method of distribution.
Who does it affect?
The IDD extends to the entire European Economic Area (EEA) and had to be transposed into national legislation by 1 July 2018. It applies to persons and entities participating in the distribution of insurance products including:
- Those who sell directly to consumers without an intermediary, such as insurers and reinsurers
- Those who distribute on an ancillary basis, such as agents and brokers (unless they fall within a limited exemption)
- Providers of after-sales services, such as loss adjusters and expert appraisers of claims.
This has significantly broadened the scope compared to the IMD, which only applied to agents and brokers.
The European Commission believes that the IDD will cover 98% of market participants, compared with 48% covered by the IMD.
Insurers or insurance intermediaries are defined as “product manufacturers” under the IDD, as the entities responsible in designing and developing an insurance product, and those that advise on an insurance product but do not design it, i.e. brokers, are defined as “product distributors”.
What are the obligations?
By now, all those affected by the IDD should have clear procedures in place for compliance and any teething problems should be being worked through.
By way of reminder of the key obligations, product manufacturers are now required to maintain, operate and review a product approval process in place for new products/significantly amended existing products before they are marketed to the customer. This process should involve:
- Ensuring that the design of the product takes into account the customer’s interests
- Regularly monitoring the distribution strategy of that product
- Ensuring that the product distributors have an Insurance Product Information Document for each product, to ensure that the customer can make an informed decision about buying that product.
Product distributors on the other hand will have to ensure that they understand the characteristics of the insurance being offered so that they can advise whether it meets their client’s needs. Those writing or advising on insurance-based investment products are subject to more stringent rules in addition.
The FCA has issued three consultation papers on the IDD, three policy statements and a Handbook Notice of May 2018 (No.55) which confirms the final rules.
What does it mean for the insurance industry?
Enhancing the level of communication and transparency around the production and distribution of an insurance product should, in our view, mean there will be fewer coverage disputes over the meaning of wordings and clauses, and fewer claims against insurance intermediaries for alleged failure to advise on products and their clauses. Customers will be more likely to end up with the right insurance to meet their needs, and will have less recourse if it doesn’t, as they will have been fully informed as to the cover provided - assuming the IDD requirements are properly followed.
Although more firms are caught within the IDD’s scope than under the IMD, the IDD regime is designed to be applied proportionately and compliance should not therefore be too burdensome for small and medium-sized insurance and reinsurance distributors.
Sadly, the IDD is not the last of the legislative changes impacting on the insurance industry - the next challenge will be the Senior Managers and Certification Regime, which is being extended to insurance intermediaries from 9 December 2019.