EU Insurance Distribution Directive

Mike Roderick, partner with Clyde & Co, assisted by Dr Kathrin Feldmann, from Clyde’s Düsseldorf office, has written in the IUMI December newsletter about the EU Directive 2016 (97) of January 20th 2016 on insurance distribution (the Insurance Distribution Directive or IDD), which sets out a new and enhanced European legal framework for insurance (and reinsurance) distribution applicable to risks inside the EU. Since publication the IDD has been supplemented by two further Delegated Regulations from the European Commission, C(2017) 6218 and 6229, which are directly applicable in Member States. Key aims of the IDD are to afford greater protection to customers and to further harmonise insurance and reinsurance distribution.

Roderick said that several changes were of particular importance for marine insurers:

  1. To ensure a level playing field for customers whatever the distribution channel used, the IDD would widen the scope of existing regulation beyond intermediaries such as brokers and agents to include all sellers of insurance products which also sell insurance directly to their customers as part of a wider package.
  2. There would be a much-enhanced pricing transparency requirement. Intermediaries will have to state the nature of their remuneration – although there would be no obligation to disclose the level of the remuneration itself. Whatever the nature of the remuneration arrangement it could not be in conflict with the obligation to ensure appropriate insurance coverage for the customer. Roderick noted that implementation of this requirement was proving particularly controversial in a number of Member States. For example in Germany there had been intense legislative discussion about a provision that would prohibit broker remuneration other than by way of payments from insurers with no fee to be charged to the insured (a provision that was ultimately defeated at a recent Parliamentary session).
  3. New rules on product review had been introduced – insurers and intermediaries that design new or significantly amend existing products have to have an internal and thorough Product Oversight and Governance (POG) process in place to ensure that products were and remained suitable for their target market. This requirement therefore applied both before products were first marketed and on an ongoing basis. These new rules would not, however, apply to large risks, as defined in Directive 2009/138/EC – that definition includes loss or damage to ships and to goods in transit.
  4. Member States would have to ensure that insurance distributors were under a duty always to act in the best interests of their customers, to ensure that their remuneration arrangements do not conflict with that duty, to ensure that customers received clear and fair information about the product being sold and that distributors were properly trained and qualified.

Roderick noted that these changes were both significant and complex. In the UK alone, the Financial Conduct Authority had published three lengthy Consultation Papers on implementation of the IDD. Roderick said that the changes would impose significant additional burdens on insurers. “Certainly their impact on insurance distributors such as freight forwarders is not yet fully appreciated within the industry.” The IDD is set to enter into force on February 23rd 2018. In recognition of the complexities involved and to allow the insurance industry sufficient time to properly implement the changes required, the European Commission has been requested to delay entry into force. “At the time of writing we anticipate that a postponement to October 1st 2018 will be granted but no extension has as yet been officially confirmed”, concluded Roderick.