The Insurance Distribution Directive (IDD) introduces new rules enhancing the protection of clients, in parallel with client protection rules recently adopted in other sectors of the financial industry. The new Directive is in force since 1 October 2018.
In this newsletter we focus on the distribution of insurance based investment products or IBIPS (often referred to as unit-linked insurance contracts). It is to be noted that IDD is a European directive and applies to the interests of European resident clients.
Inge De Wolf, International Head of Legal and Regulatory, provides an analysis of the directive and its implications.
The creation of a level playing field
For the first time in insurance history, sales performed directly by insurance companies has been identified as distribution activity and require from insurance companies to align with the client protection obligations that were already applicable to insurance intermediaries (agents and brokers). Everyone involved in the “intermediation” activity is now considered a “distributor” and as such affected by the distribution provisions. There are broadly spoken two types of distribution:
- Distribution by insurance intermediaries: intermediaries that independently represent the client (also called “brokers”) and intermediaries that act on behalf of one or more insurance undertakings (also called “agents”)
- Distribution by the insurance undertaking: “direct sales” performed by its employees.
A refined definition of distribution (previously insurance mediation):
The directive defines ‘insurance distribution’ as “the activities of advising on, proposing, or carrying out other work preparatory to the conclusion of contracts of insurance, of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim, including the provision of information concerning one or more insurance contracts in accordance with criteria selected by clients through a website or other media and the compilation of an insurance product ranking list, including price and product comparison, or a discount on the price of an insurance contract, when the customer is able to directly or indirectly conclude an insurance contract using a website or other media"
The directive also clarifies that the following is not considered as distribution:
(...) the mere provision of data and information on potential policyholders to insurance intermediaries, reinsurance intermediaries, insurance undertakings or reinsurance undertakings where the provider does not take any additional steps to assist in the conclusion of an insurance or reinsurance contract;
(...) the mere provision of information about insurance or reinsurance products, an insurance intermediary, a reinsurance intermediary, an insurance undertaking or a reinsurance undertaking to potential policyholders where the provider does not take any additional steps to assist in the conclusion of an insurance or reinsurance contract.
Therefore a third type of collaboration is indirectly recognised: the business referral. If this activity is strictly limited to the provision of information and no further steps are being taken (as described by IDD), such activity will not be affected by the provisions of the directive.
The client at the heart of the product development process
Insurance companies are “product manufacturers”. They have to ensure that throughout the product development process the client’s interests are being put at the centre of all concerns: the product needs to be adapted to the client’s “market” and his concrete needs. This involves the need to describe the product’s risks, the need to comply with prudential requirements, the need to respond to the general good provisions of the country of residence of the client, to name only a few. Whilst most of this is already implemented by the insurers, the insurance company has to formalise its product development process with an embedded distribution strategy for each product including a regular review of the processes. Manufacturers and distributors will have to work together to ensure that the expertise and feedback from the distributor are reflected in an appropriate and suitable product offering. The aim is to develop an end-to-end product value chain, including distribution.
The client at the heart of the distribution process
The distributor is required to get a holistic view of the client’s needs and personal situation.
An independent intermediary will also need to know the offering available in the market and be able to compare it in the client’s interest, and finally identify together with the client the offer that best suits the client’s personal situation and needs.
The distributor may sell an insurance contract on the basis of specific, personalised advice given to the client. This advice may be compulsory in certain Member States, especially when dealing with complex IBIPS. In such case, establishing the needs and demands of the client will not be sufficient. A more detailed suitability check will need to be performed, on the basis of which the client’s knowledge, experience, financial situation and investment objectives will be discussed and analysed. Advice will have to be adapted to the outcomes of such an analysis.
A distributor may also offer to perform regular reviews of this suitability check. The distributor will then have to determine what is an appropriate frequency to perform the review (at least annually) and how to document this.
Certain important events during the lifetime of the insurance contract may trigger the need for a new review to be performed. Such important events can include important additional investments or important withdrawals made, important changes in the family situation of the client, a change of investment strategy, etc. The distributor will have to find the right balance for the best monitoring of the client’s needs and interests.
All these information requirements during the distribution process now need to comply also with the conduct of business rules and general good provisions in the country of residence of the client. Europe will be working on a more comprehensive list of what all these general good provisions are, but this list is not available yet.
Product Oversight and Governance: POG
As described above, the product development process needs to be laid down in what is now called Product Oversight and Governance. The insurance company will have to make all relevant POG information available to each of its intermediaries, depending on the relevant markets and products that the intermediary is authorised to distribute. From October 2018 an important exercise will start during which Swiss Life Global Solutions shall contact its intermediaries to review the distribution arrangements in place and to make the relevant POG documents available. Such POG documentation can also be obtained from Swiss Life starting October 2018 upon simple request, depending on the distribution arrangements in place.
Information to Clients
IDD imposes an increase of disclosure requirements. For IBIPS this means concretely that the distributor will have to be transparent about costs and charges.
An intermediary will have to disclose during the distribution process what the cost for the distribution service is and what the service will be composed of (assistance during conclusion of the contract, advice or no advice, ongoing reviews or not, investment advice or not, …).
Swiss Life will apply the same transparency and disclose to the client the cost of the distribution service and the cost for the back office administration of the insurance policy.
Our PRIPS KID documentation, in combination with all the information disclosed in the Swiss Life insurance application forms and general terms and conditions, will allow the distributor to complete its own informative obligations towards the client.
Needs analysis and Appropriateness & Suitability assessment
Each distributor will have to ensure a proper needs-analysis of the client. Where advice is provided regarding an IBIP by the distributor, the latter will have to complete an appropriateness and suitability check. The appropriateness and suitability assessment are to be considered an in-depth KYC process, but with the aim to obtain information on the knowledge, the experience, the financial situation and the investment objectives of the client.
The distributor will need to ensure that the insurance contract sold corresponds to the demands and needs of the client and to the advice given. If a given client benefits in his country of residence from a right to opt out of the advice given to him, such explicit opt-out will have to be documented.
In case the insurance contract was sold with advice, a suitability statement (confirmation) will have to be provided by the distributor to the client, explaining the link between the contract sold and the client’s tested preferences, objectives etc. Swiss Life can give some guidance on these requirements, but the distributor will have to ensure to comply with the obligations applicable to him in a certain given situation.
Whilst Swiss Life is an outspoken product manufacturer and wealth planning expert, it builds its business in collaboration with its partner intermediaries, which it considers being the experts of client needs and distribution activities.
Conflict of interest
One of the sacred objectives of IDD is to protect the interests of the clients. Insurance distributors shall act honestly, fairly and professionally in the best interest of their clients and shall put internal arrangements in place, including disclosure if and where required.
Swiss Life has its own Conflict of Interest policy, which can be obtained by the client upon request.
Inducements are the monetary or non-monetary benefits received by a distributor for the distribution of an IBIP. Inducements are regulated differently under IDD then under MIFID II. There is no general ban on inducements, but insurance companies and insurance intermediaries have to identify all inducements paid or received and establish the necessary assessments and procedures to ensure that:
- Inducements do not have a detrimental impact on the quality of the relevant service provided to the client;
- They do not prevent the distributor to act honestly, fairly and professionally in the best interest of the client;
- Should inducements cause a potential conflict of interest that cannot be avoided, it must be disclosed to the client.
The delegated regulations provide some criteria of when an inducement can be considered detrimental and we invite you to take a closer look at them during your assessments. Some notable features are: the assessment of inducements shall include appropriate qualitative criteria (such as quality of the distribution service, based on client satisfaction), the value of the product and the service, an appropriate mechanism for reclaiming the inducement in cases where the insurance contract is surrendered in an early stage or where the client’s interests are harmed.
Where inducements are authorised and pass the “client interest-test”, they can be recurrent and volume based, but will need to comply with the above mentioned features. The inducement, the price paid by the client, will stand for defined services and quality of services. The introduction of clients (the above-mentioned referrals) cannot be remunerated on an inducement basis.
Certain Member States may apply more stringent provisions, which need to be analysed and respected by the insurance company and intermediary. We have seen such stricter provisions already in the UK with the introduction of the Retail Distribution Review (RDR) and the commission ban for brokers in Finland. Sweden has now also introduced a commission ban for brokers. These Member States have considered that independent intermediaries can only truly represent the client’s interests best when paid by the client and not by the insurer.
This is not the general approach of all the Member States and Swiss Life follows up closely on these developments and informs its distributors of such regulatory changes through its regulatory updates and POG documentation.
Distributors shall comply with Fit & Proper requirements and shall complete a minimum of 15 hours training, in compliance with the obligations laid down in local legislation (in the country of establishment of the distributor). These requirements will apply to the defined relevant persons in the management structure of the organisation and any staff directly involved in insurance distribution. Each Member State will determine the details of the requirements and of registration obligations with the relevant supervisory authorities.
Swiss Life (Luxembourg) S.A. and Swiss Life (Liechtenstein) AG can only distribute (in the sense of IDD) with European authorised distributers for its European resident clients. Swiss Life diligently selects distributors that distribute our products on a cross-border basis in function of established and demonstrated expertise.
We will be revising the new requirements in our distribution arrangements with all our distributors. The review and fine-tuning of existing agreements will start in October 2018.
At Swiss Life we aim for continuity. We work in collaboration with you, our partners, to complement the carefully defined wealth planning structure you define for your clients. We develop solutions so you can accommodate every requirement of your client.
We partner with the most professional and well-established financial and legal institutions to ensure we can offer you the highest quality support and expertise in your day to day intermediation activities. We pride ourselves on attention to detail and creating every solution we offer with care, and we will ensure you have every possible assistance in reducing the complexity of these regulatory matters for you and your clients.