Insurance distribution: the next steps to 2018

Insurance distribution: the next steps to 2018

February saw a number of developments in the journey towards implementation of the Insurance Distribution Directive (IDD), which will apply from 23 February 2018.

Director and Insurance regulatory lead, EMEA

KPMG in the UK

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These are covered below:

Product oversight and governance (POG), conflicts of interest and inducements

On 1 February, EIOPA provided its final advice to the Commission on the above areas. As expected, this builds heavily on EIOPA’s preparatory phase guidelines (which we covered in the July 2016 newsletter), minimising the impact on insurers and their distributors.

The substance has not changed significantly since the original consultation paper, but a number of clarifications have been made, including:

  • There is no intention to introduce a ban on commission
  • Modification of the inducements criteria (for example, specifically recognising that repayment of upfront commission can reduce the risk of inappropriate sales)
  • Improved guidance regarding when an intermediary could be regarded as a manufacturer (for example, white labelling)
  • Investment switches initiated by the customer will not trigger a suitability assessment
  • Modification of the criteria to be met for execution-only sales (see below also).

Although the word ‘proportionate’ appears frequently, there are a number of areas where the principles require analysis at a granular level (for example the analysis of target market). In addition, EIOPA has retained both its recommendation that for insurance-based investment insurance products (IBIPs), the suitability of the product for the customer should be revisited no less frequently than annually and its requirement for annual periodic reporting.

Firms should review the final advice to identify areas where their processes may need to be strengthened before the implementation date.

Guidelines on insurance-based investment products that incorporate a structure which makes it difficult for the customer to understand the risks involved (CP17-001)

On 2 February, EIOPA issued this consultation paper, which links with the execution-only point above. Before an IBIP can be distributed on an execution-only basis, it must be ensured that its risks can be readily understood by the customer, considering both the underlying exposures and the contractual structure of the insurance contract itself.

The underlying exposures point is dealt with by only permitting exposure to investment classes determined as ‘non-complex’ by MiFID II and its supporting guidance.

The contractual structure point is dealt with by setting out a number of features that could hinder the customer’s understanding of the risks. These include:

  • The insurer’s ability to materially alter any key term
  • Inability to surrender or only at a disproportionate cost
  • Complex pay-out mechanisms (maturity, surrender or death)
  • Charging structure not easily understandable
  • Change of beneficiary clauses.

As execution-only sales is a Member State option, this will only be relevant to life insurers in regimes that have adopted these requirements. Insurers that wish to offer this facility going forward will need to review their insurance terms and practices to ensure these can be easily understood by the customer.

Insurance Product Information Document (IPID)

The IPID will be a mandatory pre-sale document for any insurance product not falling under the Packaged Retail and Insurance-based Investment Products (PRIIP) regulations (for which the PRIIP key information document will be provided). This predominantly captures non-life insurance products.

On 7 February, EIOPA submitted its draft implementing technical standards (ITS) to the European Commission. The content of the “short and stand-alone” IPID is set out in the IDD; Annex 1 of the ITS sets out the proposed standardised template to be followed.

The ITS makes it clear that the IPID should normally be restricted to two pages of A4 (at a set font size), but may extend to three pages when necessary (for example to deal with add-ons, options and multi-risk policies). It also prescribes the layout required where it the IPID will be provided in digital form.

The greatest challenge for many insurers is likely to be the sections on “What is insured?” and “What is not insured?”. Policy documents are often very detailed regarding cover and exclusions and firms will need to ensure that the key terms are brought out and clearly explained, while not exceeding the overall length requirement. As the IPID is intended as a “stand-alone” document, we believe a simple cross-reference to sections of the policy documentation is unlikely to be sufficient.

UK insurers that are considering restructuring options as a result of Brexit will also need to consider how they will ensure that the correct IPID is issued to the customer during their transition.

For more information, please contact Janine Hawes.

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