Nowadays the insurance market is able to provide consumers with a rather vast array of insurance choices depending on their needs. Sometimes, such products cannot be fully understood by the general consumers due to their unnecessary technicalities, especially when it comes to long-term insurance products which may include an investment element.
The Insurance Distribution Directive (“IDD”) has been published on 22 February 2016 and it should be transposed into national law by February 2018. The aim of the IDD is to establish a competitive level playing field between participants in insurance sales, whilst ensuring that consumers are provided with the right information in order to allow them to take an informed decision on their insurance purchase. It also aims to bring the insurance industry in line with consumer protection rules recently adopted in other financial sectors. For this reason, this directive has been identified as “the MIFID of Insurance”.
Product supervision and governance
The main objective of the IDD is to regulate which products are presented to the market and how these are sold. Article 25 of the IDD provides that insurance distributors are required to have in place an oversight and governance process for the approval of new products. Such process must include the product’s design, marketing and distribution strategy.
Conflict of interest
Consumers might not be fully aware of the relationship between principals and agents in the insurance industry and the service agreements that are put in place.
Under the IDD, explicit pre-contractual information must be provided to consumers, emphasizing the importance of the disclosure of any remuneration received and any ongoing premiums and fees payable throughout the duration of the contract. In addition to that, distributors are not allowed to remunerate or apply sales targets that could potentially incentivize the recommendation of a certain policy when a different product could better suit the consumer’s needs.
Suitability, appropriateness and product information for consumers
Once the IDD is transposed into national law and becomes effective, distributors will be subject to suitability and appropriateness requirements similar to those for investment services firms under MIFID II.
A Product Information Document (“PID”) shall be provided to all consumers. Such document must include standard information on the product and must be provided at the pre-contractual stage. The PID has to be “short, stand-alone, comprehensible, accurate and not misleading”[1].
In case of bundled products companies will be requested to disclose information on each component in the package and its costs and charges and customers must be able to purchase them separately.
Professional competency requirements under the IDD
The professional experience, qualifications and knowledge of those involved in product development, distribution and relations with consumers (aftersales) need to be in line with the level of complexity of the product. For the first time, salespeople will be required to undertake a minimum of 15 hours of professional training or development per year.
The Malta Financial Services Authority's position on the IDD
The MFSA issued several documents for Consultation with the main purpose of providing guidance on the transposition of the Insurance Distribution Directive:
Amendments to the Insurance Intermediaries Act (Cap.487)
- Since all insurance distributors will fall under the remit of the IDD, the MFSA is proposing to amend the title of the Insurance Intermediaries Act (“Act”) to the “Insurance Distribution Act”. The amended Act will not only address intermediaries, but all persons carrying out insurance distribution and reinsurance distribution activities including agents, managers, brokers, tied insurance intermediaries, ancillary insurance intermediaries and undertakings authorized under the Insurance Business Act to carry out distribution activities.
- The term “ancillary insurance intermediary” is now defined as a separate activity under the proposed new Act. The ancillary insurance intermediary is deemed to be an intermediary who acts under the full responsibility of an authorized undertaking, under some certain stipulated conditions. Such intermediary has to successfully pass a fit and proper test as well as a knowledge and ability test. Further details need to be determined in the Insurance Distribution Rules. Moreover, the supervisory authority is proposing to set up a threshold of the possible number of appointments an ancillary insurance intermediary may hold. According to this proposal, it can be appointed and registered with no more than two insurance undertakings carrying on general business as long as their core business is in different products and one undertaking carrying out long term business.
- In line with the provisions of the IDD, all people involved in distribution activities are required to have appropriate knowledge and ability in order to complete tasks and perform duties adequately. The details of such requirements are still not known as they will be developed in the Insurance Distribution Rules.
- Additionally, an applicant which is seeking the Authority’s recognition to act as a manager, broker or tied insurance intermediary will be required to disclose the identity of the shareholders, direct or indirect, legal person or body corporate who will have qualifying shareholding in that intermediary and the amount of the shares held as well as possible close links with such holdings.
- The MFSA is also proposing that a new section relating to the provisions applicable to authorized insurance and reinsurance undertakings carrying out distribution activities should be added. Such undertakings are not required to be enrolled, however, the MFSA is proposing to maintain a register which will keep track of the names of senior management responsible for such activities.
Amendments to the Insurance Business Act (Cap.403)
Consequential amendments are being proposed to the Insurance Business Act as well in order to ensure it will be in line with the proposed amendments to the Insurance Intermediaries Act. Among the new features that might be brought by such amendments, there will be the introduction of the new ancillary insurance regime as well as the introduction of new powers related to the revocation and suspension of an authorization.
What to expect before the IDD comes into force?
Further consultations are expected to be brought to the industry’s attention together with draft regulations, draft Insurance Distribution Rules and a draft of the Conduct of Business Rulebook. In addition to that, further guidelines and rules are expected to be issued by the European Commission.
[1] Article 20 of Directive (EU) 2016/97 of the European Parliament and the council of the European Union of 20 January 2016 on Insurance Distribution
