The Insurance Distribution Direction: will it affect you?

The Insurance Distribution Directive (IDD) is a regulatory framework for the sale of insurance which repeals and replaces the Insurance Mediation Directive (IMD). It came into force in February 2016, giving member states until 2018 to implement the changes. Currently, the buzz around the document is growing as the Financial Conduct Authority has allowed until June 5th for responses to the consultation document. At over 100 pages, is it worth reading, especially for UK companies leaving the EU?

The IMD originally intended to remove the barriers in the European single market for insurance and reinsurance intermediation. IDD looks to further harmonise regulation of insurance distribution activities to improve consumer standards and promote a single market for insurance sales, and will be implemented in the UK despite Brexit. Many of the changes look to extend standards already implemented in the UK to the rest of Europe.

What’s changing?

A significant change in the regulation of IDD is that it will now cover the sale of insurance products directly by an insurer, estimating to cover 98% of the market, compared to just 48% covered by IMD. The extension already took in the UK during additional regulation to implement the IMD, thus having few changes domestically. However, in central Europe, it increases the controls, specifically in relation to packaged retail insurance-based investment products (PRIIPs).

Similarly to the IMD, the IDD is a minimum harmonising directive, allowing member states to introduce additional provisions where they see necessary, for the regulation of domestic markets. The UK already has one of the most sophisticated and competitive insurance markets in the EU, with a contribution of £29 billion to UK GDP in 2012. Therefore, the regulation must be robust enough for the large and diverse market.

The extension in the scope of the directive contains specific information provisions which will likely add cost and complexity to the insurers’ direct sales processes. The new directive lays out stricter and more professional requirements. Member states will need to establish and publish mechanisms to effectively control and assess the knowledge and competence of insurance and reinsurance intermediaries and employees of insurance undertakings, based on at least 15 hours of professional training or development per year. It will also extend the regulations, covering people not only acting on behalf of insurers, but also to those who widely assist in the administration and performance of policy contracts, i.e. the customer service representatives handling any policy claims.

The directive also looks to change the regulations surrounding ancillary insurance intermediaries, extending to those who do not meet three requirements, including:

• The products must not cover life insurance or liability risks unless that cover complements the product or service which the company provides as their primary service
• The risk of breakdown, loss of, or damage to, the good or the non-use of the services supplied by that provider
• Damage to, or loss of, baggage and other risks linked to travel booked with that provider.

The directive does, however, remove the requirement to regulate travel insurance and extended warranty for motor vehicles, when sold as add-on products. However, the government has commented that it believes to ensure a level playing field is kept between insurers, travel insurance as an add-on should be regulated to the level it is as a standalone product. This is due to the evidence of mis-selling and complaints which have been filed. Thus, the UK Government intends to continue to regulate add-on travel insurance beyond the requirements of IDD.

The directive does confirm that insurance distribution regulations now extend to websites and other media that provide price comparison capabilities, specifically when the customer is directly or indirectly able to purchase an insurance contract using the website.

An important final introduction to note is the two principles it outlines for insurers to follow, which are:

• “Always act honestly, fairly and professionally in accordance with the best interests of the customers”
• That all information must be “fair, clear and not misleading.”

This could be the beginning of EU level principles-based regulation.

Future-proofing your transition

The IDD, although significant, looks to minimise disruption to UK firms, with a priority to protect insurance customers. In order to make a smooth transition, Crealogix provides future-proof solutions in digital customer communication. Offering a wide range of modules to assist with customer relationships and provide an advisory workbench, we help to ensure companies remain compliant throughout the transition to the new legislation. Interested? Contact us today!

Image Source: Insurance Journal