The Insurance Distribution Directive: Time to implement!Published on 01/09/18
From 1 October 2018, the Insurance Distribution Directive (‘IDD’) 2 will become an everyday reality for insurance and reinsurance distributors across the European Union. Fair competition, greater transparency and consumer protection will become the order of the day… naturally requiring a bit of compliance effort! Let’s prepare for this together in 5 simple steps.
The IDD aims at ensuring minimum harmonization of insurance distribution regulation across the EU, creating a ‘level playing field’ for insurance intermediaries and insurance distribution, regardless of the channel customers use to purchase their insurance products.
The purpose is to ensure consistent prudential standards for intermediaries as well as significant raising conduct standards, improving consumer protection and effective competition. The new Directive will apply to Insurers, Insurance Intermediaries and Ancillary Insurance Intermediaries.
Obviously, the conduct requirements applying to all distributors of insurance products vary according to the nature of the business, policyholders (i.e. personal or legal entities) and distribution channels used.
Main areas to consider
Employee Knowledge and Competence
The IDD stipulates that all customer-facing employees require a sound reputation. Each employee must at least have a clean criminal record as per police conduct certification and never filed for bankruptcy.
In addition to this, such employees must attend professional training on a regular basis. In fact, the IDD requires at least 15 hours per year of Continuing Professional Development (CPD). Such CPD requirement applies to those employees who are either directly involved in the carrying out of the company’s insurance distribution activities, those responsible for the supervision of such employees and those within the management structure with responsibility for the firm’s insurance distribution activities.
Professional Indemnity Insurance
All intermediaries have in place a professional indemnity insurance or a comparable guarantee with minimum levels of cover of € 1,250,000 per claim per year, and € 1,850,000 per year in aggregate for all claims.
Conduct of Business
The IDD introduces general principles that apply to all insurance distributors. In principle:
- Firms must act honestly, fairly and professionally in accordance with their customers’ best interest
- Firms must communicate in a way which is clear, fair and not misleading. Marketing materials must be clearly identifiable as such
- Remuneration of a firm or its employees, and performance management of employees, must not conflict with the duty to act in accordance with their customers’ best interests.
The IDD obliges insurance distributors to disclose certain information before concluding a contract with the policyholder. Such distributors are obliged to disclose:
- Whether they are an insurer or an intermediary
- Whether they will provide advice
- Whether they act for the customer or the insurer (applicable only to intermediaries)
- Shareholding links between the intermediary and any insurers. This applies to any shareholding of 10% or more
- Nature of the remuneration in relation to the insurance contract and whether they work based on a fee/commission (applicable only to intermediaries).
An Insurance Product Information Document (‘IPID’) shall be provided to all consumers. Such document must include standard information on the product. The IPID has to be ‘short, stand-alone, comprehensible, accurate and not misleading’. Such document will provide clearer information on non-life insurance products, which will ultimately help the consumers to make more informed decisions.
In case of bundled products, companies will be requested to disclose information on each component in the package and its costs and charges. Furthermore, customers must be able to purchase them separately.
Product supervision and governance
One of the main objectives 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.
These rules on product oversight will ultimately be beneficial to all consumers as such rules will help consumers avoid buying products that do not meet their needs.
Implementation of the Insurance Distribution Directive in full swing!
We are working closely with our partners to ensure we are IDD-compliant from Day 1. Fair competition, product transparency and professional distribution teams are what we aim for. We will be happy to guide you further on any aspect of the new regulation over the phone or by email… So get in touch and let’s make this happen!
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