EU Directive 2016 (97) of 20 January 2016 on insurance distribution (the Insurance Distribution Directive or IDD) sets out a new and enhanced European legal framework for insurance (and reinsurance) distribution applicable to risks inside the EU. Since publication it has been supplemented by two further Delegated Regulations from the European Commission, C(2017) 6218 and 6229, which are directly applicable in Member States.
Key aims of the IDD are to afford greater protection to customers and to further harmonise insurance and reinsurance distribution.
Impact on marine insurers
The following changes are of particular importance for marine insurers:
- To ensure a level playing field for customers whatever the distribution channel used, the IDD widens the scope of existing regulation beyond intermediaries such as brokers and agents (e.g. managing general agents with delegated underwriting and claims authority) to all sellers of insurance products e.g. yacht chartering companies, freight forwarders and removal companies, which sell insurance directly to their customers as part of a wider package.
- There is a much enhanced pricing transparency requirement. Intermediaries have to state the nature of their remuneration - although there is no obligation to disclose the level of the remuneration itself. Whatever the nature of the remuneration arrangement it must not be in conflict with the obligation to ensure appropriate insurance coverage for the customer. Implementation of this requirement is proving particularly controversial in a number of Member States e.g. in Germany there has been intense legislative discussion about a provision that would prohibit broker remuneration other than by way of payments from insurers with no fee to be charged to the insured, a provision that was ultimately defeated at a recent Parliamentary session.
- There are new rules on product review – insurers and intermediaries that design new or significantly amend existing products must have an internal and thorough Product Oversight and Governance (POG) process in place to ensure that products are and remain suitable for their target market. This requirement therefore applies both before products are first marketed and on an ongoing basis. These new rules do not, however, apply to large risks, as defined in Directive 2009/138/EC - that definition includes loss or damage to ships and to goods in transit.
- Member States are to ensure that insurance distributors are under a duty always to act in the best interests of their customers, to ensure that their remuneration arrangements do not conflict with that duty, to ensure that customers receive clear and fair information about the product being sold and that distributors are properly trained and qualified.
Delayed entry into force
These changes are both significant and complex. In the UK alone, the FCA has published three lengthy Consultation Papers on implementation of the IDD. The changes will impose significant additional burdens on insurers. Certainly their impact on insurance distributors such as freight forwarders is not yet fully appreciated within the industry.
The IDD is set to enter into force on 23 February 2018. In recognition of the complexities involved and to allow the insurance industry sufficient time to properly implement the changes required the European Commission has been requested to delay entry into force. At the time of writing we anticipate that a postponement to 1 October 2018 will be granted but no extension has as yet been officially confirmed.
I am grateful to my colleague, Dr Kathrin Feldmann, in our Düsseldorf office for her assistance with this article.