Implementation of the Insurance Distribution Directive

The transposition of the Insurance Distribution Directive (IDD)¹ into German law was an important topic for BaFin in 2016. The directive is not required to be transposed into national law until 23 February 2018. However, an initial ministerial draft by the Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie – BMWi) was published on 22 November 2016; the government draft followed on 18 January 2017.² BaFin was involved in restructuring the existing national regulations together with the Federal Ministry of Finance (Bundesministerium der Finanzen – BMF) and was mainly concerned with requirements relating to the Insurance Supervision Act.

Manageable level of existing regulation

The new regulations on insurance distribution, and therefore the planned German implementation of the directive as well, will significantly alter the supervision of distribution-related activities. Under the provisions of the old directive on insurance mediation³ – currently still in force – the supervision of insurance distribution is based on the concept that it is sufficient to ensure the fitness and propriety of an intermediary in terms of commercial law. For this purpose, insurance undertakings are required to address distribution-related issues in particular in the context of risk management. This abbreviated summary makes it clear that, at the moment, the level of supervisory regulation is still manageable.

Changes due to the IDD

This will change with the implementation of the IDD. For example, the supervision of insurance undertakings is intended to start in future at the earlier stage of the product development processes. It will also be expected to ensure that conflicts of interest in distribution, i.e. between customers and undertakings, are avoided. Even if these points only represent small extracts from the regulatory framework, it is already clear at this point that the IDD will entail the implementation of a systemic change.

However, the new directive leaves scope for interpretation, since it makes use of indefinite legal concepts. According to the discussions on the implementation of the directive in Germany to date, this scope is expected to remain in place. As the supervisory authority, BaFin will therefore have to address in future the issue of what constitutes "appropriate" measures for the purpose of preventing conflicts of interest between intermediaries and customers, or what represents "adequate" remuneration for distribution.

The government draft also contains provisions tailored to the German market which do not derive from the Directive. These include, for example, the rules relating to the ban on special remunerations and therefore in particular to the ban on the sharing of commissions, as well as provisions applying to insurance consultants.

Delegated acts relating to the IDD

There will be further European regulations in the form of delegated acts, presumably in 2017, that will implement additional detailed provisions relating to the directive on insurance distribution. This project will run in parallel to transposition into national law.

The EU Commission instructed EIOPA to draw up proposals for the delegated acts provided for by the IDD by 1 February 2017. EIOPA consulted interested parties on the drafts of these proposals from July to October 2016. A public hearing on the subject took place in Frankfurt am Main on 23 September 2016.

• The content of EIOPA's proposals focuses on the following four topics:
• Product oversight and governance requirements for all types of insurance products (Article 25(2) of the IDD)
• Conflicts of interest relating to insurance-based investment products (Article 27f(4) of the IDD)
• Commissions/inducements relating to insurance-based investment products (Article 29(4) of the IDD)
• Assessment of suitability and appropriateness and reporting obligations relating to insurance-based investment products (Article 30(6) of the IDD)

59 responses to the consultation were received, of which 17 were from Germany. EIOPA has reacted to many of the criticisms by amending its proposals. The revised EIOPA proposals were submitted to the EU Commission on 1 February 2017. It remains to be seen to what extent the EU Commission takes the proposals into account for its delegated acts, since it is not obliged to do so.

Claims settlement by insurance brokers

By a judgment dated 14 January 2016, the Federal Court of Justice (Bundesgerichtshof – BGH) ruled that insurance brokers are in breach of the Legal Services Act (Rechtsdienstleistungsgesetz) if they settle claims on behalf of an insurer.⁴

For example, an insurance broker which had arranged a liability insurance contract for a textiles cleaning company settled a claim for the injured customer on behalf of the insurer.

In its judgment, the BGH made it clear that the settlement of insurance claims constituted a legal service within the meaning of the Legal Services Act. It stated that the settlement of claims on behalf of an insurance undertaking did not generally form part of the professional profile or activities of an insurance broker – not even as an ancillary service. In accordance with section 5 (1) of the Legal Services Act it was therefore not permitted.

The assumption that this was a permitted legal service also conflicted with section 4 of the Legal Services Act. Pursuant to that section, legal services which could directly affect the performance of another service obligation may not be provided if doing so would endanger the proper execution of the other legal service. This provision is intended to avoid conflicts of interest.

Brokers acting in the interests of the policyholder

The BGH explained that insurance brokers acting in the interests of the policyholder were under an obligation to take these interests into account even when performing a legal service for the insurance undertaking. That was precisely what could endanger the proper provision of the legal service with respect to the insurance undertaking.

The insurance brokers’ economic interest in settling claims for a particular insurance undertaking would frequently be greater than their economic interest arising from their relationship with an individual insurance customer whose contract they had previously arranged in return for a commission. In these circumstances, insurance brokers would have an incentive to represent the interests of the policyholder – which was their professional obligation – only in a restrained way. Section 4 of the Legal Services Act was intended to guard against influences of this kind.

In principle, the BGH does not rule out that in particular areas other than textiles liability insurance the insurance broker's activity profile has changed, or could change in future, to include the claims settlement for insurance undertakings. However, section 4 of the Legal Services Act would also apply in this event, and the settlement of claims would generally not be permitted anyway as a result of the conflict of interests described.

From the perspective of insurance supervisory law, this affects the insurance undertakings' compliance with statutory requirements in particular. They will have to modify the way in which they work together with brokers to reflect the provisions of the judgment.

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