Topic Insurance intermediaries Insurance distribution
Article from BaFin's 2017 annual report
Implementation of the Insurance Distribution Directive
The EU member states were required to transpose the IDD, the Insurance Distribution Directive1, into national law by 23 February 2018 (see info box "Application date delayed").
German legislators therefore resolved the "Act Implementing Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on Insurance Distribution and Amending Further Laws" and promulgated the Act in the Federal Law Gazette on 28 July 2017.2 Some of the provisions, such as the ban on special payments and the sharing of commissions (section 48b of the Insurance Supervision Act), came into force with immediate effect on the following day.
Note:Application date delayed
.In mid-November 2017, the EU Commission accepted a proposal by the EU Parliament and the member states to push back the start date for the application of the IDD by the insurance industry from 23 February to 1 October 2018. This does not apply to the member states, however; they are now required to transpose the IDD into national law by 1 July 2018 at the latest. The amendments to the Insurance Supervision Act, the German Insurance Contract Act (Versicherungsvertragsgesetz) and the German Industrial Code (Gewerbeordnung) adopted by German legislators in July 2017 are not affected by this, and have applied without restriction since 23 February 2018.
The amendments to existing legislation are not derived solely from the IDD. The ban on special payments and the sharing of commissions (section 48b of the Insurance Supervision Act) and the pass-through provision on crediting customers with commissions included in premiums (section 48c of the Insurance Supervision Act) constitute particular features of national law for the purpose of consumer protection.
BaFin will pay particular attention to compliance with the pass-through provision in future in order to support the promotion of fee-based advisory activities intended by the legislation. The aim is that policyholders should benefit from the premium reductions provided for in section 48c of the Insurance Supervision Act. At the same time, however, there is no intention to neglect traditional forms of distribution such as insurance mediation. BaFin's understanding of the delegated regulation on insurance-based investment products is that commission-based distribution should not be banned or hindered disproportionately, and also bases its supervisory practice on this understanding.
Legislative acts relating to the IDD
At the end of December 2017, two delegated regulations based on the IDD were published in the Official Journal of the European Union, dealing primarily with the distribution of insurance-based investment products3 and the product approval process4. In addition to the delegated regulations of the EU Commission, an implementing regulation was adopted which sets out a standardised presentation format for a product information document for (non-life) insurance products.5
Furthermore, EIOPA published the "Guidelines under the Insurance Distribution Directive on Insurance-based investment products that incorporate a structure which makes it difficult for the customer to understand the risks involved", on the basis of Article 30(7) and (8) of the IDD. The Guidelines set out criteria enabling national supervisory authorities as well as insurance intermediaries and/or insurance undertakings to assess whether an insurance-based investment product is complex.
Insurance-based investment products classified as complex should not be allowed to be distributed without advice by telephone or online (execution-only sales). Execution-only sales are possible in principle for non-complex insurance-based investment products, provided that the relevant member state decided to make use of the execution-only option (Article 30(3) of the IDD) when it transposed the Directive, and provided that the further pre-conditions of Article 30(3) of the IDD are met. BaFin will incorporate the Guidelines into its supervisory practice.
Product approval process
Article 25 of the IDD specifies product oversight and governance requirements for the distribution of insurance products, frequently referred to as the "POG" requirements. The product approval process based on the IDD, under section 23 (1a) to (1c) of the Insurance Supervision Act, and the European requirements apply to primary insurance undertakings falling within the scope of the Solvency II Directive. Insurance products whose purpose is to insure against large risks within the meaning of section 210 (2) of the Insurance Contract Act are not affected.
The product approval process, which is intended to protect consumers, formulates requirements for the product manufacturer, but also for insurance undertakings if they take responsibility for distribution on behalf of other insurers, especially within groups (see section 23 (1c) of the Insurance Supervision Act). The product approval process forms part of the insurance undertaking's system of governance and is subject to the proportionality principle.
Product approval policy
In their capacity as product manufacturers, insurance undertakings are required to develop a product approval policy which defines the requirements for the product approval process, and then to apply that product approval process for each specific new insurance product or each significant adaptation of an existing insurance product.
The product approval policy must be set out in a written internal document – described as the "product oversight and governance policy" within the meaning of the Delegated Regulation referred to above6.
In the product approval process, the insurance undertakings must in particular identify a target market for the insurance products they have manufactured. The target market describes the targeted group of customers at an abstract level. The insurer must consider whether the product meets the needs, objectives and characteristics of the target market over the course of its entire life. Distribution outside the target market may be permitted. Relations with customers are governed by the civil law requirements for providing customers with advice and information.
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