It is currently expected that the IDD will come into force in December 2015. It will be applicable two years after its entry into force.

The IDD replaces the Insurance Mediation Directive (IMD) of 2002. However, unlike the IMD, it regulates the entire distribution chain. It therefore applies to all distributors of insurance contracts, not just brokers and tied insurance intermediaries but direct distribution by insurance undertakings as well. For this reason, it was renamed the Insurance Distribution Directive.

However, the new IDD does not apply to insurance policies mediated as an ancillary service with the sale of another product and for which the premium does not exceed EUR 600 annually, or EUR 200 in the case of contracts of up to three months. This could affect travel cancellation insurance, among other things. Nevertheless, Member States must ensure that the essential requirements of the IDD are also met for insurance mediation businesses which are not covered.

No ban on commissions

There are no plans for a ban on commissions in the mediation of insurance businesses. Commissions bans such as already exist in Scandinavia and the Netherlands, would have had serious consequences for Germany. In Germany, it is common practice for the insurer to take on the commission of the intermediary initially and then finance it from the initial premiums, for instance using the so-called zillmerisation method. This distribution model would no longer be possible if commission were banned. Instead, the IDD stipulates that Member States can decide whether they want to ban such distribution channels or not.

The IDD does not impose a general duty to disclose intermediaries' commissions. Rather, insurers generally only have to inform their customers of the basis of the remuneration, i.e. how it is calculated and who pays it – namely the customer, either directly to the intermediary or indirectly via the premiums. Nevertheless, Member States have to ensure that the remuneration does not provide incentives which could harms customers' interests. There are stricter regulations only for insurance-based investment products within the meaning of the new PRIIPs Regulation¹⁾. For such products, the premium includes a savings portion which is invested in investment products for the customer.

Increased transparency

However, the trilogue parties agreed on higher transparency requirements. These include an obligation for intermediaries to disclose to customers whether they are acting as tied insurance intermediaries, brokers or employees of an insurance undertaking.

Moreover, the intermediaries have to specify whether they hold shares in an insurance undertaking.

Information requirements and conduct of business rules

The IDD contains specific information requirements and conduct of business rules for the distribution of insurance products. In particular, these include provisions to avoid conflicts of interest, on transparency regarding sales incentives for distributors and on advice and information for the customer. The latter must be suitable and appropriate.

For insurance-based investment products (PRIIPs), the Commission is to specify the conduct of business rules pursuant to the IDD in delegated acts. For insurance products without an investment element, in particular term life and property insurance, there are no plans to further specify the conduct of business rules.

Insurance product information document for property insurance policies

Pursuant to the IDD, providers of property insurance will in future have to provide their customers in Europe with an insurance product information document before the contract is signed. This document will present the key features of the insurance product in an understandable form and in the language of the Member State where the product is distributed. The contents of the information documents will largely correspond to those already prescribed by law for insurance companies in Germany today.

The IDD authorises the European Insurance and Occupational Pensions Authority (EIOPA) to enact implementation standards with provisions on the form and content of the production information sheets for property insurance policies and to carry out a consumer study on these. The standards are to apply a year after the entry into force of the IDD.

Authorisation requirement

Member States can still decide unilaterally whether insurance advisers require authorisation from the supervisory authority. The Directive merely prescribes that they have to register.

Cross-selling and product development

The IDD also contains provisions on cross-selling and product development processes.

If an insurance product is offered together with a non-insurance product (cross-selling), the intermediary must inform the customer whether he or she can also buy the products separately. If this is the case, the intermediary must inform the customer of the content of the components and their costs separately and generally also offer the products separately.

The regulations on product development processes are directed at insurers as well at distributors who manufacture insurance products. The latter are very rare in Germany. The IDD prescribes that persons manufacturing insurance products must record the product development process in writing. This should include the target group, the relevant risks and the marketing strategy. This information should be made available to all distributors of the product. The distributor must be familiar with the product and pay attention to the manufacturer's specifications, in particular regarding the target group.

The IDD empowers the Commission to adopt principles for product development processes. The principle of proportionality must be taken into account on three levels: with regard to the activities performed, the nature of the insurance products sold and the nature of the distributor.

Minimum harmonisation

Like the Markets in Financial Instruments Directive II (MiFID II), which regulates the purchase of investment products, the IDD is also intended to create standardised conditions in the European Union. However, while MiFID II aims at a maximum harmonisation of national regulations, the IDD is designed as a minimum harmonisation directive. That means that Member States have leeway in its implementation.

The IDD therefore contains less strict provisions than MiFID II, particularly about commissions and the target group. However, Member States can introduce more stringent provisions or decide to make the advisory business subject to an authorisation requirement.

Important authorisations in the Insurance Distribution Directive

Authorisation for delegated acts

• Article 18: implementing technical standard for insurance product information documents for property and casualty insurance
• Article 21a (2): principles for product development processes for insurance contracts
• Article 23: criteria to avoid conflicts of interest when distributing packaged retail and insurance-based investment products (PRIIPs)
• Article 24: criteria for transparency relating to sales incentives for distribution (including remuneration and commissions) of PRIIPs
• Article 25: criteria on the suitability and appropriateness of advice and information for customers about PRIIPs
• Article 8: authorisation of the European Insurance and Occupational Pensions Authority (EIOPA) to adjust the level of professional indemnity insurance for distributors every five years from 31 December 2017 on an index basis.

Authorisation for guidelines

• Article 25(5a): guidelines on the commercial assessment of PRIIPs which are structured in such a way that the risk associated with the product is difficult for customers to understand

Options of Member States

• Application of the requirements pursuant to Articles 24 and 25 also for professional clients within the meaning of the Markets in Financial Instruments Directive II (MiFID II) (e.g. supervised entities and institutional investors)
• Introduction of a ban on commissions

Footnote:

¹⁾ Packaged Retail and Insurance-based Investment Products Regulation. For more on this issue, see this article.