Insurance update - Europe

Publication November 7, 2014


Introduction

In this update we summarise the key issues arising from the recast Insurance Mediation Directive, now known as the Insurance Distribution Directive. EIOPA has launched a consultation on guidelines for product oversight and governance for consumer products. The guidelines follow the approach the UK’s FCA has taken to product design, target market and oversight arrangements. A recent case in the High Court considered the jurisdiction of the FOS to consider a complaint brought by an insured person under a D&O policy for protection against liability in their role as a director. Finally, we report on recent developments in the Italian insurance market including new measures allowing insurers to grant financing.

The Insurance Distribution Directive – 10 things to know about the proposals so far

Since May 2014 there have been published six compromise texts of the directive to revise the regulation of insurance mediation – now called the Insurance Distribution Directive (IDD).

The directive is expected to be adopted by Spring 2015 with transposition within two years meaning that the revised rules for the distribution of insurance products may be in effect in early 2017.

Set out below are key issues relating to the proposals in the IDD.

  1. Revised scope. The IDD is a minimum harmonisation European Directive that will be applied to intermediaries and also to insurance and reinsurance undertakings who sell direct to their customers. Claims management, loss adjusting and expert claims appraising are not within scope of the draft IDD according to the latest compromise text.
  2. Introducing no longer included. Insurance distribution includes advising on, proposing or carrying out work preparatory to a contract of insurance or assisting in the administration and performance of such contracts, in particular in the event of a claim. Notably, the activity of ‘introducing’ is not within the definition of insurance distribution (as it is under the current Insurance Mediation Directive (IMD)). Accordingly, once in force there will no longer be any need for those merely introducing customers to brokers or insurers (or providing data on policyholders to insurers) to be registered.
  3. Registration of all intermediaries. Intermediaries (i.e. those distributors who are not insurers or reinsurers selling directly) are required to be registered with a competent authority in their Home Member State. Where a distributor is responsible for the activities of an intermediary (for example, an Appointed Representative) they will have responsibility to ensure that the intermediary meets the conditions for registration and for registering that intermediary with the relevant competent authority.
  4. Overriding requirement to act in customers’best interests. The IDD requires that all insurance distributors should act ‘honestly, fairly and professionally in accordance with the best interests of its customers’. This requirement imposes a high standard upon all distributors (including direct sellers and those distributing to professional customers) to consider the interests of customers in their business. This could have potentially far reaching consequences as was seen in the application of Treating Customers Fairly by regulators in the UK. Furthermore, distributors are required to ensure that they do not remunerate or assess the performance of their employees in a way that conflicts with the duty to act in the best interests of customers. In a move similar to the recent tack taken by the Financial Conduct Authority (FCA), the draft IDD also requires firms to operate and review a process for the approval of each insurance product they offer and to review any significant adaptations of existing products before they are marketed or distributed to customers. This process requires firms to identify target markets and ensure that risks to the target market are assessed and managed.
  5. Conflict management requirements for investment products. The IDD introduces higher standards of disclosure and conflict management for Insurance-based Investment Products (IBIPs). These are products that offer a maturity or surrender value that is dependent on market fluctuations. Where organisational measures are insufficient to ensure, with reasonable confidence, that risks of damage to the customer cannot be prevented, the distributor is required to disclose the general nature and source of the conflict. The European Commission is given powers under the IDD to introduce delegated acts in order to define the steps that distributors might reasonably take in order to identify, prevent, manage and disclose conflicts and to establish criteria for determining the types of conflicts that may damage the interests of customers or potential customers. The inclusion of the conflicts measures and supporting delegated acts reflects similar requirements in the Markets in Financial Instruments Directive (MiFID). In addition, insurance distributors will be subject to the requirement in the measures being developed for packaged retail investment and insurance-based investment products (PRIIPs) to provide customers with a key information document (or ‘KID’).
  6. Conflict measures expedited into ‘IMD 1.5’ by MiFID II. In order to ensure that MiFID type conflicts measures are introduced for IBIPs in advance of agreement on the IDD, Article 91 of MiFID II introduces a new Chapter IIIA into the IMD in a measure being called ‘IMD 1.5’. Chapter IIIA introduces the requirement for insurance intermediaries and direct sellers to identify conflicts and disclose the existence of conflicts where required. Similar to the current draft of the IDD, IMD 1.5 requires the European Commission to introduce delegated acts to define the steps that distributors might take to identify and manage conflicts and to identify particular types of conflicts. In its consultation, the European Insurance and Occupational Pensions Authority (EIOPA) proposes using very similar wording to that applied in MiFID for both the identification of conflicts and types of conflict scenarios. It is likely that this IMD 1.5 approach will be replicated in the IDD, once finally agreed.
  7. Enhanced professional requirements. Those persons carrying out insurance or reinsurance distribution will be required to meet certain competency requirements and comply with obligations for continuing professional development, taking into account the nature of the products being sold and the type of distributor (i.e. taking into account the variances between tied agents, commercial brokers and IFAs). These include requirements for continuing professional development. 
  8. Disclosure and transparency. Before the conclusion of an insurance contract, intermediaries are required to provide details about themselves and must describe to their customer the nature of their remuneration and whether the contract will work on the basis of a fee or commission (or other type of arrangement). The IDD excludes these obligations where the distribution relates to large risks, reinsurance or for professional customers. The European Commission proposal for a revised IMD had originally mandated commission disclosure after a 5 year transitional period for all insurance policies. Insurance undertakings will be required to disclose the nature of the remuneration received by its employees in relation to the contract sold (i.e. bonus payments). The latest European Council compromise text enables Member States to restrict the payment of commission as has been done in the UK under the Retail Distribution Review rules in operation since December 31, 2012.
  9. Online selling and aggregators. The IDD recognises the use of websites in distribution and in particular includes aggregator sites within scope. In addition, the IDD recognises that pre-contractual information can be provided to customers via a website.
  10. Cross-selling disclosures. When a product is offered with another service or as part of a package the distributor must inform the customer whether it is possible to buy the different components separately and if so they must provide an adequate description of the different components as well as separate evidence of costs and charges.

For further information please contact Laura Hodgson.

EIOPA consults on product governance guidelines for competent authorities

EIOPA has decided to follow the FCA and develop guidelines for Member State competent authorities on product oversight and governance for consumer products. This represents the developing move away from consumer protection measures at point of sale (i.e. status disclosure and product information) towards a more intrusive and pre-emptive regulatory approach. Clearly, like the FCA, EIOPA will expect firms to have in place advanced systems in order to ensure that products are not sold to the wrong markets.

This consultation follows a mandate given by the Joint Committee of the European Supervisory Authorities (ESAs) after it published a Joint Position of the ESAs on Manufacturers’ Product and Oversight & Governance Processes (November 2013). EIOPA sees its mandate to issue guidelines in the light of Article 41(1) of Solvency II: ‘Member States shall require all insurance and reinsurance undertakings to have in place an effective system of governance which provides for sound and prudent management of the business’.

Among the implications of the guidelines is that firms will need to take a much more robust approach to product testing. This may include undertaking stress-tests which take into account changes in the financial strength of the firm as well as reviews of how policy terms and conditions may impact the target audience and whether products may be affected by changing tax environments.

For the general insurance market, EIOPA suggests that an assessment of a product may include a review of the expected claims ratio and claims payment policy. This would require firms to review products should the claims ratio be higher or lower than expected. Firms would also have to take into account whether products overlap with coverage already provided to customers. Terms and conditions should be reviewed to see if they meet the needs of the target audience and reviewed to ensure that that audience understands the policy terms and limitations.

For the investment market, product testing should consider what would happen to the risk and reward profile of the product following changes to the value and liquidity of the underlying assets, how the risk-reward profile of the product is balanced and how might the tax environment change the product outcomes.

EIOPA is seeking feedback on the following 12 guidelines:

  • Establishment of product governance and oversight arrangements.
  • Role of the manufacturer’s administrative, management or supervisory body.
  • Review of product governance and oversight arrangements.
  • Management of conflicts of interest in product design.
  • Target market.
  • Knowledge and ability of staff involved in the design of products.
  • Product testing.
  • Product monitoring.
  • Remedial action.
  • Distribution channels.
  • Outsourcing of the product design.
  • Documentation of product governance and oversight arrangements.

Responses are due by January 23, 2015.

For our insight into product governance please refer to our briefing Beyond law: understanding the scope of conduct regulation.

For further information:
EIOPA Guidelines on product oversight and governance arrangements by insurance undertakings

High Court rules that FOS erred in accepting jurisdiction for complaint against broker under D&O policy

R (on the application of Bluefin Insurance Services Ltd) v Financial Ombudsman Service Ltd [2014] EWHC 3413 (Admin)

The High Court gave judgment in a judicial review claim brought by Bluefin Insurance Services (claimant), an insurance broker, challenging a decision made by the Financial Ombudsman Service (FOS) to accept jurisdiction over a complaint made against the claimant.

The claimant originally acted as a broker for a Directors and Officers (D&O) insurance policy taken out by Betbroker Ltd. Mr Lochner, founder, CEO and shareholder of Betbroker, benefitted from the D&O policy as an ‘insured person’. A claim was brought against Mr Lochner for allegedly dishonest misrepresentations made in the course of fund-raising on behalf of the Betbroker group. Litigation commenced in 2011 and Mr Lochner sought the protection of the D&O policy. The insurer rejected his claim contenting that it had not received any notice of a claim or circumstance likely to give rise to a claim pursuant to the policy terms. 

Mr Lochner claimed to have notified the claimant (the broker) of the potential claim before the policy expired but the claimant failed to pass that information on to the insurer. Consequently, Mr Lochner brought a complaint to the FOS against the claimant.

In its decision of May 3, 2013, the FOS found that it did have jurisdiction to investigate Mr Lochner’s complaint and he was an ‘eligible complainant’, in this case ‘a consumer’, for the purposes of the Dispute Resolution: Complaints (DISP) section of the Financial Services Handbook. The FOS reasoned that the claim under the D&O policy related to a legal action against Mr Lochner personally and that his complaint concerned a loss of policy benefits that would go to him as an individual rather than his former company. The FOS decided that Mr Lochner was complaining on his own behalf and was, therefore, acting outside his trade, business, or profession. As such, Mr Lochner satisfied the DISP definition of a consumer.

The High Court ruled that ‘this was a case where the FOS decision was one of precedent fact and, upon its being challenged in judicial review proceedings, it is a decision which the court has to take, rather than being limited to review the decision of FOS on conventional judicial review grounds’. In giving judgment, Wilkie J then went on to consider whether the FOS was wrong to conclude that Mr Lochner was ‘a consumer’ and found in favour of the claimant concluding that, as an issue of precedent fact, Mr Lochner did not fall within the compulsory jurisdiction of the FOS as he was not an eligible complainant.

This is an important case for a number of reasons. It determines that it is for the courts to determine whether eligibility is a question of precedent fact. Furthermore, the case reviews case law on who is a consumer and draws boundaries around the eligibility of natural persons seeking redress from the FOS in relation to D&O policies taken out for protection against liability in their role as directors.

For further information:
R (on the application of Bluefin Insurance Services Ltd) v FOS [2014] EWHC 3413 (Admin)

Insurers allowed to grant financing

On October 22, IVASS, the Italian insurance regulator, issued a new measure (the Provision) aimed at implementing the provisions of Law Decree no. 91 of 24 June 2014, converted with amendments into Law no. 116 of 11 August 2014 (Competitiveness Decree).

The Competitiveness Decree allows Italian insurance companies to grant financing directly to borrowers (other than individuals and micro-enterprises) for the purpose of widening the range of potential lenders and boosting access to credit.

Insurers shall adopt a ‘financing plan’, to be submitted to IVASS for evaluation, and they are allowed to consider such financings as investments covering their technical provisions, up to certain thresholds which have been set by the Provision.

Insurers must be assisted by a bank or financial intermediary in the activity of selecting borrowers, and such bank or financial intermediary shall retain an interest in each transaction, until the expiration of the transaction (but such interest is transferable to other banks or financial intermediaries). Alternatively, insurers may seek an authorisation from IVASS to directly carry out the activity of selecting borrowers.

Further implementation measures are expected to regulate access by insurers to the credit risk database kept by the Bank of Italy and periodic reporting to the Bank of Italy in respect of such financing business.

This development is consistent with wider efforts to encourage investment by insurers in the European economy.

For further information please contact Nicolò Juvara.

IVASS consults on a new draft Regulation regarding authorisation to conduct insurance activities

In September 2014, IVASS commenced a public consultation regarding a new draft Regulation aimed at updating rules concerning:

  • the authorisation procedure to conduct insurance activities and the public register of insurance companies; and
  • the provisions regarding ‘interlocking directorates’, by implementing legislative measures which entered into force in 2011.

This will change the documentation that insurers are required to provide to IVASS during the procedure of registration to the public register of insurance companies incorporated in Italy. Insurers will now be required to provide:

  • a specific self-certification declaring that each of the companies’ managers, directors and auditors do not hold positions with competitor companies; and
  • a company declaration regarding the existence, according to the policy adopted by the administrative body, of eligibility requirements for the position of head of the risk management, compliance and internal audit functions.

Finally, the rules concerning authorisation to conduct insurance activities have been formalised in a draft Regulation which introduces many changes that can improve transparency in the insurance market.

For further information please contact Nicolò Juvara.


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