IDD Intermediary Policy

What is Insurance distribution?

Insurance distribution means to sell, propose to sell, advise on or carry out other work preparatory to the conclusion of an insurance contract, including dealing with claims after an insurance event.

The Insurance distribution Directive (IDD) regulates the activities of insurance intermediaries, insurance companies, their employees, ancillary insurance intermediaries as well as online distribution.

What is the IDD?

IDD is the abbreviation for Insurance Distribution Directive. It is directive issued by the European Union and which has been adopted by all the member states of the EEA.

In 2003, with the Mediation guideline 1, the first step was taken towards regulating insurance mediation. This process has continued since then, with the explicit goal of enhancing transparency in the mediation process, harmonising the national rules in the different member countries and improving customer protection. The IDD applies not only to intermediaries but to ¬all forms of insurance distribution, including insurance companies, where new and stricter rules for the products sold, advice and documentation apply. This is being backed up with new sanctions towards the companies that do not comply.

The IDD has been fully implemented in Liechtenstein.

The IDD only lays out a legal framework which the individual member states must follow, when adapting the local national law. There is explicit mention of minimum harmonisation. However, this does not prevent the individual EEA countries from implementing stricter rules for their own national markets.

With the insurance distribution directive (IDD) and the regulation on basic information sheets for packaged investment products for small investors and insurance investment products (PRIIPs regulation), the European legislator has created a new term in insurance law: Insurance based investment product (IBIP). This takes into account the fact that life insurance contracts are more than just a remedy to cover biometric risks but may also contain an investment component with opportunities and risks for the policyholder.

According to the PRIIPs Regulation, an IBIP is any life insurance contract that offers a maturity or surrender value that is wholly or partially exposed to direct or indirect market fluctuations. In addition, certain financial products are explicitly excluded from the scope.

Insurance investment products are subject to stricter regulations for insurance companies and intermediaries regarding the product approval process, proper advice, conflicts of interest and remuneration.

Who will benefit from the IDD?

Consumers will benefit from the Directive through improved sales standards and the extension of those standards to new areas of protection, for example to insurance-based investment products. Consumers will receive basic standardised information about the insurance policy through the Insurance Product Information Document, which is expected to invite them to compare offers and shop around for products best suited to their needs.

National supervisors will benefit from increased certainty in the rules that they apply to insurance businesses, especially as regards cross-border sales, sanctions and consumer protection.

Insurance distributors will benefit from fair competition with a level playing field. The Directive is expected to restore consumer confidence and lead to expanded business opportunities, including greater options for cross-border sales. Lower costs of operating cross-border and higher consumer demand is expected to increase sales and spur innovation in the industry.

What are the requirements of the IDD for insurance distributors?

The directive requires only insurance distributors who are intermediaries (such as brokers or agents) to be qualified and registered. As a minimum, insurance intermediaries must demonstrate knowledge of the terms and conditions of the insurance policy they sell, the applicable law, knowledge of the insurance market, minimum financial knowledge and complaints and claims handling.

Before the conclusion of an insurance contract, all insurance distributors, whether intermediaries or not, must disclose their identity, whether they provide advice as well as information on potential conflict of interests. They must inform customers about the source and the nature of remuneration. If they ask for a fee, they must disclose its amount.

The Directive also prescribes the way in which these disclosures must be made.

Some requirements relate to insurance undertakings. For example, insurance undertakings will have to ensure that the product approval processes are in place, before putting a product into the market and that the product is designed for a target market.

A further universal requirement of the Directive is that the insurance distributors need to check whether the product they offer meets the demand and needs of the customer.

This is how SIMTAL will support its intermediaries in the future with respect to IDD:

SIMTAL, provides you, as an independent insurance intermediary a unique and user-friendly customer onboarding platform which also includes Identification check and Anti-Money Laundering check, and assist you with all queries regarding technical support and organisational and regulatory issues, and not least – IDD. We assist you in fulfilling the Insurance Distribution Directive (IDD) criteria allowing you to service your customers in an efficient manner.

All necessary IDD requirements are specified in the onboarding portal, which is tailored to provide intermediaries with a powerful digital onboarding tool, assisting you in your discussions with your customers

What are the rules for “First Information”?

In good time before the conclusion of an insurance contract, you make the following disclosures to the customer:

  1. Your identity and address and that you are an insurance intermediary;
  2. Whether you provide advice about the insurance products sold;
  3. The procedures referred to in Article 14 of the IDD enabling customers and other interested parties to register complaints about insurance intermediaries and about the out-of-court complaint and redress procedures referred to in Article 15 of the IDD;
  4. The register in which you have been included and the means for verifying that you have been registered; and
  5. Whether you represent the customer or are acting for and on behalf of the insurance undertaking;
  6. The type of compensation you will receive,
  7. Whether the remuneration is to be paid directly by the customer (fee) or is included in the premium as a commission or other remuneration
  8. whether it has a holding, direct or indirect, representing 10 % or more of the voting rights or of the capital in a given insurance undertaking;
  9. whether a given insurance undertaking or parent undertaking of a given insurance undertaking has a holding, direct or indirect, representing 10 % or more of the voting rights or of the capital in the insurance intermediary;

The transmission must generally be made on paper. Under certain circumstances the information required may be provide on the website. SIMTAL will provide such on our website. Our system is fully compliant and able to manage electronic transmissions.

All pre-contractual information should be accessible free of charge

Please note that you must also submit the status-related first information on your homepage when you first contact business and that it is “easily recognizable, immediately accessible and always available”.

What effects does the IDD have on the advisory process?

Where advice is provided prior to the sale of an insurance product, in addition to the duty to specify the customers’ demands and needs, a personalised recommendation should be provided to the customer explaining why a particular product best meets the customer’s insurance demands and needs.

Customer onboarding:

During the onboarding process, the customer can completely waive this consulting process by ticking the box on the onboarding platform. This will confirm that he abstains from having the full consultation. He will at that time be made aware of the risks and possible consequences of not taking the full consultation.

For you to avoid possible legal consequences it is crucial that the customer specifically declares that he waives the full consultation.

Distance selling:

The principles of advice and documentation also apply to distance selling. Here, the customer can also abstain from the full consultation. This can be done in text form, for example in the form of a letter or e-mail.

The complete waiver is probably not IDD-compliant, because Art. 20 IDD requires standards for sales without advice. You are therefore subject to a legal risk if you generally work with the comprehensive waiver in distance selling.

What are the requirements for the sale of Investment Based Insurance Products?

You must generally carry out suitability tests. To do this, you must inquire about the customer’s knowledge and experience in the investment area, financial circumstances and, in particular, loss-bearing capacity, investment goals and risk tolerance. You may only recommend products that suit his/her requirements. If the customer does not provide sufficient information, you must at least carry out an appropriateness test. This must be based on the customer’s previous investment experience. This must always be combined with a warning. Certain non-complex IBIPs that have not yet been finally defined may also be sold without advice.

Which documents are to be given to the customer in the consultation process?

As part of the IDD implementation, a further expansion of the information overload for customers has been introduced. The insurer must create a product information sheet (in paper form or electronically) for each product. The intermediary must hand this over to the customer before concluding the contract. For Insurance Based Investment Products, the product information sheets are more extensive given the complexity of the products.

However, the insurer defines specific target markets for all product categories. You, as the intermediary, have the task of carrying out the comparison between the customer and the defined target market.

Consultation documentation?

Regarding the consultation documentation, the standard costs and remuneration (source and type) must be mentioned for all products. For each consultation the intermediary must specify why exactly the product, or the products were recommended in the proposed composition.

In the case of Investment Based Insurance Products, the requirements are expanding: Here, the knowledge of the customer, his financial situation, loss capacity, investment goals and willingness to take risks must be considered and documented. In addition, it must be documented whether the suitability test is carried out regularly (at least once a year) by the intermediary in the future.

Initial and continuing education

Training obligations

The directive stipulated that an intermediary must undergo training for a duration of at least 15 hours per year. It is unclear whether an examination or other means of verification of successful completion is required at the end of the annual training.

Who is obliged to undertake further training?

In addition to the well-known target group of insurance intermediaries, the persons involved in the back office of brokerage companies who are directly or significantly involved in insurance sales will also be affected by the obligation to further train in the future.

Are people in the management structure affected by the training obligation under IDD?

The following persons in the management of an intermediary company must undergo regular training under IDD:
The Chief Sales Officer
Any other person directly involved in sales
Any other member of the management who have a significant and creative influence of insurance sales.

Are part-time workers or marginally employed also fully obliged to undertake further training?

Part-time and marginally employed persons must also submit to the full further training obligation

What are the consequences if the obligation to continue training is not met?

The person obliged to undertake the training may be subject to sanctions if he/she does not meet the requirements of the obligation to continue training.

What are the consequences if the obligation to continue training is not met?

The person obliged to undertake the training may be subject to sanctions if he/she does not meet the requirements of the obligation to continue training.

Conflicts of Interest and Compensation

According to IDD, what does it mean to avoid conflicts of interest and to act in the best possible interest of the customer?

According to IDD, you must always act honestly and professionally with the customers best interests in mind. This means that you put the interests of the customer above your own financial interests.
There are therefore extensive obligations for the insurance intermediary:

  • Holistic risk analysis: identify, understand and meet customer needs
  • Objective product selection: the right product for the customer
  • Comprehensive documentation: meaningful advice documentation as evidence
  • Efficient customer care: Support with existing contracts and in the event of a claim

Requirements for remuneration systems affect the entire insurance industry, especially when it comes to the remuneration of insurance investment products. Insurers are not allowed to create incentives for their employees and intermediaries to offer customers less suitable products than are available. Above all, excessive sales targets, excessive closing commissions or those without adequate cancellation liability, profit or volume-dependent additional payments, and incentives dependent on certain product sales are critical.
If you have employees, you should stick to the same guidelines as insurers regarding sales targets, compensation and incentives.

Is there a commission ban?

This topic has been debated for a long time. Result: There is no general commission ban. According to the IDD, the EEA member states are free to decide whether to introduce such a ban. You may decide one of the following options:

The insurance intermediary must inform the customer in good time before the conclusion of an insurance contract about:

a) the type of remuneration received in connection with the insurance contract;
b) whether he works in connection with the insurance contract:
1. works based on compensation, i.e. the compensation is paid directly by the customer;
2. works based on a commission, i.e. the remuneration is included in the insurance premium;
3. works based on a different type of remuneration, including economic benefits of any kind that are offered or granted in connection with the insurance contract;
4. works based on a combination of the types of remuneration specified in items 1 to 3.

2) If the compensation is to be paid directly by the customer, the insurance intermediary will inform the customer of the amount concerned or, if this is not possible, of the method used for calculating it.

3) If, after conclusion of an insurance contract, the customer makes payments that are not ongoing premium payments or scheduled payments, the insurance intermediary or the insurance company shall also disclose the information in accordance with this article for each such payment.