Key reforms proposed include:
- An extension of the scope of the IMD to cover direct insurance sales as well as professional claims management and loss adjusting;
- Mandatory disclosure by insurance intermediaries of the nature (i.e. fee and/or commission), basis and amount of remuneration received as well as any variable remuneration received by individual employees;
- Stricter requirements for the sale of life insurance products with investment elements;
- Additional information requirements for the sale of bundled products; and
- A simplified procedure for cross-border entry to insurance markets across the EU, through the use of a single electronic database of cross-border insurance intermediaries.
The IMD has regulated the selling practices of all insurance products since its implementation in 2005. However, as a minimum harmonisation directive, it has been implemented ‘in substantially different ways’ by the Member States. This has resulted in fragmented insurance markets and inconsistencies, for example in information requirements. Particular concerns have arisen relating to insurance selling practices, e.g. conflicts of interest, and policyholder protection. The review of IMD and the proposals for IMD 2 are intended to achieve a level playing field between participants in insurance sales in order to
improve consumer protection, market integration and competition.
The IMD 2 proposals should be considered in the context of other European regulatory reforms concerning selling practices, conduct of business and investor protection as well as investment product disclosures, such as the review of the Markets in Financial Instruments Directive (“MiFID II”) and the proposals on packaged retail investment products (“PRIPs”).
Timing and current status
Following publication in July 2012, the proposals for IMD 2 are now under trialogue negotiations with the European Parliament and the Council of the European Union. The European Parliament’s Committee on Economic and Monetary Affairs (ECON), a key player in EU financial services legislation, produced a draft report on 14 December 2012 and is scheduled to vote on the proposal on 26 March 2013. The Parliament’s indicative plenary date to consider the proposal is 2 July 2013. IMD2 is expected to be adopted by the EU Parliament and Council during 2013/14 and enter into force about two years later.
Key provisions of IMD 2
The proposals for IMD 2 impose new requirements for insurance intermediaries to disclose the nature (i.e. fee and/or commission), basis and amount of remuneration they receive. The proposal will require (in lieu of disclosure on request) mandatory prior disclosure to clients of the amount of commission retained by the intermediary/paid by the insurer. This is very controversial in the general insurance sector across many countries.
For a transitional period of five years, the mandatory disclosure regime will apply to the sale of life products only, while the remuneration disclosure requirement in relation to non-life insurance products will be ‘on-request’ only (although customers must be notified of their right to request disclosure). At the end of the five-year period, the full mandatory disclosure regime will apply to both life and non-life products.
The European Commission will be able to specify further detail in relation to these requirements under delegated acts.
The remuneration disclosure requirements are intended to mitigate conflicts of interest between sellers and buyers of insurance products, and are a particularly significant new development.
The proposal also requires disclosure by both intermediaries and by insurers (in relation to direct sales) of sales bonuses and any other variable remuneration received by individual employees for ‘distributing or managing’ the insurance. Both the nature and basis of the calculation must be disclosed. This will capture employee remuneration structures such as those based on sales volumes.
Certain categories of insurance market participants will be exempt from the new remuneration disclosure rules, on the basis of advice provided to the Commission in November 2010 by CEIOPS (the Committee of European Insurance and Occupational Pensions Supervisors which was replaced by EIOPA (the European Insurance and Occupational Pensions Authority) on 1 January 2011). The exempt categories are as follows:
- Intermediaries (e.g. brokers) intermediating contracts of large risks (which will remain defined by reference to Article 5(d) of Directive 88/357/EEC with the same thresholds, including companies with a balance sheet total of €20 million; net turnover of €40 million; and own funds of €2 million);
- Intermediaries placing reinsurance; and
- The professional consumer category (defined as “a customer who possesses the experience, knowledge and expertise to make his own decisions and properly assess the risks that he incurs”).
The requirement for insurance intermediaries to disclose the nature, basis and amount of remuneration they receive has, however, run into opposition from ECON. On 29 October 2012, Werner Langen, the rapporteur for ECON, published a working document on IMD 2, which questioned whether the benefit to consumers of the disclosure requirement would outweigh the additional administrative burdens and costs imposed (largely on SMEs). It suggested that the “disclosure of the nature and source of remuneration and/or of the acquisition and selling costs factored into the commission might be a far
better alternative.” A draft ECON report on IMD 2 was published on 14 December 2012, proposing the deletion of some, but not all, of the provisions in the IMD 2 proposal relating to the remuneration disclosure requirements, including the requirement to disclose the nature and full amount of the remuneration (or, if not possible, the basis of calculation), whilst leaving in place the requirement to disclose whether the intermediary works on the basis of a fee, or a commission or a combination of both. The report acknowledged that conflicts of interest and transparency are one of the major areas of
change under the revised Directive, but expressed concern that compulsory disclosure of variable remuneration would lead to spiralling competition rather than greater consumer protection. ECON’s position, in contrast to the Commission’s, is that disclosure requirements should be introduced at the national, rather than at the EU level and that Member States should be free to introduce disclosure requirements over and above those of the directive. The European Parliament will consider the
amendments on 2 July 2013, an indicative plenary sitting date. The final outcome, however, will be dependent on the trialogue negotiations.
The proposals for IMD 2 will extend the scope of the current IMD to cover direct sales by insurance and reinsurance undertakings without the intervention of an intermediary. This measure is designed to level the playing field in insurance sales and to improve consumer protection in relation to all sales channels.
The extension of scope means that insurance and reinsurance undertakings which carry out direct sales will now be subject to information and disclosure requirements and conduct of business rules applying to intermediaries under IMD 2. These requirements and rules include a general obligation, when carrying out insurance mediation activities, to act ‘honestly, fairly and professionally’ in accordance with customers’ best interests; and to ensure that all information disclosed to consumers is ‘fair, clear and not misleading.’
Cross-selling – bundling and tying
The IMD 2 proposals introduce new requirements in connection with ‘bundling’ products together (i.e. offering one or more ancillary services with insurance as a package where the insurance is available separately but not necessarily on the same terms). The new requirements will apply to both insurance undertakings carrying out direct sales and intermediaries. Under the new requirements, insurance undertakings/intermediaries offering bundled products will have to inform customers that it
is possible to buy the components of the package separately. They will also have to provide information about the costs and charges of each component of the package that may be bought from/through them separately.
Whilst ‘bundling’ will be permitted, IMD 2 would prohibit ‘tying’ practices, i.e. selling insurance in a package with ancillary services where the insurance is not available to be purchased separately (thereby forcing consumers into purchasing products or services which they may not wish to purchase, in order for them to obtain the product or service they want). An example of a tying practice would be making it necessary for customers to open a current account when purchasing an insurance service, in order to pay the premiums.
The FSA mentioned the prohibition on tying practices under the IMD 2 proposals in its Consultation Paper on packaged bank accounts* stating that the effect on packaged bank accounts was not yet clear, but it was possible that the current packaged bank account product design, where a customer chooses a fixed package for a single price, would not be permitted under the IMD 2 proposals. The uncertainty seems to arise because in the case of packaged bank accounts the insurance is ancillary to the banking product (rather than the situation where insurance is the main product and is sold with
ancillary banking or other product). The FSA concluded that it was too early to know the final outcome of the IMD 2 proposals and therefore it will continue with its own initiatives on packaged bank accounts.
Guidelines will be developed by EIOPA (the European Insurance and Occupational Pensions Authority) for the assessment and the supervision of cross-selling practices, and will indicate situations in which cross-selling practices are not compliant with IMD requirements.
Life insurance investment products
Additional requirements are proposed in relation to the sale of insurance investment products. Again, these will apply to both insurance undertakings carrying out direct sales and intermediaries. The requirements include the following:
- Identifying conflicts of interest and disclosing them to customers where they cannot be adequately managed;
- Providing appropriate information to customers and potential customers about services, advice, the risks of investment strategies and costs and associated charges;
- Obtaining information from customers to assess the suitability and appropriateness of insurance products; and
- Preparing reports for customers on the services provided to customers.
Level 2 measures will be produced in order to reinforce these additional requirements and align them with MiFID.
Claims management and loss adjusting
The scope of IMD 2 will also be extended to cover professional claims management and loss adjusting. However, intermediaries carrying out these activities will not be required to meet the full registration requirements under IMD 2 but, instead, will be able to submit a simple declaration to the regulator. They will also be subject to lighter information and organisational requirements, under the supervision of an insurance undertaking or registered intermediary.
In addition, current exemptions under the IMD will be narrowed in order to bring within scope insurance policies sold ancillary to the sale of services (for example, travel insurance policies sold by travel agents). These activities will also be subject to a light touch regime via the declaration procedure.
The activity of ‘introducing’ will be removed from the definition of ‘insurance mediation’. This follows varying interpretations of the term ‘introducing’ being used across Member States. The effect of this change could potentially be to remove introducers from the scope of regulation. However, Member States have the option of imposing requirements beyond those in the Directive and therefore this change may have no effect in the majority of Member States.
Implications of the proposals in the UK
The most significant reforms under the IMD 2 proposals for the UK insurance market are the new mandatory remuneration disclosure requirements (see also our separate RegZone below on ‘Current developments in insurance broker remuneration – a UK perspective’).
They are likely to have a major effect particularly in connection with the sale of general insurance as, although mandatory prior disclosure of commission has been debated many times over the years, it has been strongly opposed by the general insurance industry and has never been introduced under domestic rules. The proposed new mandatory remuneration disclosure requirements under IMD 2 would therefore be a major change in this sector. They may affect insurer and intermediary relationships and commercial structures within the UK, as well as possibly leading to changes in staff remuneration structures.
Certain additional information requirements proposed under IMD 2 are also likely to have an impact on participants in the UK market, the new requirements in relation to ‘bundling’, ‘tying’ and ‘cross-selling’ will also be relevant. The FSA is already planning measures for ‘packaged bank accounts’ which cover bank accounts with ancillary insurance coverage.
However, a number of other developments under IMD 2 will have limited impact in the UK.
- Direct insurance sales have been regulated by the FSA under the Insurance: Conduct of Business sourcebook (ICOBS) in the FSA Handbook since 2005 and, consequently, the impact of the extension of scope of IMD 2 to direct insurance sales will be more dramatic in other Member States.
- In the life assurance investment sector, the impact will be limited due to the comprehensive nature of existing FSA rules as well as the upcoming rules to take effect from 31 December 2012 under the Retail Distribution Review (the RDR). For example, the RDR rules will go much further than IMD 2 by prohibiting commission style remuneration altogether.
Implications of the proposals in Italy
The IMD 2 proposals will have a limited impact in Italy, as many of the anticipated provisions have already been implemented domestically as a consequence of IMD.
Nevertheless, some of the principles set out by IMD 2 are likely to result in important changes for certain players in the insurance market, some more so than others.
The main categories of individuals in the insurance market, who will be impacted by the changes, include: (i) brokers (who, in Italy, act on behalf of and in the interest of the insured), (ii) claims management and loss assessment/settlement services providers, and (iii) non-mediation services providers who perform insurance mediation as a purely ancillary service (e.g. travel agents, car rental companies, leasing companies, financial institutions).
New intermediary categories
IMD 2 will extend some of the intermediaries’ rules (see below) to entities such as travel agents, car rental companies and leasing companies, who are currently not considered intermediaries, but provide insurance policies as an ancillary service to their core business. Claims management and loss assessment services providers will also be similarly affected.
The above categories of individuals will be subject to rules in IMD 2 regarding:
- Simplified registration procedure and declaration activities (Chapter III);
- Freedom to provide services and freedom of establishment (Chapter IV);
- General principles on information requirements and conduct of business rules (article 15);
- General information provided by the insurance intermediary or insurance undertaking (article 16);
- Other organisational requirements (Chapter V);
- Sanctions and measures (Chapter VIII);
- Final provisions (Chapter IX).
Disclosure and transparency – intermediary’s remuneration
The most significant reform introduced by IMD 2 concerns disclosure requirements, in particular, the obligation to disclose (which will not be required by the new category of intermediaries discussed above).
Remuneration disclosure for intermediaries will be mandatory for all categories of insurance business and should include the following:
- Nature of intermediaries’ remuneration;
- How it is calculated;
Currently, the disclosure obligation applies to (i) motor vehicles insurance (Article 50 of the ISVAP Regulation no. 5 of 5 October 2006), and (ii) life policies related to loans (Article 1 of the ISVAP Regulation no. 40 of 30 May 2012). The disclosure obligation only requires the disclosure of the intermediary’s remuneration.
In relation to the variable remuneration received (if any) by the employees of either the insurance undertakings or the intermediaries, the nature and the basis of calculation of the variable remuneration received by the employees of insurance undertakings and intermediaries will be required to be disclosed.
IMD 2 will extend considerably the ambit of the disclosure obligation by increasing (i) the amount of information required to be disclosed to the insured (not only intermediaries’ own remuneration figures but also their employees’) and (ii) the number of policies subject to the disclosure obligation (which will not only include motor vehicles insurance or life policies related to loans but all categories of insurance business).
The disclosure requirement in IMD 2 will likely be difficult to implement and probably cause some confusion for insurers, given the different types of remuneration that can be agreed by intermediaries.
The Italian brokers’ association (“AIBA”) claims that such disclosures should be provided only if explicitly requested by the insured, and that the more information is required to be disclosed (e.g. remuneration), the less attention the insured will pay to the policy’s main terms and conditions. AIBA has also challenged the disclosure requirement, claiming it is discriminatory to brokers when compared to direct sales of insurance, which are not subject to the same obligation.
According to the Italian Regulator (ISVAP), such a remuneration disclosure should be mandatory only in relation to particularly complex policies, such as insurance investment products. In all other cases, it should become mandatory only at the insured’s request.
Broker’s acting for insurers – conflict of interest (with the insured)
IMD 2 rules on intermediaries’ conflicts of interest are already in force in Italy. The Private Insurance Code in Italy explicitly bans any kind of representation by the insurance broker without the power to represent the insurer's interests and position (Article 109, para 2(b) of the Code).
As a consequence, Italian brokers cannot directly act for insurers nor do they have any binding authority. Brokers can only act on behalf of insureds and agents only on behalf of insurers (they belong to different categories and different sections of the register). However, a recent piece of legislation - Law Decree n.179 dated 18 October 2012, which is aimed at increasing the level of competition within the insurance market - provides that brokers and agents are allowed to cooperate (something they were previously doing in practice) provided that the client is informed about the involvement of additional
intermediaries in the mediation activity. The information should include names of the intermediaries, section they belong to and role played by each of them. The intermediaries are jointly liable towards the clients for their activity.
Direct sales (by internet or cold-calling) are excluded from the remuneration disclosure obligation and this has provoked debate in Italy, particularly within the AIBA, which, as mentioned above, is strongly opposed to the requirement on the basis that its exclusion could potentially lead to discrimination among intermediaries.
However, in contrast to brokers, direct sales will not be affected, in practice, by the disclosure obligation.
The IMD 2 cross-selling rule is already in force in Italy, although it is of partial effect, since it applies to life policies related to loans and mortgages (as recently introduced by the Law Decree 1/2012).
IMD 2 will extend the cross-selling principles to any insurance product mediation other than life policies related to loans and mortgages.
Implications of the proposals in Germany
The IMD2 proposal is currently subject to debate in Germany. Like in Italy, the major issue is the planned obligation for intermediaries to disclose their remuneration. German insurers and intermediaries are anticipating significant reforms to their operations.
Disclosure and transparency – intermediary’s remuneration
Germany’s Insurer Association (GDV) has issued a paper discussing the planned disclosure duty and proposes various arguments against it:
- Current GDV rules provide that the disclosure of remuneration is not necessary for insurance products that do not have a “money saving” component like life assurance contracts (for which a disclosure duty is already in place in Germany), especially for P&C insurance, since the motivation of a client to buy such insurance does not depend on the remuneration of insurers/intermediaries.
- As for life assurers, who currently have a duty to disclose remuneration, it is not their remuneration that is useful but the disclosure of calculated costs in the product. Acquisition and distribution expenses factored in the premium of the life insurance should be disclosed at an industry-wide level and thus help the customer to understand and compare the costs charged for mediation services in relation with insurance and financial services products. This duty to disclose costs already exists in Germany.
- A more useful addition would be information relating to the extent to which expenses factored into the product can cause a reduction in yield.
- The disclosure of detailed remuneration (as opposed to the calculated distribution costs factored into the premium) is considered to be much more complicated and gives no advantage to the client.
GDV additionally claims that the legislator should not forget that competent advice to clients is necessary and forms part of consumer protection. With a compulsory disclosure, clients will be invited to negotiate commission sharing with the intermediaries, which will result, in the long-term, in a loss of quality of the advice.
Conflict of interest policy
The existing IMD rules in respect of the prevention of conflicts of interests are sufficient for Germany’s insurance market. Any discussed extensions or modifications of MiFID rules on managing conflicts of interests are inappropriate with respect to insurance mediation.
Further, it is said that there is no need to introduce further rules to prevent conflicts of interests since IMD provides sufficient and appropriate provisions in this context. Moreover, due to the industry, MiFID rules on organizational provisions to prevent conflicts of interests, in particular, applying to financial tools such as securities, do not seem to be appropriate role models. They are designed for large companies with a large number of employees and cannot be applied to small insurance intermediary firms. In fact, insurance intermediaries normally operate as individual traders and employ no more than one or two employed intermediaries.
Germany’s insurance industry wants to keep the existing different remuneration practices in European markets. Any onesided support for intermediaries being exclusively remunerated by customers is rejected by the industry.
German insurers claim that online distribution must be made available to consumers. IMD 2 duties to inform and advise a
client must consider the restricted possibilities of individual advice in online sales.
Implications of the proposals in the Czech Republic
Similar to other jurisdictions, the proposed new rules for the mandatory detailed prior disclosure of commission paid to insurance intermediaries would be the most controversial issue raised by IMD 2 in the Czech Republic. Currently, Czech law stipulates that insurance intermediaries are obliged to provide information about their commissions only upon a request made by a client; there is currently no specific obligation on insurance intermediaries to disclose to customers the remuneration figures of their employees.
Czech law is currently unclear as to what details about their remuneration the insurance intermediaries are obliged to provide to the clients upon such request; in practice local insurance intermediaries do not disclose actual or detailed figures about their commission in the majority of cases. Local industry associations have not published their view on the issue of the remuneration disclosure brought by IMD 2 yet, however, it can be expected that this issue will be perceived as highly controversial.
Conflicts of interest
Also stricter rules for the conflict of interest introduced by the IMD 2 will have an important impact on insurance intermediaries in the Czech Republic. Currently, rules on disclosure and management of conflicts of interest under the Czech Insurance Intermediation Act are in general limited to the EU requirement for the disclosure of shareholdings (exceeding 10%) between of insurers and intermediaries, and a general obligation on insurance intermediaries to act honestly, diligently and in the interest of clients. The more detailed rules of IMD 2 on disclosing and managing conflicts of interest will therefore require adjustment to internal compliance procedures and increased information obligation towards clients both on the side of insurers and insurance intermediaries.
Bundling and tying
Both insurers and insurance intermediaries will also have to carefully assess the impact of the IMD 2 rules on product bundling and the prohibition of product tying. These topics are not currently specifically regulated by Czech insurance law and in practice are assessed based on general principles of competition law and consumer protection.
Implications of the proposals in Slovenia
Due to the peculiarity of Slovene legislation, which distinguishes strictly between brokerage and agency, the IMD 2 proposal was subject to extensive comments lodged by Slovenian Insurance Association in September 2012. It is therefore currently recognized as a draft document that will undergo further amendments. Nevertheless the following segments of the insurance market in Slovenia are likely to be affected by IMD 2:
Impact on intermediaries
Although the Slovenian Insurance Act contains a general clause which obliges intermediaries to act in the best interest of the insured and imposes various other obligations on the intermediaries vis-à-vis the policyholders, it does not oblige intermediaries to disclose the nature, basis or the amount of remuneration they receive. This applies also to the life assurance sector, which will be immediately impacted by the disclosure requirements of IMD 2. Given the different and sometimes rather complex remuneration schemes, the industry will have to adapt either by adopting simpler schemes or by providing a comprehensible presentation of the schemes to policyholders in accordance with the aims of IMD 2.
Impact on direct sales
Since IMD2 is likely to cover direct insurance sales, the specified exceptions on direct sales of article 215 of the Slovenian Insurance Act will no longer apply.
Ancillary insurance sales
Travel agents, car rental companies and leasing companies who are currently not considered intermediaries, but provide insurance policies as an ancillary service to their core business, will fall under the regulatory regime of IMD 2 and will therefore be subject (as the respective industries argue) to additional administrative burdens which may result in increased costs and consequently in higher prices for the affected industries.
Cross-selling – bundling and tying
The Slovenian Insurance Act already contains a provision pursuant to which the insurance premium must (whenever possible) be presented separately for each of the covered risks. The insured must therefore only be provided with adequate information with regard to the insurance costs for each insured risk of the presented bundle. Under IMD 2, however, each of the covered risks will have to be offered also as a separate insurance product whenever possible, since IMD 2 prohibits tying of insurance products. Assuming a fair pricing of the separate products, Slovenian consumers are therefore likely to
benefit from stricter regulation under IMD 2 in this respect and will be able to insure a specific group of risks which is most suited to their needs.
* CP 12/17, July 2012 4