EIOPA considers the application of the EU Insurance Distribution Directive
The Insurance Distribution Directive (IDD) established minimum criteria for the design and distribution of insurance products within the European Union (EU) by setting out harmonised regulations for the insurance market with the aim of improving consumer protection standards. In recent months two significant publications on the IDD have been released by the European Insurance and Occupational Pensions Authority (EIOPA), namely the Report on the Application of the IDD (Report) and the second Annual Report on Administrative Sanctions and Other Measures under IDD (Sanctions Report). This article considers the findings in both and what they could mean in terms of legislative changes, if any, in future.
The EIOPA’s Report on the Application of IDD
On 6 January 2022, the EIOPA published the Report following its review of the IDD’s application since implementation. The review was undertaken to consider where improvements could be made to enhance consumer experience, ensure that distributors take responsibility for consumer outcomes and that the products sold meet consumer needs. The Report notes that in reality it is too early for conclusions to be drawn on the impact of IDD and that more time is required to assess the full impact of the legislative changes. The Report also notes that the Covid-19 pandemic and digitalisation have disrupted the market, making it challenging to isolate the specific impact of IDD. The EIOPA has therefore decided to postpone any major amendments to the legal framework until the reassessment of the application of IDD in 2024.
Notwithstanding the above, the Report considers the preliminary impact of IDD on consumers, insurance distributors and supervisory activities. This was based on industry surveys and input from EU Member State Regulators (Regulators). This impact was assessed under three headings: changes in the EU insurance distribution market; the impact of the new regulatory framework; and the impact of the new supervisory framework.
Changes in the EU insurance distribution market
While IDD sought to harmonise the distribution of insurance to consumers, the Report notes that the EU insurance distribution market remains ‘diverse and widely fragmented’. This results from the variety of and differences in national distribution channels, registration requirements and reporting frameworks across the EU. These differences pose a challenge to reaching conclusive findings and assessing whether consistent outcomes are achieved for consumers purchasing insurance in the EU.
Despite these challenges, the Report observes the following trends:
- There has been a decrease in the number of registered intermediaries from 2016 to 2020. The potential reasons for this are diverse and may relate to consolidations, aging intermediaries, reorganisations in distribution models, stricter professional requirements and the review of national registers to delete inactive intermediaries.
- Despite a reduction in the number of registered insurance intermediaries, most Member States reported an increase in the number of insurance intermediaries with a passport. Unfortunately, as there is no data at an EU level, no conclusions can be drawn on the amount of business being written on a cross-border basis.
- In 2020, bancassurers played a significant role in the distribution of life insurance whereas other intermediaries such as agents were very relevant for the distribution of non-life insurance. Based on available data, it seems that while online sales are relatively low, they are increasing and will likely continue to do so.
The impact of the new regulatory framework
The impact of IDD has generally been positive on the distribution of insurance products to consumers, however problematic practices have been identified relating to the cross-selling of unit-linked products, mortgage and consumer credit protection policies. While most Member States note an improvement in insurance distribution, some unfavourable feedback was received, arguing that the demands and needs tests are too formulaic, forcing customers to tick a box confirming the contract aligns with their demands and needs, particularly for online sales. In addition, the bundling of these products prevents consumers shopping around or studying the individual characteristics and costs associated with such policies.
The Report notes that, in relation to the professionalism and competence of insurance distributors, certain short comings in the training of insurance distributors needs to be tackled, especially regarding certain types of insurance-based investment products which are not easily understood by consumers. The knowledge and competence of insurance distributors has become an area of increasing importance about product innovations and the growing market for sustainable products.
The Report maintains that in relation to digitalisation, additional guidance is required for both industry and Regulators regarding the rules on the form and timing of disclosures in a digital context. In particular, the scope of ‘insurance distribution’ and application of IDD to digital platforms requires further guidance in an online environment.
While IDD aims to promote good consumer outcomes, it has also resulted in consumers receiving an increased amount of information when purchasing an insurance product. This is due to an overlap in information requirements in EU legislation which can lead to information overload and may contribute to consumer confusion. The Report indicates that a targeted review, greater coherence and coordination of EU legislation is required to address this issue.
A lack of additional guidance on the regulatory framework has been a challenge for both the industry in applying certain elements of IDD and for Regulators in relation to supervision. The EIOPA confirms that further clarifications on the correct interpretation of IDD are necessary to facilitate supervisory convergence and provide clarify to insurance distributors.
The impact of the new supervisory framework
The Report notes that while Regulators’ resources dedicated to the conduct of business has increased moderately due to the additional responsibilities set out in IDD, not all Regulators have sufficient tools to carry out the required level of supervision. Home and host Regulators have noted difficulties in enforcing key requirements in IDD, where Regulator judgement is required. This has had the negative impact of some Regulators invoking product prevention as opposed to enforcing requirements related to product oversight and governance. There are deficiencies in certain Regulators’ reporting of data to facilitate risk monitoring and some Regulators believe that they are limited in respect of the specific product information they can request from market participants. Local laws also curtail the use of mystery shopping, which is an effective tool in monitoring the substance of practices rather than pure regulatory compliance.
Notwithstanding the increase in intermediaries which passport their services. The Report observes that cross-border trade and regulatory cooperation could be enhanced. Further work to harmonise EU insurance contract law, social security law and tax law is likely to be required to facilitate this harmonisation. The quantity and diversity of national rules is the main challenge for distributors in expanding their actives within the EU.
Despite the EIOPA’s Decision on the Cooperation of Competent Authorities under IDD, there are still deficiencies in the interaction between Regulators in the context of cross-border business. While some cross-border issues have been addressed by the EIOPA’s cooperation platforms, IDD illustrates the limitations of cross-border supervision. For example, the ability of host Regulators to intervene regarding mis-selling in their market (based on the existing IDD provisions providing for such intervention) and the EIOPA’s powers to exercise a more coordinating role. Regulators have suggested the use of an online notification form, published on the EIOPA’s website, for a more consistent and easier notification procedure.
While IDD has resulted in certain strides being made in the harmonisation of insurance distribution throughout the EU, there is still room for improvement. A well aired complaint regarding EU law, is that the harmonisation of tax and social security law is required to facilitate the full integration of the single market. In addition, while the EIOPA notes that the true impact of IDD cannot be assessed due to the impact of the Covid-19 pandemic and digitalisation, certain areas within IDD need to be updated to reflect the significant effects of digitalisation on the market and the ever increasing trend towards online sales. The EIOPA should move away from IDD’s default paper-based regime for communicating with customers and should account for advances in technology, including artificial intelligence. IDD should be adapted to ensure that intermediaries can continue adapting to the changing market, to maintain profitability and efficiency and to guard against a separate set of rules being established for digital products which could further reduce the proposed harmonisation of the EU’s insurance market. The adaption of IDD should however guard against stifling innovation and competition by onerous regulation.
The EIOPA’s Sanctions Report
The EIOPA’s Sanctions Report was published on 21 December 2021. It notes that since 2018, sanctions were imposed in Member States including Hungary, Lithuania, Malta, Poland, Slovakia, Sweden, Iceland and Romania, cumulating in 3,865 sanctions with fines totalling €1,739,281. The vast majority of sanctions were imposed for infringements relating to the professional and organisational requirements set out in Article 10 of IDD. The remainder were imposed for breaches of the registration requirements in Article 3 of IDD.
It is interesting to note that these breaches mainly occurred in a few specific Member States. In the absence of a detailed review, the Sanctions Report noted that the differences in the approach of Member States supervision and sanction and the subsequent number of sanctions imposed cannot necessarily be demonstrative of the actual degree of non-compliance across Member States. For example, Member States have some discretion in establishing under national law whether a sanction or different measure should be imposed for a particular IDD breach.
The Sanctions Report notes that the number of sanctions imposed is affected by the minimum harmonisation effect of IDD, local market and regulatory structures along with consumer expectations. The disparity must be considered in light of the following differences in approach between Member States:
- supervision – some Regulators have specific reporting requirements for intermediaries, while others supervise intermediaries as part of its ongoing review process;
- sanctions – following the identification of a compliance breach, Member States take different courses of action, with reference to national laws and application of the principle of proportionality;
- licencing – some Member State required intermediaries to be relicensed as part of the transition from the Insurance Mediation Directive (IMD) to IDD.
The Sanctions Report states that the figures for 2020 still represent a transitional phase between the IMD and IDD. It also notes that a substantial number of Member States have yet to impose sanctions under IDD. The EIOPA notes that going forward it would expect that a higher number of Regulators would impose sanctions each year.
It is clear from both the Report and the Sanctions Report that while IDD has accelerated the harmonisation of the insurance market at an EU level, further harmonisation is required to meet IDD objectives. The EIOPA will need to consider the changes required to IDD to ensure supervisory convergence and harmonisation of legislation with reference to the increased digitalisation of the insurance industry, especially where the harmonisation of tax and social security seem out of reach. This will ensure consumers are treated fairly regardless of the Member State in which they purchase a policy or whether it is purchased in-person or digitally.