ENGLISH VERSION: The new Directive on insurance distribution: opportunities, problems and prospects for the Italian marketLascia un commento
8 agosto 2016 di ilbroker
Interview with attorney Salvatore Iannitti – partner at global law firm Norton Rose Fulbright – Corporate Finance (Insurance) Department.
Question: On the 23 February 2016 the long-awaited directive on insurance distribution entered into force (EU Directive 2016/97; IDD or IMD2, depending on the acronym). Norton Rose Fulbright held a seminar on the IDD on July 7 2016 which comprised a large representation from the Italian insurance market. What in your opinion are the main new developments for the Italian market?
Answer: The IDD introduces some significant changes for the Italian market, for example, the ability to undertake mediation activities with or without personalised advice, a change to the connected contracts exemption, enhanced pre-contractual information, and as IDD is a minimal harmonisation directive, the ability for Supervisory Authorities to introduce more stringent rules to protect consumers – notably in relation to the remuneration of insurance intermediaries.
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Question: Do we need to fear for the future of commission?
Answer: Actually the IDD merely asserts a principle of transparency, giving the broker the burden of explaining to the policyholder whether he/she is remunerated by a commission paid by the company, a fee paid by the customer (in which case the amount must be transparently represented), or both.
However, the concept of compensation is extended to any economic benefit or financial or non-financial incentive received by the broker, aligning European Community guidelines with the interpretation of compensation already adopted by some countries (e.g. the UK, Germany). The receipt (or the payment to employees) of forms of compensation that are incompatible with the duty to act in the best interests of the customer is prohibited for all distributors (including insurers selling directly). Finally, Member States have the ability to limit – or indeed prohibit – the offer or acceptance of fees, commissions and monetary and non-monetary benefits paid by third parties to distributors, as has been done for example in the UK market in relation to investments sold with advice. This is a significant change enabling broad powers to allow supervisory authorities to introduce quantitative limits to the amount of commissions, or even to prohibit payment in certain circumstances (e.g. to ensure the provision of improved service for the customer, similar to measures under MiFID).
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Question: In practical terms, what will the IDD change in terms of pre-contractual disclosure?
Answer: As far as the intermediary is concerned the level of information will be more comprehensive. The intermediary, for example, must specify if he/she will work on behalf of the customer or for the insurer, whether they offer personalised advice and provide details of the nature of their remuneration.
As regards coverage, information for non-life products is set out in a product information document (or ‘PID’) that replaces the ”nota informativa”. It will probably be a very straightforward document (containing a concise and illustrative indication of coverage and exclusions) prepared by the “manufacturer” of the product (including any intermediary who distributes through a “white label” arrangement) on the basis of technical standards drawn up directly by European Insurance and Occupational Pensions Authority (EIOPA). All distributed products will be subject to a process of analysis (product governance) aimed at identifying the target market, the risks associated with this market and the strategies needed to ensure that the distribution is consistent with the target customers predetermined by the product’s manufacturer. The product governance process is essentially very similar to what is described by IVASS and the Bank of Italy in its letter to the market, published last August with regard to products connected to mortgages or loans.
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Question: How could the provision of advisory services change the insurance distribution market?
Answer: We first need to make a clarification: the IDD introduces an ad hoc definition of advising activities which is based on personalised recommendations provided to the customer, but it does not eliminate the requirement for distributors to provide “incidental” advice, namely the minimum support necessary to allow the customer to provide “informed consent” to the purchase of the insurance product. Furthermore, providing advice is an insurance mediation activity as well as a service which may be provided together with any of the other brokerage activities which may be carried out (e.g. the proposal of insurance products).
In operational terms, the provision of advising activities requires the distributor to prepare a specific disclosure that must: (i) state if the distributor acts fairly and on a personal basis (after having search a sufficiently large part of the market) or not, and (ii) state the reasons for which the product is better suited to meet the demands and needs of the customer.
It is highly unlikely, therefore, that distributors with standardised distribution processes will be able to offer such advisory services, with personalised advice likely to be limited to brokers and agents.
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Question: Will new subjects be attracted to the distribution market as a result of the IDD? Will there be new sections added to the Intermediaries’ Insurance Broker Registry (i.e. RUI) in the future?
Answer: A point that we must consider concerns distributors who limit themselves to merely offering advice, taking into consideration that the service has quite a vague definition at the moment and that these types of mediators are currently not very active in the market for non-life products (note that – from my own perspective – lawyers and accountants are still specifically excluded from the IDD)! We also have to consider the boundaries of the activity of introducing (or the “provision of information”) as this exclusion is not applicable where the introduction is carried out within the context of a professional activity and has the “purpose” of assisting with the conclusion of the contract. The extension of the concept of mediation to price comparison websites is only partly new and the real questions in this area are likely to concern which procedures will fall within procedures that lead “indirectly” to the conclusion of the contract which will bring websites within scope of the directive.
The main area where authorities will determine whether an insurance distributors falls within the IDD or not, will therefore remain the “Connected Contract Exemption”. The IDD makes it clear that insurance coverage is connected to a non-insurance service only where it covers an interruption in service.The time limit of five years has also been removed, while the quantitative limit is raised to EUR 600 per year (or EUR 200 per person if the contract lasts for less than three years). However,where the insurance product is complementary to the main product or service, but the other conditions for the application of the exemption do not apply, the “ancillary” insurance intermediary (a new term introduced by the IDD, meaning an intermediary acting under the responsibility of an insurer or another intermediary) – may take advantage of a limited registration approach (less strict professional and training requirements, fewer disclosure obligations). This is despite being required to enrol in the RUI, keep a separated client account, and take out a professional indemnity insurance policy or comparable insurer guarantee.
There are some new developments in relation to the Insurance Intermediaries’ Register. The IDD extends registration requirements to individuals operating inside the premises of the intermediary, distribution managers of the insurers, tied agents operating under the direct responsibility of the insurer and, as already mentioned, ancillary insurance intermediaries.
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Question: Does the IDD contain a chapter on additional requirements for insurance investment products? What can you tell us about this?
Answer: This is a relatively new development for the Italian market, which for some time had extended the system set out in the Italian Consolidated Law on Finance (TUF) to financial products issued by insurance companies. The legislation in question applies specifically to those life insurance products that have an expiry or a surrender value, whose performance depends directly or indirectly on market fluctuations and is not only limited to cases of death or disability (a scope of application, therefore, other than the one currently identified by the TUF with concise reference to the III and V life insurance classes of business). In addition to reorganising the disclosure and conduct obligations for intermediaries (particularly as regards the assessment of product adequacy or appropriateness), the IDD updates the rules applicable to inducements by providing that the payment of remuneration or an incentive by a third party will no longer require that it brings a benefit to the customer but must not have a negative impact. Moreover, the relevant supervisory authority will have the power to prohibit the payment of fees, as well as to require that the intermediary returns what is received from third parties to the customer. Finally, similar to what occurs with “execution only” transactions under MiFID, the possibility of derogation from appropriateness assessment obligations is introduced, where the placement is carried out on the initiative of the customer.
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Question: Do we have to expect a massive revision of IVASS regulations in the coming years?
Answer: The scope of the IDD will be very broad: in addition to the obvious change with the Intermediaries’ Regulation (5/2006), the Transparency Regulation (35/2010) will need to be updated concerning contractual disclosure, the Training Regulation (6/2014) will need to be updated to acknowledge the minimum knowledge requirements set out in Annex I to the IDD, the Distance-selling Regulation (34/2010) and the Simplification Regulation (8/2015) will have to be updated concerning the delivery procedures for the pre-contractual disclosure. On this last point, the IDD in fact permits the provision of pre-contractual disclosure using a durable medium or on a website where this is appropriate for the transaction (in that the customer has regular access to the internet, proven by the availability of an email address) and the customer has opted for this format.
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Question: Finally: Do you consider that the opportunity to intervene specifically in certain areas has been lost?
Answer: Probably. The European Community legislator could have taken this opportunity to thoroughly regulate the issue of collaboration and conflicts between intermediaries (about which discussions have been carried on over many years, particularly in the Italian market) to clarify aspects related to transparency towards the policyholder, to the responsibility of each broker for the work of others and to whether or not each single intermediary involved in cross-border chains must passport its license. As mentioned, the IDD does however allow significant manoeuvre for national authorities to introduced a more detailed system and we cannot exclude that IVASS will choose to do this.
Who is Salvatore Iannitti
Insurance partner at Norton Rose Fulbright (working on insurance policies, reinsurance agreements, distribution contracts, regulatory issues, judicial and extra-judicial claims, umbrella programs, captive and fronting programs; CPI and PPI products, D&O, BBB, I&W policies, injury, A&H policies, unit/index linked policies, public liability policies, professional liability policies, environmental liability policies, crime policies, fidelity programs; assisting insurers and intermediaries in proceedings before the public authorities and M&A transactions). Since 2011 Norton Rose was awarded by Practical Law as one of the three leading firms in the Italian insurance market.
Salvatore has spoken at seminars on “Environmental liability law”, “Agreements between intermediaries”, “D&O insurance policies”, “Bancassurance schemes”, “Anti-money laundering in the insurance sector”, “Implementation of the Transparency Regulation”, “Insurance coverage in M&A transactions”, “Reforms introduced by the Monti Government in the Insurance Sector (motor TPL and distribution)”, “Unit/index linked products”.
Salvatore has written on the topic, in addition to articles on “IMD2”, “Implementation of the ECJ sentence on gender discrimination”, “Motor TPL reforms”, “CPI and life insurance products”, “Conflict of interest for insurance intermediaries”, “Distance marketing of insurance policies”, “Transparency regulation”,”Public bids on insurance services”.
He has participated to public consultations on regulations disciplining: “Transparency of insurance policies”, “Black boxes”, “Home Insurance”, “Comparison of motor TPL tariffs”, “Conflict of interests”, “Complaints handling”, “Passive Reinsurance”, “Anti-Fraud in motor TPL sector”, “Distance Marketing”,”CPI life products”.
According to Chambers (2014, 2015 and 2016), Salvatore “has a very deep knowledge of insurance law. He is best known for his expertise in regulatory issues”; “He is a rare lawyer who marries technical knowledge with commercial understanding and a very practical approach to problem solving”. Euromoney listed Salvatore Iannitti “Rising Star Guide” for the Italian market, in 2016.