INSURANCE DISTRIBUTION DIRECTIVE
WHAT IMPACTS IN THE AFTERMATH OF THE NORMATIVE WAVE?
THE VIEWS OF OUR EUROPEAN LAWYERS
Italy – David Morganti, Morganti Associati
What are the most significant points in the transposition of IDD in your country?
The transposition of IDD in Italy will have a wide-ranging impact on the insurance industry, because it fundamentally changes the focus of insurers from products to customers, and it will introduce significant innovations to align the Italian legislation in matter of insurance distribution to the EU one, including to the following:
– New concept of insurance distribution;
– New Entity for the registration of the intermediaries;
– Product oversight and governance;
– Alternative dispute resolution procedure;
– New sanction system;
– Pre-contractual information.
• New concept of insurance distribution
First of all, the concept of insurance distribution is introduced instead of insurance intermediation, with consequent extension of its purpose to all sales of insurance products.
• New entity in charge of registration of the insurance and reinsurance intermediaries
A new entity called “Organismo di Registrazione degli intermediari assicurativi e riassicurativi” is established that shall take care of the registration of insurance and reinsurance intermediaries in the RUI.
• Alternative dispute resolution procedure
Further to the transposition in Italy of the IDD, the establishment of a new out-of-court dispute resolution body is provided for, to be regulated in a way similar to the existing Banking and Financial Ombudsman (ABF).
The new ADR procedure will apply not only to disputes between customers and insurance distributors, but also to those between customers and insurance companies
• Pre-contractual information
After the implementation in Italy of the IDD, the intermediary is now requested to provide the potential policyholder with a pre-contract information set, more detailed and simple than what provided for by the precedent legislation, composed of the following standardised documents:
– IPID (Insurance Product Information document) for non-life insurance contracts;
– DIP (Pre-contractual Information Document) for life insurance contracts; and
– KID (Key information document) for insurance investment products.
Considering the standard format of the IPID, the Italian legislator has provided that a specific ‘additional IPID’ must also be given to the client, with the aim of providing the customer with more in-depth knowledge of both the product and their rights and obligations.
This new entity shall act under IVASS’ supervision that in the meanwhile remains responsible for the whole registration procedure.
The IDD has been implemented in Italy with the Legislative Decree no. 68 of 21 May 2018 and has come into force on 1 July 2018 (the “Legislative Decree”) by amending the Legislative Decree no. 209 of 7 September 2005 (the so called “Italian Insurance Code” or “CAP”).
Following the implementation of IDD into Italian law, on 2 August 2018 the Italian Insurance Authority (IVASS) issued three new regulations (no. 39, 40 and 41) respectively on (i) administrative sanctions; (ii) transparency, advertising and manufacturing of insurance products; and (iii) insurance and reinsurance distribution.
New concept of insurance distribution
In fact, the new art. 106 of CAP provides that “ Insurance and reinsurance distribution consists in proposing insurance and reinsurance products or in assisting, advising on or carrying out other work preparatory to the conclusion of these contracts or in concluding such contracts or in assisting in the administration or performance of such contracts, in particular in the event of a claim. Insurance distribution also includes the provision of information, through a website or other media, concerning one or more insurance contracts, in accordance with criteria selected by customers and the compilation of an insurance product ranking list, including price and product comparison, or a discount on the price of an insurance contract, when the customer is able to directly or indirectly conclude the contract”.
Therefore, the list of the addressees of the legislation has been extended concerning not only the intermediaries in the strict sense (i.e agents, brokers, direct canvassers, banks, financial intermediaries and stock brokerage companies), but also the following persons:
- Insurance undertakings that sell insurance products directly among the distributors.
In this case, the insurance company must identify a distribution manager and communicate its name to IVASS. The manager and the employees involved in the distribution activity must fulfil certain integrity and professional requirements;
- ancillary insurance intermediaries, as better analyzed below; and
- other subjects that, via websites or other means, provide comparison services that allows the customer to directly or indirectly conclude an insurance contract at the end of the process.
The owner of the internet domain must be registered in the Register of Insurance and Reinsurance Intermediaries (RUI) and the activity is subject to a number of rules provided by IVASS for the purpose of transparency, correctness and protection of the client.
- Product oversight and governance (POG)
IVASS anticipated the introduction in Italy of the POG with a letter to the market published on 4 September 2017 and directed to the insurers and distributors to promptly take any initial and necessary steps to adapt their internal models, procedures and policies in order to be ready to meet the new requirements set out under IDD.
The new art. 30-decies of CAP expressly provides that”1. (…) insurance undertakings and intermediaries which manufacture any insurance product for sale to customers, shall define and implement a process for the approval of each insurance product and significant adaptations of an existing insurance product, before it is marketed or distributed to customers, in accordance with the provisions in this article and with directly applicable EU rules.
2. The approval process referred to in paragraph 1 shall be proportionate and appropriate to the nature of the insurance products and shall be subject to a regular review.
3. The subjects referred to in paragraph 1 shall send IVASS, at its request, the documentation
relating to the product approval process.
4. The approval process referred to in paragraph 1 shall specify an identified target market for each product and the categories of customers to whom the product may not be distributed,
ensure that all relevant risks to such identified target market are assessed and that the intended distribution strategy is consistent with the identified target market and take reasonable steps to ensure that the insurance product is distributed to the identified target market.
5. The subjects referred to in paragraph 1 shall understand and regularly review the insurance products they offer or distribute, taking into account any event that could materially affect the potential risk to the identified target market. The review shall be aimed to assess whether the product remains consistent with the needs of the identified target market and whether the intended distribution strategy remains appropriate.
6. The subjects referred to in paragraph 1 shall make available to insurance distributors all appropriate information on the insurance product and the product approval process, including the identified target market of the insurance product”.
Should IVASS have a well-founded suspicion of violations in matters of governance and control, it may suspend the commercialization of the product as a precautionary measure (Article 184, paragraph 1, CAP).
In compliance with the principle of the best interests of customers introduced by IDD, in Italy also a new regime of the remuneration for the intermediaries and the distributors is provided in accordance to which:
- the intermediaries shall communicate to their clients the nature of the remuneration received and the existence of a conflict of interest; and
- the distributors shall not be remunerated or remunerate or assess the performance of their employees in a way that conflicts with their duty to act in accordance with the best interests of their customers.
- New Sanction system
In accordance with the IDD, the Italian legislator has reviewed the sanction system provided for by the CAP introducing the following:
- Higher pecuniary sanctions, also based on a percentage of total annual turnover, in order to guarantee the dissuasive effect of the sanction and eliminate the advantage obtained by the author of the violations;
- sanctions against individuals, in the presence of certain conditions;
- for the first time, new non-pecuniary sanctions, such as the temporary disqualification from occupying certain functions in the company and the cease and desist order, proscribing continuation of the unlawful conduct;
- in case of commission of more violations of the same type within a certain time frame, application of single act in order to reduce the number of sanctioning procedures;
- Pre-contractual information
The new documents are intended to simplify and make pre-contractual documentation easily understandable. The legislator is aware that if the document is too long or complicated the client may not read it or not understand it. Therefore, the new legislation establishes that the key information must be provided on a short and stand-alone document with schematic and standardized content. The information is structured in question/answer form, using simple language and graphic symbols.
Tailor made products are exempted from the pre-contract information package.
Have new categories of intermediaries emerged since the IDD came into force?
A new category of intermediaries has emerged since the entry into force of IDD: the ancillary insurance intermediaries. These intermediaries are characterized for the fact that they pursue a principal professional activity other than insurance distribution and distribute, on behalf of one or more companies, insurance products that are complementary to the product or service offered in the context of another main professional activity.
defined at art. 1 lett cc-septies of the Italian Insurance Code as “any natural or legal person, other than those referred to in article 109 d), who, for remuneration, takes up or pursues the activity of insurance distribution on an ancillary basis, provided that all the following conditions are met:
1) the principal professional activity of that natural or legal person is other than insurance distribution;
2) the natural or legal person only distributes certain insurance products that are complementary to a good or service;
3) the insurance products concerned do not cover life assurance or liability risks, unless that cover complements the good or service which the intermediary provides as its principal professional activity”.
Ancillary insurance intermediaries must be registered in the new Section F of the RUI.
This section has similar aspects to the other ones, especially with reference to the requirements for registration; and in particular: the honorability and expertise asked for members in sections C (direct canvassers of insurance undertakings) and E (the staff involved in distribution outside the premises of the intermediary registered under sections A, B, D, F or in the enclosed List, for which they conduct business, ancillary insurance intermediaries acting on behalf of another intermediary pursuant to article 109-bis (5) of the Code, as well as the staff of the intermediaries registered under section E who carry on business outside their premises) and the obligation to stipulate a professional liability insurance contract of sections A (agents) and B (brokers).
Please note that the ancillary insurance intermediaries are currently temporarily enrolled under section A of the Register.
Are these changes positive for insurance intermediaries, or do you think they could create new risks of liability? Are intermediaries ready to put these changes into practice?
The transposition in Italy of the IDD will surely create new risks of liability for the insurance intermediaries, given that they will be called upon to assist and guide the customer from the moment of design of the insurance product during its whole life.
Indeed, it will no longer be possible for them to offer pre-packaged products given that the offers shall be personalized or specifically designed on the basis of the economic situation and real needs of the customer.
In addition, they shall also carry out an evaluation and revision procedure of the insurance product to ensure that it continues to be in line with the customer’s needs for the entire duration of the insurance contract
All these changes will necessarily involve considerable efforts in terms of training, as well as the development of new automated procedures and the use of IT tools for the analysis of the needs and the services monitoring in order to guarantee customers products that are adequate and functional.