What is the (IDD) Insurance Distribution Directive?

Financial Services faces greater regulatory scrutiny than ever before. Treating customers fairly by developing a compliant, competent and highly trusted industry is uppermost in senior managers’ minds but can be a challenge in a diverse workforce.

Here we take a look at the Insurance Distribution Directive and what it means to businesses.  As you know, the Insurance Distribution Directive (IDD) came into force on 1st October 2018 and replaced the Insurance Mediation Directive (IMD). The IMD came into force in January 2005 with the objective of protecting consumers by regulating intermediaries.

The IDD takes this regulation further and is designed to:

• make it easier for firms to trade cross-border within the EU,
• create a level playing field among all participants – in other words, support competition
• strengthen policyholder protection when purchasing insurance.

The overriding aim of the IDD is to ensure that all parties in the insurance distribution chain act professionally, honestly, fairly and in the best interests of their clients. The IDD covers non-life products such as household and motor policies and non-investment life products, like term assurance. It also impacts reinsurance activities and insurance-based investment products; like maximum investment plans or endowment policies. Certain activities conducted through price comparison websites are also captured by the IDD.

The main changes brought about by the IDD are to do with:

Training and competence

The IDD require firms to (and the wording is) ‘possess appropriate knowledge and ability in order to complete their tasks and perform their duties adequately’. To demonstrate this, staff will be required to undertake at least 15 hours continuing professional development (CPD) per year and firms are expected to keep records of the activities undertaken.

Product governance

Changes brought about by the IDD include:
• the requirement for enhanced product development procedures;
• periodic review of the performance of products; and
• requirements to be clear about the intended target market for the product, these will largely be in line with the FCA’s existing product governance requirements.

Documentation

The IDD introduces a new summary document, the “Insurance Product Information Document” (IPID). General insurance firms (in the retail and small corporate market) will need to provide customers with Insurance Product Information Document in a prescribed format (like Key Facts documents).

Regarding conduct

There are two new obligations for insurance distributors with the focus on consumer protection:
• to act “honestly, fairly and professionally in accordance with the best interests of the customer” and
• that all information provided to customers is “fair, clear and not misleading” These are similar to the FCA’s principles for business:

1. You must act honestly, fairly and professionally in dealing with clients and act in accordance with their best interests.
2. You must communicate in a manner that is fair, clear and not misleading to the client which means communicating in a language the client understands and not use unexplained jargon unless you know the client has experience of the product you are selling and knows what you mean.
3. Any marketing materials you issue must be identifiable as such by the client or prospective client and again must follow the principle of being fair, clear and not misleading. All risks, excesses and exclusions must be explained in the material as  prominently as the benefits of the insurance
4. Remuneration arrangements both with insurers and within your firm must not encourage sales of one product over another if it is not in the best interests of the customer.

A new Insurance Product Information Document (IPID) is introduced that has a prescribed format and is envisioned to be no more than 2 sides of A4. It is designed as a simple, standardised document which aims to provide clearer information for consumers about non-life insurance products so that they can make more informed decisions prior to purchase and simplify comparing the products of different providers. It will be produced by the product manufacturer and is for retail clients only. It links to the policy summary and highlights the salient points of the contract with the features and risks. It must be issued to the client before the contract is completed.

The IDD extends the existing ICOBS standards for advised and non-advised sales. All firms are required to identify their customers’ insurance demands and needs and ensure that insurance contracts proposed are consistent with them. Where a firm provides advice, it must explain why a contract best meets the customer’s needs.

All firms are required to:
• identify their customers’ insurance demands and needs; and
• ensure that insurance contracts proposed are consistent with them

The IDD also makes it clear that firms need to specify the customer’s insurance demands and needs based on information obtained by the firm from the customer. In other words, you must work with your customers to ask questions to identify their demands and needs. There is no mandatory qualification required by staff advising or selling insurance products unlike investment advisers who require a level 4 qualification and a Statement of Professional Standing (an SPS) that is annually renewed.

The IDD, however, requires firms to ‘possess appropriate knowledge and ability in order to complete their tasks and perform their duties adequately’.

To demonstrate this, staff will be required to undertake at least 15 hours continuing professional development per year and keep records of the activity you undertake.

These become rules rather than guidance under the IDD. And although they apply to manufacturers of insurance products rather than distributors, distributors need to ensure that they are aware of the intended target market for the product and this needs to be clearly articulated by the manufacturer.

Manufacturers must develop or enhance their approval process for new products, identify the target market and develop a distribution strategy to aim the product at the intended consumers.

Any marketing documentation issued to intermediaries must clearly articulate the target market which will help fulfil the obligation that manufacturers must take reasonable steps to ensure the product is only distributed to those consumers for whom they are intended.

Learning Pool helps by delivering online training that engages and educates learners in a truly memorable way; ensuring that your colleagues remember key points of understanding and make the right decisions that protect your company and your customers. All our content is written by Searchlight Solutions, the UK’s leading provider of training to the insurance and financial services sector.

We’ve combined their specialist know-how on regulatory compliance and risk management with our skills and tools to create our financial services catalogue which includes everything you need to train your staff on IDD as well as other key financial services categories such as SM&CR, CASS, Conduct Risk and Cryptocurrencies

To find out more about getting your staff ready for IDD, contact us and get your 7 day free trial. For further reading, why not check out our blog on the Senior Manager & Certification Regime.