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INSURANCE DISTRIBUTION DIRECTIVE – THE CONSUMER PERSPECTIVE

Postponed or not, sooner or later, the IDD-Insurance Distribution Directive will have to be applied by EU Member States. Considered by industry representatives as a terror for business, things look quite differently when one looks at it from the consumer perspective.

Distribution is an extremely diverse business in Europe: agents and brokers are the main distribution channels for non-life alongside insurance companies while bancassurance plays a major role in the life business – according to Insurance Europe data. The popularity of each channel obviously varies depending on both the market, its culture and history, on the types of insurance products etc.

But the distribution market is changing rapidly. There are comparison websites, apps that one can download on all mobile platforms while various retailers and InsurTech companies sell insurances in so many new ways that few could have imagined until recently… But no matter the channel, all consumers will benefit from the same level of protection. This is, in fact, one of the biggest additions of IDD vs IMD. But distribution it’s not a static landscape – it is changing. Consumer needs and preferences, technological advances and regulation – all these are making a difference in how insurance distribution works in the European Union and beyond.

INCREASED CONSUMER PROTECTION | COVERS ALL DISTRIBUTORS | SINGLE MARKET
• Distributors MUST act in the client best interest

• Adds transparency to distribution / products / conflict of interest policies & remuneration rules

• Information requirements for non-life products

• Product Oversight & Governance arrangements

• Conduct of business minimum standards

• Minimum professional training for distributors (CPD)

  • Improve the competitive landscape of the European insurance industry
  • Empower cross-border business inside EU – regulates conditions for doing business in other EU countries

 

But why is regulation, such as the IDD, changing the distribution landscape? Because of the past, some might say. Let’s get into more details: as part of my travelling job, I’ve discussed to many experts from various sectors of the insurance business and I guess it is fair to say that every stakeholder see the IDD – the regulation in this case – in a different way. But most agree on something: the IDD is designed to be a milestone for consumer protection.

Its main principle: when carrying out insurance distribution, distributors always act honestly, fairly and professionally in accordance with the best interests of their customers. The IDD is expected to reshape the distribution of insurance in Europe as it introduces enhanced information and conduct of business requirements for all types of distributors.

Let me try and prove that: for the first time, thanks to the POG-Product Oversight and Governance Guidelines, consumer protection is embedded in the product itself. It is the first time when insurance manufacturers (insurance undertakings and intermediaries alike) have to design, use and review processes for the approval of new products. The product approval process must specify the identified target market and also if the distribution strategy is consistent with this market.

Just remember the Woekerpolis scandal in the Netherlands with unit-linked life insurance products. This happened because complex life insurance products were sold to retail investors without sufficient financial literacy to understand them (i.e. there was not a defined target market). Another example: think of the Payment Protection Insurance scandal in the UK. Think how POG could have prevented everything that happened. Surveys show that 40% of policyholders claim to be unaware that they even had a policy. Could you have sold payment protection insurance to unemployed people? Was this a true genuine target market? I leave the answer to you.

Also thanks to the IDD, looks like customers will benefit from more transparency. This is a very important word. Just an example: an insurance undertaking has to communicate to its customers the nature of remuneration received by its employees before the conclusion of the policy. Same goes for the intermediaries – who also have to inform the client whether they work on fees and commissions or other type of remuneration. I guess it is fair to say that as a customer I deserve to understand how it all works and who is paying who and for what. Think of what happens when a certain intermediary chooses to put on the shelves products from that insurance company that offers the highest commissions. Is like going to the doctor and being prescribed the medicine that brings certain advantages to the physician – instead of those that you really need. How fair is it? Sales targets will no longer by an incentive.

Last but not least, also thanks to the IDD, consumers will understand what they’re buying. According to EIOPA’s Consumer Trends Report, complaints relating to the terms and conditions of contracts (interpretation, insufficient transparency etc.) represented 13% of the total complaints in the EU.

So here comes the IPID-Insurance Product Information Document – which applies to non-life products is addressing just that. It is trying to fix the consumer level of engagement with disclosures, to help compare between products and to make customers focus less on the price and more on the coverage. We can only imagine the sheer numbers / and what impact the IPID will have. But for this to work consumers have to be helped to understand what information they will be given in the IPID. This shouldn’t be just a tick-box exercise. The industry really has to start talking more about its responsibility and duty of care to its customers.

In example, a car rental company (basically ancillary insurance distributors) will really have to explain to their clients if and for how much they are insured in an IPID. No more guessing, no more trying to read the fine print or understand the exclusions of the policy. Another relevant example in this particular case: the IPID will reduce situations such as the ones experienced with Mobile Phone Insurance in several countries, where consumers were unaware of the large coverage exclusions in the policies > and they had surprises when they tried to make a claim.  In my view this is the one major development of IDD; to provide a key information document with user friendly information about what is covered &what it is not covered. This is my view the “new paradigm” of consumer protection (i.e. PRIIP’s KID or UCITS’s KID).

Bottom line: the IDD brings PRINCIPLES to the distribution of insurances and to the insurance value chain. It might also bring, some argue, too much red tape and make everything a little too complex and, why not be transparent about it, costly. But how have we come to that? Are the consumers to blame?
However, what we truly need – in a perfect world, is balance. What we also need is trust between supervisors, industry and consumers. The intention is definitely good here. But one should not forget that the future is already out there and things are about to change. Really fast.

 


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