IMD2: New Tendencies

Samim ünan

IMD

Need to revise- Higher consumer protection - Avoidance of conflicts of interest

Key problems encountered

Revision of IMD

- Insufficient quality of information provided to consumers

- Conduct of business rules: conflicts of interest and transparency

- Legal uncertainty due to unclear definition of scope

Revision of IMD

Proposed approach

Policy holder protection at a high level

– Providing the policyholders with all relevant information in a clear, comprehensible and accurate manner

– But also providing fair and not misleading information

Policy holder protection at a high level

IMD 12 (information duty)

– IMD 12(1) list of information to be provided to the customer by the intermediary (prior to the conclusion of the contract and after the conclusion of the contract)

– IMD 12(2) “fair analysis”– IMD 12(3) specifying consumers’ needs + underlying

reasons for any advice– IMD 12(4) exemption of large risks– IMD 12(5) stricter rules

Management of conflicts of interest and transparency

- Insurance intermediaries to act honestly, professionally and in line with the interests of their customers

- Current rules in the IMD are not sufficiently clear and effective

Clearer provisions on the scope of IMD

- Direct sales by the insurance undertakings and their employees?

- Insurance PRIPs (packaged retail insurance products) subject to different rules?

- Inclusion of the sales through distance marketing?

- Activity based scope retained?

Cross border business

- More effectiveness

Higher level of professional requirements

- Knowledge- Ability- Requirement to ensure that all persons in

insurance undertakings rersponsible for insurance distribution and sales in respect of insurance products demonstrate the knowledge and ability necessary for their duties

IMD2

Legal framework – Lamfalussy structure?– Classical structure?– Multi-level structure?

– One or two Directives? (1- organisation of the profession/registration 2- conduct of business requirements)

IMD2 - Scope

As broad a scope as possibleDirect sales of insurance activities to be included

within the scope (consumer protection= protection afforded to consumers should be the same regardless of the sales channel)

But employees of the insurance undertakings need not be registered under IMD2.

IMD2- Scope

Insurance undertakings acting as agent for another insurance undertakings should be regarded as intermediaries

Reinsurance intermediaries: different opinionsInclusion (single market objective) Exclusion (b2b relationship)

IMD2- Scope

Exemption of “large risks” and “reinsurance intermediation”: (no reason for removing the exemption, no particular problem detected)

Nature and characteristics of reinsurance and large risks + specific type/profile of the parties (in particular the customer). Customers usually sophisticated in terms of knowledge and financial capability, receive information and advice often tailored to their needs from professionals

IMD2- Scope

- Definition of “insurance intermediation”- Retaining of activity-based definition but improvement of the

definitions- Grey areas: price comparison websites, car rental companies- A policyholder in the context of a collective policy? (if the

policyholder does not receive any remuneration, collect premiums from the adherants on account of an insurance undertaking nor perform any other intermediation activity such as claims handling he must not be regarded as an intermediary

IMD2- Scope

Basic definitions of “agents” and “brokers” to be included in IMD2?

“Introducing” ? (activity consisting of forwarding contact details only without giving any information about the product –key element seems to be information about the product: if it is given then IM).

IMD2- Scope

Price comparison websites (displaying or ranking insurance contracts = insurance mediation? Would remuneration on the number of click-throughs to insurance undertakings websites or number of contracts sold mean brokerage?)If from the website there is no support to the sale of an insurance, exclusion from the scope; if the consumer at the end of the process can conclude the contract or if the consumer receives a recommendation to buy one or more, within the scope(magazines or other media?)

IMD2-Scope

Car rental companiesdifficult to reach a majority view- IMD2 to bring more precise drafting of scope of intermediary activities

Wholesale (master) brokers? They must be treated as the other intermediaries.

IMD2- Scope

Outsourcing

Outsourced intermediation activities should be included in the scope of IMD2 (to prevent circumvention)

Outsourcing of the direct sales?

IMD2- Consumer protection

• Transparency of remuneration

• Conflicts of interest

• Information provided by the insurance intermediary

• Possible improvements of IMD Article 12 and 13

IMD2- Consumer protection

Transparency of remuneration - Regulation- Conditions under which information on

remuneration should be disclosed- Content of the disclosure- Remuneration through the chain

IMD2- Consumer protection

Conditions under which remuneration should be disclosedThe customer should be entitled as a minimum to request the information on remuneration - At the conclusion of the contract- At each renewal or amendment ,

The right of the costumer to request disclosure of the remuneration should last until the end of the contract periodThe information requested should be provided promptly

IMD2- Consumer protection

Content of the disclosure of remuneration- All types of remuneration should be disclosed.- When there is uncertainty on the amount received by the intermediary, how to

disclose? - description of the benefit (remuneration in kind) or

- description of the calculation criteria (contingent commissions)- Or only the fact that the intermediary receives a type of remuneration which is

uncertain in amount (existence of a contingent commission) without stating the type of remuneration or the calculation criteria (giving too much information might not help to adress consumer protection- information so abstract and difficult to understand – could create misunderstandings)

- Ban on remuneration which is uncertain in amount?

IMD2- Consumer protection

Remuneration through the chain

If remuneration through the chain is not included in a disclosure of remuneration, certain remuneration paid directly or indirectly by the customer may be unknown.

Two options:- The intermediary should declare the existence of a chain of

intermediaries, upon request only- The intermediary should declare the total sum (cash) of all remunerations

paid through the chain as a percentage of premium paid by the customer, here too upon request only

IMD2- Consumer protection

Remuneration through the chain

Chain of intermediaries is simple in the case of a retail sale (one to two parts)But it is complicated in the case of a whole sale (many differents parts). For complicated chain, neither the insurance undertaking nor the intermediary (facing the customer) necessarily knows the exact amount of remuneration through the chain or the breakdown

IMD2- Consumer protection

Conflicts of Interest Definition: situations that have the potential to negatively influence the independence of an intermediary because of the possibility of a misalignment between the intermediary’s and his customer’s interest resulting in detriment to the customer

IMD2- Consumer protection

Possible conflicts of Interest

- Intermediaries integrated in or part of an insurance group (risk of not being independent and impartial)

- Intermediaries also members of the governing bodies of insurers or reinsurers; acting as investigation experts or claims adjusters

- Marketing or selling insurance products in association with the supply of other products or services (credit insurance offered by a bank associated to a loan)

IMD2- Consumer protection

Possible conflicts of Interest

- Contingent commissions, profit shares, volume over-riders, corporate hospitality and gifts, soft loans, training support

- Reinsurance conflicts (placement of business is used to encourage insurers to use the intermediary to arrange reinsurance contracts)

- Broker-agent (intermediary acting at the same time as broker-representing interest of policy seekers- and agent representing the interest of insurers)

IMD2- Consumer protection

Management of conflicts of interest- IMDArticle (12) (1) (c) and (d)(mutual holdings between insurance intermediaries and the

insurance undertakings – to be disclosed) Article 12 (1) (e) and (2)(insurance intermediation exclusively with one or more

insurance undertakings)

IMD2- Consumer protection

Management of conflicts of interest- IMD has adopted a regulatory approach

(mandatory disclosure of certain facts). - For IMD2: “three- level approach”– High level principles– Eropean requirements concerning insurance

intermediary– National requirements

IMD2- Consumer protection

Management of conflicts of interest

High level principles in the first level (for insurance intermediaries as well as for insurance undertakingsLevel two and three to apply only to intermediaries (those levels do not seem to fit for direct sales).

IMD2- Consumer protection

Management of conflict of interest – High level principles– Both insurance undertakings and intermediaries should

take reasonable steps to identify and manage the conflicts of interest

– If the conflict is not manageable and avoidable, they should disclose it to the customer

– But in some instances the disclosure is not sufficient. Therefore a general “duty of care” principle should also be included within the high level principles

IMD2-Consumer protection

Management of conflicts of interest – High level principles – Besides duty of care principle and disclosure of

conflicts of interest, should the intermediary consider also refusing the business when the intermediation activity would prejudice the customer? Yes.

– Internal procedures? They are useful tools but burdensome, therefore not necessary.

IMD2- Consumer protection

Management of conflicts of interest – Level 2– Decision regarding the relevance of certain

situations in terms of conflicts of interest should not be left to the discretion of the intermediary and clearly indicated by the IMD2 (or by national regulations).

– Banned activities? A “blacklist” of situations that would always lead to a ban of the intermediation activity is not likely. But a third level is envisaged.

IMD2- Consumer protection

Management of conflicts of interest- Level 3– Detailed provisions at national level– Stricter national requirements (prohibition of the

intermediation activitiy in certain situations where the intermediary could not act in the best interest of the customer)

– National law to define also the dependent and independent intermediary

IMD2- Consumer protection

Possible improvements of Articles 12 and 13, IMD – To make Article 12 more transparent to the

customer irrespective of whether he buys products or service from an intermediary or the insurance undertaking.

– To ensure a level playing field between intermediaries and insurers (direct sales).

IMD2-Consumer protection

Possible improvements of Articles 12 and 13, IMD – Article 13 to apply to direct distance saling.