Articles - What does the IDD mean for UK insurers

Over the past year I have become increasingly involved with conduct of business rules, in particular the Insurance Distribution Directive (IDD). I am sure many of you will have heard about it as it comes into effect in February 2018 and will part a significant change in Europe. But what’s important about IDD for UK insurers and intermediaries? The answer really depends on what products you write and how and where you sell them.

 By Kareline Daguer, Director, PwC

 IDD applies to both insurers and intermediaries, including price comparison websites. In the UK, the FCA has traditionally been very proactive in gold plating EU conduct regulation. As a result, UK firms already comply with certain elements of the directive. IDD is the successor of the Insurance Mediation Directive (IMD), both of which are minimum harmonising directives. This means that Member States can have rules that go over and above those dictated by the directive. So, in practice, different EU countries will apply IDD in slightly different ways. One difference from the IMD is that IDD will have a lengthy set of Level 2 regulations and EIOPA Guidelines to back it up; both the Level 2 measures and Guidelines do not need to be transposed into national law to be effective. This will boost convergence across Europe, but for some EU countries with little history or experience of conduct regulation it will require a lot of effort.

 What are the key changes introduced by IDD that firms should be looking at? First, IDD is based on the overarching principle that firms should act in the customer’s best interest at all times. This seems an obvious thing to aspire to but some business models are complex and firms in the distribution chain might be adding little if any value to the customer. The directive requires firms to disclose the nature and basis of their remuneration before a contract is concluded and again the FCA is clear that vague statements will no longer be sufficient. The new principle, coupled with a continued focus from the regulator on value in distribution chains and rules on remuneration disclosure, should be an area of focus for firms in the next few months.

 Secondly, for those selling on a non-advised basis (usually non-life products) there will be stricter requirements to identify a client’s insurance needs and to only offer relevant products. This goes beyond adding a generic statement to communications with customers and requires asking the right questions to determine the client’s needs. More importantly, insurers must have controls in place to ensure distributors are offering the correct products to the clients across the distribution chain. This change will require drafting distribution agreements across the chain and may result in simplification of products. Finally, the IDD brings in many other smaller changes that will affect players to different degrees: professional and competence requirements (i.e. minimum number of hours of training and documentation), Insurance Product Information Document (IPID), risk transfer CASS rules and alignment to other directives (MiFID2 and PRIIPs) to name a few.

 UK insurers and distributors need to comply with the UK version of IDD in eight months’ time so many firms are already considering what steps they need to take to be ready. The FCA plans to issue another consultation on transposition of the directive soon to cover rules on product oversight and governance plus some other matters so insurers should watch this space. From a different perspective, IDD raises questions about the ability of UK distributors with EU businesses to continue trading in Europe after Brexit. IDD has no equivalence provisions, so for those making Brexit contingency plans, IDD is a very important block to consider. We can expect that IDD implementation will come in different flavours in different Member States.

 I think IDD is a great opportunity for market players. Product simplification to fit real customer needs, eliminating unnecessary steps in the value chain and proper disclosures should be beneficial to the business as a whole if done well. Some will prefer to wait until the regulator comes knocking on their doors to get their act together. The question is: do firms need to be forced to ensure they act in their customers’ best interest? Not taking IDD seriously might indicate that the customers are far from the top of firms’ priorities. Firms send that message to markets and regulators at their peril.

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