In the second of a series of three articles, Anthony Dault, director of insurance regulatory services at PwC Luxembourg, explains the implications of the insurance distribution directive (IDD), which is set to go live in October 2018. Today he explains the impact on distributors and how investors will benefit.
Delano: How will the changes brought by the IDD impact distributors of insurance products?
Anthony Dault: The impacts are far-reaching and range from operational to strategic considerations.
The POG (product oversight governance) and PDA (product distribution arrangements) will force insurance companies to rethink the whole product launch and maintenance process.
Launching a new product will need to go through an enhanced and much more formal process, which will require a full assessment of the product’s eco-system (adequacy of the product’s features via ex ante product testing, assessment of the appropriateness of distribution channels, adequacy of the remuneration scheme, potential conflicts of interests…), not only at the inception stage but also on a regular basis as a product will need to go through a periodic reassessment (with formal proof that the exercise has been actually undertaken).
Consequently, intermediaries will need to ensure they fully understand the products they are selling: who it is intended for (i.e. target market) and its adequacy to the clients demands and needs. They must also ensure increased “after sale maintenance” as a suitable and appropriate product at the time of sale might not be later in the contract life cycle as the policyholder’s needs evolve over time. Although already in the professional practice of many intermediaries, ensuring proper client services over time might nevertheless prove challenging. The “old days” of selling a product and forgetting about the client are over.
Increased communication and cooperation between product manufacturers and intermediaries are to be expected (the IDD formally states the minimum information to be shared between manufacturers and intermediaries). While it could be concluded that the IDD remains mostly an intermediary burden, insurers are not in a position to place full responsibility on the intermediaries. Proactive, “intelligent” and mutually beneficial relationships that will need to be set up among actors.
For insurers, challenges may also arise from situations where they find themselves in unwanted/undesired “direct selling” situations, where intermediation obligations will bear on them. Anticipating and devising actions to be taken to handle such situations will be key.
Finding a balance between the formal obligations without disrupting operational and commercial efforts too much will not be easy and will require embedding the IDD requirements in a revised/enhanced/adjusted business and operational model.
Delano: How will IDD benefit investors?
AD: By raising professional standards, the IDD aims at generating greater transparency and accountability of insurance distrubutors. Even though it would be utopic to envisage buying an insurance product in the same was as "shopping for a fridge", the client has earned the right to be properly informed and assisted in making an informed decision as follows:
Improved pre-contractual information,
Personalised advice and recommendations,
Transparency on costs and charges attached to the insurance product (and its underlying investments’ performance), including the cost of advice,
Better trained intermediaries.
One could argue that the additional information that will be provided to clients may not fully support the objective of the IDD of better and clearer client information (IDD-induced information will come on top of the already pretty extensive pre-contractual and contractual information that is provided to the client). However, it is difficult to argue against the objective sought by the IDD, namely enabling a more educated decision-making process by the client and ensuring that intermediaries fulfil their duty to assist the clients.
The IDD should be seen by manufacturers and intermediaries as a tremendous opportunity to forefront their role and capabilities by allowing them to better communicate on the added value they, in most cases, aleady bring to the policyholders during the contracts’ lifecycle.
This Q&A is based on available information at the date of writing. In addition, in several instances, it reflects the personal views of Anthony Dault and not necessarily the views and position of PwC Luxembourg as a whole.
In summary: Key changes introduced by IDD
The IDD introduces or reaffirms a variety of concepts that will help reshape the insurance intermediation value chain, such as, but not limited to:
Organisational and professional requirements (training, increased professional indemnity insurance thresholds…),
Product oversight governance (POG) for insurers and the related product distribution arrangements (PDA) for intermediaries will mean greater communication between insurers and intermediaries, as well as a rethinking of product development with the introduction of new concepts such as target market;
Stricter requirements for insurance-based investment products (IBIPs);
Enhanced minimum standards in relation to conflicts of interest (prevention, management, disclosures…) including considerations and guidelines on remuneration and inducements,
Generalised mandatory advice (with possible exemptions, opt-outs),
Suitability and appropriateness assessments (depending on the product type),
Increased clarity on bundled insurance products (cross-selling);
Publicly available register of approved intermediaries;
Generalised mandatory advice (with possible exemptions, opt-out);
Suitability and appropriateness assessments (depending on product types).