The topic of IDD has been plaguing the insurance market for some time now. The new broker guidelines of the Insurance Distribution Directive (IDD), which were adopted by the European Union, entered into force on 23 February 2018. EU member states must implement the Directive as national law by 23 February 2018. However, the details concerning the structuring of the new regulations on a national level still have to be defined in a regulation. In Germany, a new draft regulation was published on 27 June 2018; the draft is expected to be passed by the German parliaments – the Bundestag and Bundesrat – by the end of 2018. The IDD comprises all the sales activities of the insurance industry and applies to all distribution channels. The goal of the EU is to harmonise the selling of insurance investment products through minimum standards and to achieve equal conditions of competition for all distribution channels.
With the directive, legislators have exercised significant influence on the product and distribution structures of insurers. The IDD includes, among other things, new advisory guidelines on insurance investment products, transparency provisions, basic principles for avoiding conflicts of interest and an obligation to professional training on behalf of insurance brokers. This requires significant adjustments to business processes, workflows and IT systems of insurers.
1. Representation of the product and distribution costs
Brokers must be able to provide their customers with the amount of their personal remuneration and/or their personal interest in the sale of the product prior to the conclusion of the contract. In addition to commissions and fees, this also includes indirect benefits such as allowances, bonuses, incentives, etc. However, classic IT systems only allow calculation of the remuneration and commission at a later point in time during the sales process, in part because the remuneration is dependent upon the achievement of the sales targets. The IDD requires that information on the costs be presented during the offer phase. In addition, brokers may only sell insurance products that are ideal for the customer. Sales targets and remuneration must not create incentives that could influence the broker to offer or to sell insurance products that do not correspond to the interests of the customer. This could lead to significant adjustments in the remuneration and commission systems.
2. Advice and documentation requirement
No sale without advice – all sales channels, offline or online, are treated in exactly the same way. Until now, insurance technology companies, direct insurers and online distributors were able to sell their products without advice. The IDD renders this exception out of date. Sales over the Internet will become significantly more complex with the advice requirement. Because experience shows that completion drop rates for complex online processes, insurers should rely on intelligent and user-friendly IT solutions to keep the online sales process as simple as possible. Thanks to modern IT platforms and the use of CRM systems, distribution channels can be connected to each other, thereby making it easier to comply with regulatory requirements.
In order to meet the higher requirements in terms of advice, brokers also need more information about existing customers and potential customers. This means that insurers need secure IT tools that comply with data protection regulations to collect, manage and store customer information. Brokers need efficient IT support that enables them to use data, regardless of time and place, in compliance with regulations across the entire sales process.
Every contract offered must correspond to the customer’s needs, so there must be written documentation of the reasons why the product is best suitable for the end customer. Additionally, for the sale of insurance investment products, it must be illustrated that the knowledge and experience of the customer, their financial situation, risk tolerance, etc. were taken into consideration during advising and recommendation. To ensure that this is the case, advice and documentation processes must be analysed and adjusted.
3. Product approval procedures
In the future, insurers that design insurance products must implement a procedure for the approval of each individual insurance product. This also applies to any significant adaptation of products before they are marketed or sold. Furthermore, the target market for each product must be determined and it must be ensured that all risks for the defined market have been assessed. This arises from the Preparatory Guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors, which were published in February 2016 by the European Insurance and Occupational Pensions Authority (EIOPA). This means that existing product development processes and IT systems need to be adjusted.
4. Professional training
The directive provides for an obligation to professional training for all distributors of insurance. Each year, they must provide evidence of 15 hours of professional training. This applies to anyone who can give information about an insurance product, and therefore applies to all employees with sales activities, whether internal or external.
The overview clearly shows the impact of the IDD on insurance sales and the cooperation between insurers and online platforms, comparison sites and online brokers. This means, for instance when robo-advice is used, it must be ensured that these tools only recommend products to end customers that correspond to the customers’ needs and wishes. So the databases and algorithms must be adapted and updated on an ongoing basis in order to comply with the requirements of the IDD. An online article in the industry journal for insurance sales experten Report said the following: ‘All sides will take a close look at which potential partners offer the best IT systems and processes in order to make the balancing act between regulation and digital distribution as efficient and user-friendly as possible.’
Without appropriately designed IT, the IDD will not be realisable. The implementation of these rules will lead to extensive changes in IT systems. For the life insurance industry, which is already under significant pressure in terms of costs and turnover, this means additionally high levels of burden.
msg life knows the system landscapes of life insurers, as well as their technical processes and workflows. Our many years of experience as a software and consulting company in combination with our expertise in the implementation of regulatory projects makes msg life your perfect partner in matters relating to IDD. We offer modern and flexible complete solutions that meet all regulatory requirements.
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