Germany – Dr. Kathrin Feldmann, Clyde & Co
Dr. Kathrin Feldmann – traces the most significant points of the transposition of the Insurance Distribution Directive and its impact on insurance intermediaries in Germany
What are the most significant points in the transposition of IDD in your country?
What I find most important is the remuneration issue, as IDD now requires intermediaries to act honestly and fairly, and in particular to avoid any false incentives in relation to remuneration, and that any payment based on quantitative criteria should be considered carefully.
Training obligations as well as complaints handling requirements impose additional administrative structures and requirements for intermediaries.
- Training obligations
Insurance intermediaries have to ensure that their employees who are directly involved in the mediation of or advice on insurance products are reliable and sufficiently qualified. These are employees who are (potentially also) in direct contact with the customer. General preparatory activities such as sending contract forms, information or advertising material as well as activities not directly linked to the customer (eg bookkeeping or monitoring of premiums) are not included.
In line with the minimum requirements of the IDD, insurance intermediaries have to ensure that employees who are directly involved in the mediation of insurance complete a minimum of 15 hours of training every year (regardless of whether they work for the entire year or just part of the year, eg maternity leave). The only types of intermediaries who do not have to complete this training are ancillary intermediaries (Bagatellvermittler) and intermediaries who offer insurance as a supplement to goods or services which constitute their main activity (produktakzessorische Vermittler).
Intermediaries, eg retailers, have to fulfil all of the following requirements to be considered as ancillary intermediaries:
- they are not a full-time intermediary,
- the insurance is ancillary to the supply of goods or services; and
- the insurance covers the risk of defect, loss or damage to the goods or non-use of the service or the damage, loss of luggage or other risks in connection with a holiday booked with the retailer and
- the premium does not exceed EUR 600 if calculated pro rata temporis on an annual basis, or
- by way of derogation from i., the premium per person does not exceed EUR 200 where the insurance is supplementary to one of the aforementioned services of a duration not exceeding three months.
- Complaints handling for intermediaries
Insurance intermediaries must:
- have internal complaints handling guidelines, ensure implementation and enforcement thereof;
- establish a complaints management function if deemed necessary in relation to the scope of business (principle of proportionality, ie generally not required for individual enterprises, generally required for larger enterprises, but specific benchmarks have not been established);
- register a complaint, allow the competent IHK to inspect the register at any time and continuously examine and evaluate the data for complaint processing;
- keep complainants informed about the status of the complaint;
- disclose adequate information regarding the complaints handling process and ways for complainants to file complaints.
As under the previous regime, insurers are permitted to remunerate insurance intermediaries on a commission basis. However, where the IMD only provided for rules on insurance intermediation, the IDD now applies to the entire distribution process, including direct distribution by insurers.
There is a general requirement implemented in the Insurance Contract Act for insurers and intermediaries to act honestly, fairly and professionally and ensure that they are not remunerated, and do not remunerate or in any other way assess the performance of their employees in a way that conflicts with their duty to act in the customers’ best interests or would create an incentive (ie an economic benefit of any kind) to recommend a specific product even though a different product would be better suited.
An inappropriate incentive could, for example, be the amount of commission received for an individual contract or bonus payments. Generally speaking, any payment based on quantitative criteria should be considered carefully.
Additionally, there is a ban on special allowances and preferential contracts, meaning that is it prohibited for insurers and intermediaries to pass on or promise benefits (eg part of the commission, other goods or services not relating to the insurance, discounts on good or services) to policyholders, insureds or other beneficiaries for conclusion of an insurance contract (unless such benefit does not exceed a certain threshold). While not part of IDD, this ban has been (re-)introduced into German law upon IDD implementation. It is eg currently often discussed in the context of vouchers/gift cards provided to policyholders.
Further, upon first business contact, the insurance intermediary must disclose the following information to the customer in addition to the pre-IDD information requirements:
- the type of remuneration received in connection with the mediation (though not the amount), and
- whether (i) the remuneration is paid directly by the customer, (ii) the remuneration is included in the insurance premium as commission, (iii) the intermediary receives other contributions or (iv) whether the remuneration is a combination of (ii) and (iii).
Current discussion on commission cap
In line with the IDD intentions to avoid false incentives in sales, there is currently a discussion in Germany as to the introduction of a cap on acquisition commission in life insurance in connection with a recently published draft bill by the Federal Ministry of Finance. In order to keep life insurance policies attractive in times of low interest rates, the Federal Government plans to cap commissions to 2.5 percent of the gross contribution sum. Only if certain conditions such as a low lapse rate or only a certain number of complaints (ie rather qualitative criteria) are met, the acquisition commission may be raised to 4 percent of all gross premiums. In addition, with regard to residual debt insurance, the acquisition commission shall also be limited to a maximum of 2.5 percent of the insured loan amount.
The planned cap would apply to all distributors of insurance products, irrespective of the complexity of the insurance product. This means that both insurance products with a simpler structure (such as term life or funeral expense insurance) and more complex products such as life insurance with savings would fall within the scope.
The draft bill is currently reviewed by different stakeholders (eg insurance / intermediary associations) that will have the opportunity to comment. Considering the extensive discussions and diverging views on the topic, it is not yet foreseeable how such cap will be implemented.
Legal consequences in case of non-compliance with the prohibition to pass on commission
The German Federal Financial Supervisory Authority investigates violations of the prohibition to pass on commission committed by insurance companies within the context of its general supervision.
With regard to intermediaries, the competent Chambers of Industry and Commerce are responsible for sanctioning infringements. They have to decide whether the passing on of commission in a particular is an administrative offence.
Further, since the prohibition to pass on commission is a market conduct rule, violations can also have consequences under competition law (in particular injunctive relief) if pursued by competitors or other competent associations. This is not typically included in the scope of coverage, but should be mentioned here for the sake of completeness.
- Product Oversight and Governance
The requirements of Article 25 IDD on the development and distribution of new products and significant adaptations to insurance products are regulated by way of a “product approval process” for insurance product manufacturers. The rules apply to both product manufacturers (insurers and intermediaries) and those who are merely distributors of another manufacturer’s product.
Product manufacturers must develop a product approval policy in accordance with the European Commission delegated regulation relating to product oversight and governance (POG Regulation) defining the requirements for the product approval process. This must be applied to each specific new insurance product and each material change made to an existing product. The product approval policy must be set out in writing in an internal guideline which must include the following:
- definition of the “insurance product” or of the “material change” to an insurance product,
- definition of the methods used to identify the target market for the insurance product as well as determination and assessment of the risks relevant to the target market,
- definition of the methods used to determine the distribution strategy corresponding with the target market and the information to be provided to distribution partners,
- definition of the methods used to ensure that the insurance products are distributed to the identified target market,
- definition of how the insurance products will be monitored and undergo regular reviews.
Have new categories of intermediaries emerged since the IDD came into force?
No, not really. There haven’t been any new categories of intermediaries but some adjustments to the current regime for insurance advisors and what we have also seen – that’s not necessarily IDD related but goes along the implementation – is new kinds of intermediaries entering the market, in particular relating to digitization initiatives, such as InsurTech Intermediaries. We have seen a whole range starting from contract managing platforms to proper intermediaries, and what plays a significant role in the market is comparison platform at the moment.
No new categories of intermediaries have emerged since the entry into force of the IDD. However, the legal framework for insurance advisors (Versicherungsberater) changed to some extent. Insurance advisors in the German law sense advise on insurance or reinsurance, require respective license and – without deriving any economic advantage from an insurance undertaking or being otherwise dependent on it – also provide their client with advice on the agreement, amendment or review of insurance contracts or on the assertion of claims arising from insurance contracts in the event of an insured event, represents the client vis-à-vis the insurance company out of court, or takes over the brokerage or conclusion of insurance contracts for the client. Insurance advisors must only be remunerated by their clients. Any commission received by an insurer upon mediation of an insurance contract has to be forwarded to the client, ie policyholder. Insurance advisors are generally subject to the same licensing requirements, including eg PI insurance.
Besides, a number of new business models have developed (as eg InsurTechs) and have newly entered the market with different business models from (“mere”) contract managing platforms to licensed intermediaries (and also insurers).
In addition, online comparison platforms have played an increasingly important role and we have seen a number of co-operations between large platforms and insurers.
Are these changes positive for insurance intermediaries, or do you think they could create new risks of liability?
Generally I think it could create new risks for intermediaries. Not at least, as from a recent survey, intermediaries themselves consider that the time spent on preparation, documentation and advice, as well as all related requirements, has increased. Those requirements, in our impression are much more difficult to implement for smaller intermediaries as they very often do not have the HR requirements to implement those criteria.
The general tendency in the market seems to be that the introduction of the IDD has in fact increased the risks of liability as well as the general workload in insurance distribution.
According to a recent survey, for about 90 percent of insurance and financial investment intermediaries the introduction of the IDD has resulted in an increased effort in terms of preparation, documentation and advice. More than half of the intermediaries (55 percent) report that they have had to amend their internal processes and approx. 1/3 of intermediaries stated that they reduced the number of products they distribute. 9 percent of intermediaries surveyed even said that they would stop distributing insurance products entirely.
Further, obligations in relation to training, complaints handling and product oversight and governance may, in particular, be difficult to implement for smaller intermediaries who may not have the necessary human resources to successfully respective internal structures. From what we have seen in the market, the new regulations have not been implemented to the same extent by all intermediaries.
One of the areas where we have seen deficits, is first business contact information and, in this context, website imprints which often seem incomplete. This is an administrative offence and may be punished with a fine of up to EUR 3,000.
In addition, there is a considerable amount of uncertainty as the legal consequences in case of non-compliance in certain areas (eg failure to establish an internal complaints management system) are not clear resp. there is scope of interpretation.
Overall, based on the statistics provided by the Federal Chamber of Industry and Commerce (Deutscher Industrie- und Handelskammertag) that keeps the German insurance intermediary register, since January 2018, the total number of registered intermediaries has decreased by approx. 20,900, the vast majority of reductions being with tied intermediaries (decrease by approx. 20,200). At the same time, there is an increase of about 800 intermediaries who offer insurance as a supplement to goods or services which constitute their main activity (produktakzessorische Vermittler). This mirrors our impression that, in the market, more and more sales structures (in particular online) are developed including such intermediaries or ancillary intermediaries (Bagatellvermittler).
Are intermediaries ready to put these changes into practice?
Some are very well prepared and some are still in the process of implementing the requirements so there’s a whole range of level of implementation