Despite the notable uncertainty concerning the United Kingdom and Gibraltar's future trading relationship with the European Union, there are a number of upcoming developments which the Gibraltar insurance industry and its stakeholders should be monitoring. One such example of this is the European Commission's Directive (EU) 2016/97 on Insurance Distribution (the "Insurance Distribution Directive" (IDD)), which came into force on 22 February 2016.
Understandably, the spectre of Brexit will have taken some attention away from the impact of this and indeed, other EU directives. However, despite what the longer term future may hold, both the UK and Gibraltar will be required to implement the provisions of the IDD into national law by 23 February 2018. This is due to the fact that, based on current forecasts, both jurisdictions shall remain a part of the EU until at least March 2019 (and possibly longer) and will therefore have continuing treaty obligations, including in respect of the transposition of the IDD. Consequently, Gibraltar based insurance intermediaries and undertakings which sell, advise on or carry out other work preparatory to the conclusion of insurance contracts will be required to comply with the provisions of the IDD for at least a period of one year (subject to the IDD having first being transposed into Gibraltar law).
What is the IDD and why is it important?
The IDD will revise and replace the current Insurance Mediation Directive (2002/92/EC) (IMD), which all Gibraltar based insurance brokers and intermediaries are already subject to. The principal aim of the IDD is to ensure that distributors of insurance products act professionally, honestly, fairly and in the best interests of their clients. The new directive is designed to improve the way insurance products are sold and distributed by:
- Improving transparency in the price and costs of insurance products, as well as helping consumers avoid buying products that they do not actually require.
- Establishing a simple, standardised insurance product information document (IPID) providing clearer information on non-life insurance products, so that consumers can make more informed decisions.
- Improving regulation in the retail insurance market.
- Promoting fair competition between distributors of insurance products.
- Strengthening consumer protection.
The scope of the IDD is significantly broader than that of the IMD and places much greater emphasis on the regulation of all distribution channels for insurance products. According to the European Commission, the IDD will cover a reported 98% of the insurance market, as opposed to the estimated 48% caught by the IMD. One of the main reasons for this being that many entities not previously regulated, such as travel agents, price/insurance aggregators, car rental companies, opticians and similar SMEs will now have regulatory obligations (albeit that these obligations will be applies proportionately). The IDD will also apply to (re)insurance companies selling directly to consumers.
The IDD identifies the following categories of person as falling within its scope:
- Insurance and reinsurance undertakings – insurers or reinsurers that sell their own insurance or reinsurance products to consumers directly (without using intermediaries).
- Insurance and reinsurance intermediaries – effectively any insurance intermediary whose main business is that of insurance or reinsurance distribution.
- Ancillary insurance intermediaries – persons which carry on insurance or reinsurance distribution activity as a secondary activity, such as travel agents, car rental companies and similar businesses offering insurance products that are complementary to their principal goods/services (although certain exemptions and "lighter touch" provisions will apply).
What will the IDD change?
As already indicated, the IDD will have differing requirements for firms depending on the extent to which they are involved in the distribution of insurance by way of business. It is however designed to generally improve the regulatory framework for the distribution of insurance products throughout the EU by focusing on greater consumer protection and cross-border integration.
Summarised below are some of the main changes and key elements of the IDD:
- Registration requirements – Insurance, reinsurance, and ancillary insurance intermediaries (falling within the IDD's scope) shall be required to register with the Gibraltar Financial Services Commission.
- General good rules – under the IDD, where EU Member States possess and apply additional 'general good' type rules, then these rules must be made publicly available. By way of information, 'general good' rules are a concept of EU law under which a host EU Member State may impose additional regulatory measures if those measures serve a general good (within the context of free movement of services and goods). The Court of Justice of the European Union has acknowledged areas such as consumer protection, language rules and avoidance of fraud could fall within the scope of the interest of the general good. These rules are therefore only relevant to those insurers or intermediaries which 'passport' services into other EEA states.
- Enhanced professional requirements and internal policies - the IDD shall require that employees of (re)insurance undertakings and intermediaries undertake a minimum of 15 hours per year of professional training and development
- Professional indemnity insurance - The IDD sets a minimum professional indemnity insurance requirement for intermediaries of at least €1.25 million per claim or €1.85m in aggregate, (unless a comparable insurance or guarantee is already provided by the undertaking on whose behalf the intermediary is acting). Under Gibraltar's current IMD regime, GFSC licensed insurance intermediaries are only required to hold €1 million per claim or €1.5m in aggregate, meaning that some of these entities may need to consider extending their existing cover. The IDD also prescribes that ancillary insurance intermediaries must hold proportionate professional indemnity insurance, but at a level established by each Member State.
- Transparency – prior to concluding contracts, insurance intermediaries must disclose details concerning their remuneration (i.e. fees and commissions) to their customers. This is already the case under IMD, but certain additional measures will apply.
- Information requirements/ product information document – the IDD prescribes detailed requirements on the information that must be disclose to customers before the conclusion of contracts. These requirements will differ for each type of insurance distributor but will generally include identity, address and registration information. A standard 'insurance product information document' must also be drawn up for non-life insurance products.
- Sanctions - the IDD lays down penalties for both natural and legal persons, with fines ranging from €700,000 up to €5 million.
What should I do?
If you are an insurer, intermediary, or otherwise involved with the sale or distribution of insurance products, then you would be well advised to consider whether the IDD applies to your business. Despite Brexit, the IDD is likely to come into effect into Gibraltar law next year meaning that non-compliance could lead to significant regulatory action and penalties. There is however still sufficient time for affected parties to review their internal processes and procedures to ensure that they are compliant when the new requirements take effect next year.
Please note that this article is only intended to provide general guidance and specialist advice should be sought on your specific circumstances.