On 4 August 2020 IVASS (Institute for Insurance Supervision) issued Regulation No 45 on insurance product oversight and governance requirements (POG) in order to complete the relevant discipline and implement the provisions of national and EU legislation. The Institute's purpose is clearly to secure uniformity in the discipline applicable to insurance investment products regardless of the distribution channel, to ensure consistency and effectiveness in supervisory systems, particularly regarding insurance investment products, and to safeguard the interests of final consumers.
The Regulation, which is scheduled to come into force on 31 March 2021, regulates in detail the approval procedure for new insurance products or for existing products that undergo significant changes before being marketed and/or distributed.
By such measure, IVASS imposes specific obligations on manufacturers (including de facto manufacturers) such as the identification of the reference market of the product, the identification of the categories of subjects to whom the product should not be distributed and the adoption of appropriate measures to ensure the correct distribution of the product to the reference market.
More specifically, and without claiming to be exhaustive, the Regulation:
- identifies the role, tasks and responsibilities of the corporate bodies of manufacturing insurance undertakings and distribution intermediaries enrolled in Section D of the Register of Intermediaries (RUI). They, when involved in the approval and distribution process of insurance products, shall be responsible for compliance with the relevant rules. The administrative bodies will also be required to approve and review, at least annually, the policies on POG considering the procedures for designing, monitoring, reviewing and distributing products as well as for corrective action for products that are detrimental to customers, taking into account the objectives, interests and characteristics of the customers to whom such products are addressed;
- sets out the specific tasks of the compliance function, which is responsible for monitoring the POG measures adopted, in order to identify the risks of non-compliance with the current legislation, and developing a periodic report. Such report shall contain the elements resulting from the analyses carried out regarding the correct definition and effectiveness of each stage of the approval and review procedure for each product;
- sets out the rules and elements necessary for the identification of the reference market and the negative reference market. The Regulation indeed requires the manufacturer to define in sufficient detail the reference market to which the insurance product is addressed and also to identify the so-called “negative reference market” to which such product cannot be sold under Article 30-decies of the Private Insurance Code. The assessment of the reference market shall take into account: the type of risks related to the product, the risks to which the types of customers for which the product is intended are exposed, the needs and objectives of such customers, the specific features of the product (in particular guarantees, exclusions and limitations of coverage) and the complexity of the product, having regard to the degree of understanding of the customer and the age of the customers as well as their professional and family profile. With regard to Insurance-Based Investment Products (IBIPs), the Regulation gives further specific indications to operators in order to identify the reference market, requiring them to assess the product conformity in terms of risk/reward profile and the conformity of the type of investment proposed to the business model envisaged for customers. In addition, the Regulation requires the manufacturer to verify that the product is actually distributed within its reference market and that any sale of the product outside of it be in any event outside the negative reference market and consistent with the adequacy assessment;
- identifies how the so-called product testing is carried out. IVASS provides that an insurance product, before being distributed on the market, shall be subject to testing activities in terms of the amount of costs and charges in relation to the objectives, the needs and characteristics of the reference market, so as to represent adequate value for customers. As regards IBIPs, however, the test shall involve verifying that costs and charges do not compromise return-on-investment expectations and that the product does not pose a threat to the stability and functioning of the financial markets;
- provides a definition of the information flows that must occur between manufacturers (including de facto manufacturers) and distributors. The Regulation establishes that, in order to better protect customers, undertakings must indicate the direction, content, periodicity and methods of exchanging information relating to the performance of their respective activities necessary to fulfil their obligations as well as to allow distributors to understand the target market of the products;
- regulates the distribution mechanisms of the products. Distributors, in accordance with the provisions of Article 30-decies of the Private Insurance Code, are required to adopt mechanisms to avoid or mitigate customer detriment, support a proper management of conflicts of interest and ensure that the objectives, interests and characteristics of customers are duly taken into account. The Regulation specifies that said mechanisms must be planned by assessing the compatibility of the products with the interests, needs and objectives of the reference market and in such a way as not to allow products to be sold to the negative reference market identified by the manufacturer. Intermediaries will also be required to identify the so-called actual reference market as well as the other categories of customers to whom a product cannot be distributed –so-called actual negative reference market–, thus allowing a further specification in addition to the indications given by manufacturers;
- specifically sets out the supervisory obligations of the structure responsible for the insurance distribution of the intermediaries registered in sections A, B and F of the RUI. They are required to monitor the risks of non-compliance with the obligations to obtain from manufacturers all the information necessary to understand the characteristics of the products and the reference market as well as the effectiveness of the above-mentioned distribution mechanisms adopted. Furthermore, distributors are required to highlight any critical issues emerging during such monitoring and to ensure the completeness of the information flows under the Regulation;
- sets out the terms of free collaboration relationships between intermediaries in order to ensure compliance with the obligations set out in the Regulation. More specifically, agents, brokers and ancillary intermediaries are required to provide their external staff with information relating to the reference market and the distribution strategy adopted by the manufacturer or intermediary granting the mandate. They are also required to identify how they receive the information collected by such persons and to verify the consistency of the distribution strategy with the reference market. In addition, in case of horizontal collaboration, intermediaries shall be required to ensure the correct transfer of information from the issuing intermediary to the proposing intermediary.
Originally published by NCTM, October 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.