Challenges and Opportunities from the Insurance Distribution Directive Athens, July 12th, 2017 Carlos Montalvo Rebuelta
Table of Contents 1 Introduction 2 3 In a nutshell: Hot topics of today and tomorrow Some challenges to be aware of 4 IDD 2
Introduction
External Context The reality out there: Political Economic Technological Social & Demographics Regulatory & Supervisory impact of all the aforementioned (BUT also business) 4
Regulatory context Regulation has been a Top 3 risk for executives (Banana skins). Why? Uncertainty and change Prudential regulatory pendulum has shifted Growth as new driver. Conduct regulation as the new area of focus for regulators and politicians! Conduct risk is here to stay. FSB focus, IAIS focus, Regional and local focus as well. Conduct supervision will come (where it is not already business as usual). Compliance functions are still trying to find their way within companies: Are they a pure control function or (similar to the Risk Function) they can evolve towards adding value? 5
Hot topics for today and tomorrow
Hot topics (in a nutshell) TODAY Solvency II (implementation, interpretation, review(s)) ORSA ( fresh EIOPA report, enhanced expectations) ICS at a global level Brexit and its side effects Conduct risk (including IDD) (GDPR) (IFRS17) TOMORROW From Conduct to Culture Recovery and Resolution PEPP 7
Some challenges to be aware of
Challenges 01 Excess of Regulation Lack of holistic approach 02 03 Regulation as a cost Not tailored to local needs? (Greek specific risks and opportunities) 04 05 Why always wait until last minute? Who owns it? 06 9
IDD
IDD: What & Why What is IDD? A regulatory piece aimed at regulating How you sell products but also What products you (can) sell, to Whom and at What price. IDD Why IDD?. Why is IDD important? Because it exceeds compliance and gets into business models and strategy. Relevance to companies Under the radar Most companies focused on PRIIPS when the exercise started Strong links and dependencies to other areas Need to involve different departments in the Company Affects all companies and will change how Home-Host business model was built. 11
IDD: When There are less than 9 months left to prepare for IDD with even less time to shape the way the regulator will approach the implementation. 2016 2017 2018 IDD applies from February 23rd, 2018 Q1: EIOPA Thematic Review of unit linked products Q1: EIOPA advice Delegated Acts Q4: Mystery shopping by EIOPA? You need to be on the front foot in your response as IDD will shape the way the industry approaches customers and product design, as: 1. It articulates a formalised need to care about insurance customers 2. It reflects increasing board expectations surrounding customer centricity and accountability 3. It is evidence of regulators new approaches such as behavioural economics 4. National authorities will fine those found to be noncompliant MiFiD II PRIIPs - KID IDD? 12
Legal Framework Level 1 Legislative Acts Level 2 Delegated Acts RTS ITS Level 3 EIOPA Guidance and Recommendations Q&A Level 1 Level 2 Level 3 Directive UE 2016/97, of the European Parliament and of the Council of 20 January 2016 on insurance distribution. Technical Advice on possible delegated acts concerning the Insurance Distribution Directive (1 February). (Delegated Acts not yet published) 3 er Preparatory guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors. Guidelines on insurance-based investment products that incorporate a structure which makes it difficult for the customer to understand the risks involved (CP). Implementing Technical Standards on a standardized presentation format of the Insurance Product Information Document (CP). (Not yet published) Where are you now? (Not yet published) (Not yet published) European level National level 13
Main Impacts of IDD Sales with advice Inducements Text Text Conflicts of interest IDD Training POG Information to clients Crossselling 14
Content: Advice and standards for sales when no advice is given ALL insurance products Sale without advice Sale with advice Specification of the demands and needs of the client (based on the information obtained from the client). Specification of the demands and needs of the client (based on the information obtained from the client). Personalized recommendation explaining why a particular product would better meet the demands and needs of the customer. Information about whether the advice is given on the basis of a fair and personal analysis. Member States may require mandatory advice for the sale of any type of insurance product or for certain types of insurance products. IBIPs. Retail Clients Sale without advice Sale with advice Knowledge and experience assessment in the investment field of the relevant to the specific type of product or service (appropriateness test). Exception: (i) assumptions on which the assessment of the suitability sale is not necessary (ii) even if a product is not suitable or the customer information it s not obtained Knowledge and experience, financial situation and investment objectives assessment (suitability test). Suitability statement specifying the advice provided and how that advice meets the preferences, objectives and other characteristics of the client. 15
Content: Cross-Selling ALL insurance products The insurance distributor shall inform the customer whether it is possible to buy the different components separately and, if so, shall provide an adequate description of the different components of the package. Where an insurance product is ancillary to a service which is not insurance, the insurance distributor shall offer the customer the possibility of buying the good or service separately. Sectorial regulations for investment products/services, credit agreements, payment accounts. The distributor shall specify the demands and needs of the customer requirements and customer needs in relation to insurance products that form part of the whole package. Potential risk of remuneration policies ban that encourage cross-selling. IBIPs Retail Clients Sale without advice Sale with advice When a service package or combination products is offered, the insurance distributor will assess whether the overall bundled package is appropriate for the client taking into account their knowledge and experience. When a service package or combination products is recommended, the insurance distributor shall assess whether the overall bundled package is suitable for the client, taking into account their knowledge and experience, financial situation and investment objectives. 16
Content: Conflicts of Interest Insurance intermediaries Shall inform their customers, at least: ALL insurance products Whether it has a holding, direct or indirect, representing 10% or more of the voting right or of the capital in a given insurance undertaking; Whether a given insurance undertaking or parent undertaking of a given insurance undertaking has a holding, direct or indirect, representing 10% or more of the voting right or of the capital in the insurance intermediary. Insurance distributors Are not remunerated or assess the performance of their employees in a way that conflicts with their duty to act in accordance with the best interest of their clients. IBIPs Insurance distributors Shall maintain and operate an effective organizational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest from adversely affecting the interests of its clients. In the event that such administrative measures are not sufficient, the insurance distributor shall disclose the client of the general nature or source of such conflicts of interest (disclosure to clients). 17
Content: Inducements ALL insurance products IBIPs It shall inform the customer about... The nature of the remuneration received in connection with the insurance contract. Whether in relation to the insurance contract, it works: On the basis of a fee, that is the remuneration paid directly by the customer (in this case, the amount thereof shall be informed); On the basis of a commission of any kind, that is the remuneration included in the insurance premium; It shall inform the customer about... All costs and associated costs, including the cost of advice (where applicable), the cost of the product and how it can afford, as well as payments related to any third parties. They may be received commissions or fees, provided that: Do not have a detrimental impact on the quality of the relevant service to the customer. Do not impair compliance with its duty to act honestly, fairly and professionally. On the basis of any other remuneration; On the basis of a combination of any of the above types. Member States may restrict or prohibit the offer or acceptance of fees, commissions or non-monetary benefits from third party insurance benefits. Member States may restrict or prohibit the offer or acceptance of fees, commissions or non-monetary benefits from third party insurance benefits in relation to the provision of insurance advice. 18
Content: Information to Clients ALL insurance products Ex ante information Insurance intermediary Its identity and address, as well as its status as an intermediary; If they offer advice; Procedure for filing complaints and claims; Registration that is registered; If he or she acts on behalf of the insurance company; Information about the insurance product. Insurance undertaking Its identity and address as well as its insurance status; If they offer advice; Procedure for filing complaints and claims; Information about insurance product. Ex ante information IBIPs. Ex-post information Retail Clients Information about insurance products, including associated costs and expenses (PRIIPs, product sheets); When counseling, information about if a periodic assessment of the suitability will be provided Information about costs and expenses in aggregate, at least once a year. Periodic communications on the service provided. 19
Content: Training ALL insurance products Distributors that are engaged in insurance and reinsurance distribution: Shall possess appropriate knowledge and competence to perform their duties and functions properly: Training courses or professional development of 15 hours a year at least. It may require proof have successfully completed the training requirements and development by obtaining a certificate. Records of the courses and assessments made. They must have a good reputation, and in any case not have a criminal record. 20
Content: Sanctions The amounts of the pecuniary sanctions provided for in the IDD are significantly higher than those foreseen in the current Mediation Law (Law 26/2006, of July 17, on private insurance and reinsurance mediation). Additionally, the IDD extends the temporary prohibition to exercise management functions to the members of the management body in the insurance companies. Pecuniary sanctions under the current Mediation Law Very serious: Fine from 15,001 to 30,000. Serious: Fine from 6,001 to 15,000. Minor: Fine up to 6,000. IDD pecuniary sanctions If it is a legal person: o Up to at least 5,000,000 or up to 5% of total annual turnover according to the latest available approved accounts; or o Up to double the amount of the profits obtained or losses avoided with the infraction. If it is a natural person: o Up to at least 700,000, or o Up to twice the amount of the profits obtained or losses avoided due to the infraction. 21
Content: Building Ideas for your Product Supervision and Governance (POG) Agreements on Product Supervision and Governance (POG) are intended to ensure that the interests of customers throughout the life cycle of an insurance product are taken into account. This includes the process of designing and manufacturing the product, commercialization it in the market and monitoring the product once it has been sold. From 2018 onwards, POG will be an integrated part of a centered approach on the customers. Product design Many companies already know that their current focus on the product governance will not meet the new requirements, even if it is only because they are not able to demonstrate their fulfillment. Given that the insurance companies do not have other choice but implementing the new regulation, What are the odds? Product monitoring Customer Sales & Marketing POG 22
Content: New Requirements in the Design process and Distribution of the Insurance Products Objetives Manufacturers must clearly identify the Target market of each of the products as well as establish a proper distribution strategy. Procedures Implications of process Establishment of procedures and mechanisms, including process of design, approval and periodic review of products, definition of Target Market and distribution strategy. Product Governance Design & Distribution Distributors must ensure that they have adequate procedures and mechanisms in order to obtain the necessary information from the manufacturer for proper marketing of the product among its customers. Target Market Target Market definition: Determine an appropriate approach to define the identified target market of end customers within the category of customers Monitoring and reviewing on an on going basis the compatibility of products with the needs and characteristics of Target Market. Exchange of information Improving the flow of information between manufacturers and distributors: review and amendment of current information exchange agreements. 23
Lessons Learned: Most relevant IDD Challenges 1 2 3 4 5 6? Technology Inducements Business vs Compliance Deadlines Joint ventures Legal uncertainty IT changes require a great investment in time and money and for this reason they have to be prioritized and identified as soon as possible. The companies are worried about the inducements for their salesforce and how they can ensure the competitiveness. Insurers are looking for the right balance between Marketing, profitability and compliance with IDD. Insurers are not aware of the urgency and the short time available to adapt all issues before deadlines. When the company is involved in a joint venture, the efforts regarding IDD have to be shared, and this cooperation has to be monitored. The legal framework remains uncertain, Europe has no homogeneity regarding local laws, and the delegated acts are not public. 24
Risks and Success Factors Risks Success factors Very theoretical and exclusively regulatory. Not properly integrated in business. Insufficient approach to the Technological impact. Absence of clear reflection on business implications and decisions. Increase of deadlines and costs. Multidisciplinary and multidivisional teams. Clarity regarding project ownership Agile decision-making model of governance. Focus on the outcome not on the article. Approach by unconnected silos without global vision. 25
Questions? Thank you Carlos Montalvo Rebuelta Partner, EMEA Insurance Regulatory Leader t: +34 6287 79707 e: carlos.montalvo.rebuelta@es.pwc.com At, our purpose is to build trust in society and solve important problems. We re a network of firms in 157 countries with more than 223,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com. refers to the network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. 2017. All rights reserved.