Having covered Product Governance in our first Insurance Distribution Directive (IDD) Deep Dive, this article, our second in the series, will focus on the changes in provision of information to customers and the Insurance Product Information Document (IPID) and what this may mean for insurance businesses.
With the date for implementation of the IDD fast approaching many companies in the insurance industry are finding the need to change their documentation challenging. A combination of the number of products or documents which require changes and the need to reconfigure IT in order to be able to do so is resource intensive.
We aim here to give some guidance and help on what is required and how to approach some of the tasks involved.
Who is likely to be impacted?
All insurers and intermediaries who distribute general insurance products are likely to be impacted. In this article we are only looking at the implications of the IDD on information which is required to be provided to consumers whether through an intermediary distribution chain or direct by the insurer. With the introduction of the IDD, comparison websites are now specifically included, if there had been any doubt beforehand as to whether they were to be considered as an intermediary.
The impact on intermediaries and insurers will in some cases differ. For example, the disclosures about the nature of the services being offered and remuneration will differ as between an insurer or an intermediary. However, the obligations on other issues, such as product governance and delivery of the IPID (see later) will be dependent not on whether a distributor is an insurer or an intermediary but on who is the “manufacturer” of the product. That is, the party, who designed the product being distributed. In many cases, particularly where the intermediary is an MGA, both the insurer and the intermediary, will be jointly responsible for product governance and creation of the IPID requiring them to possibly work closer together than ever before, though the party responsible for delivery of the IPID will be the party distributing the product to the consumer. This may in many cases be a broker several links down a chain.
What are the changes to Customer Information?
The Insurance Mediation Directive, (IMD) which is being replaced by the IDD, provided some basic information to be provided by insurers or intermediaries to their customers but did not apply to large risks as defined. The IDD is increasing these disclosure requirements.
As a minimum harmonising Directive, the IDD also permits each country to go beyond the minimum requirements. Meaning that each member state may have differing requirements regarding who IPIDS need to be distributed to (I.e. to include commercial customers as mandatory) and varying customer disclosure requirements. Firms distributing products in Europe should be mindful of this potentially extra, regulatory burden.
The FSA and subsequently the FCA incorporated these requirements into their rules in a manner consistent with the IMD and they are currently to be found in FCA ICOBS 4, 5 and 6. These rules were not significantly beyond those contained in the IMD though there is the requirement, in ICOBS 3, that the terms and conditions of the insurance contract be communicated to the customer before the customer buys the policy in order to comply with related and separate EU legislation, the Distance Marketing Directive.
The IDD is advancing the requirements further in order to ensure that customers are receiving better information about the product they are buying and the service they are receiving and now requires the following to be provided before conclusion of the contract of insurance:
- Identity and address
- Whether they are providing advice or just information?
- Details of their complaints procedure
- In the case of an insurer, that they are an insurer
- In the case of an intermediary, where they are registered (evidence of authorisation) and the means of verifying this
- In the case of an intermediary, whether they represent the customer or insurer in the transaction
- In the case of an intermediary, whether they have 10% or more voting rights in an insurer or an insurer in them
- The nature of the service being provided
- The nature of the remuneration received in relation to the insurance contract and:
- Whether they are being paid a fee or commission by the insurer and if so whether it is included in the premium
- Any other remuneration or economic benefit they are receiving in connection with the contract
- If being paid direct by the customer, the amount of that fee or if not possible, the method of calculation
- Any other payments which the customer may have to make after the contract has been concluded such as payments for things like administration or claims handling fees
- The requirement to provide transparency is repeated at the renewal date when a further IPID (see below) must be issued
- A standardised insurance product information document, now known as an IPID as to which see below.
So, the new information which is required primarily sees an increase in transparency around the remuneration which the insurance distributor is to receive whether in the form of premium to an insurer or commissions/fees to an intermediary. In many ways the information relating to the service being provided is no more than had to be provided previously though there is now a requirement to ensure that the product meets the demands and needs of the customer regardless of whether it is being sold on an advised basis or not. This was partially dealt with by our first deep dive and will be looked at again in our next deep dive when we consider the new Customer’s Best Interests rule.
The previous rules for disclosure of remuneration applied by the FCA provided no requirement for disclosure to consumers but obliged an intermediary to provide details of their remuneration to a commercial customer if asked. For many years there have been debates about what intermediary remuneration should be disclosed to consumers and the issue has now been firmly resolved in favour of greater transparency.
Importantly IPIDs are only required for general insurance contracts being distributed to consumers. For these cases there is no longer a need to provide the customer with a Key Facts Document or Policy Summary and in fact must not be provided to consumers. However, the Key Facts Document or Policy Summary remains a requirement for general insurance customers and for customers purchasing pure protection contracts.
What is an IPID?
The IDD requirements are that the IPID shall:
- Be a short and stand-alone document;
- Be clear and easy to read;
- Be comprehensible whether in colour or black and white if printed in the latter;
- Be in an official language;
- Be accurate and not misleading;
- Be called an IPID;
- Provide information about the type of insurance;
- Provide a summary of the cover including main risks insured, sums insured, geographical scope and summary of excluded risks;
- Provide details of the payment and duration of premiums;
- Detail the main exclusions;
- Detail any obligations at the start of the contract;
- Detail any obligations in the event of a claim;
- Set out the term, start date and end date; and
- Provide the means for terminating the contract.
These requirements are prescriptive and appear in detail in the proposed FCA rules. They are supplemented by EIOPA’s technical standards which have been developed in accordance with the provisions of the IDD, (which includes the prescribed template for the IPID).
The EIOPA technical standards confirm that the document is intended to be a pre-contractual document and therefore should not be one which is personalised leaving personalisation to the policy document which is not replaced by the IPID. However, there are considerable difficulties with such a broad statement. For example, the income received by an intermediary, the start and end dates of the policy and the premium terms and payment proposals will change according to when the policy is being purchased and its start date.
The Technical Standards are sufficiently prescriptive to:
- identify Font and Size of text;
- specify the headings to be used and require icons as well as the order in which the sections must appear;
- outline the contents of each section and require the use of, for example, “green ticks” as symbols in the section identifying what is covered;
- be no longer than 2 A4 pages or 3 if the manufacturer can justify the need for a further page.
Hints and helpers on how to prepare an IPID
Although the document itself is an entirely new document a great deal of what is required in the document should already be readily available to insurers and intermediaries who have been issuing customers with product/policy summaries. In drafting IPIDs therefore the following may be helpful:
- Remember that the manufacturer’s name must be at the top of the IPID. If there is more than 1 the parties must agree who the “lead” manufacturer may be. This may not be the insurer in every case if the product has been designed by, for example, an MGA. Additionally, if you choose to put a company logo on the IPID, it must be the manufacturers logo, and not of any firm in the distribution chain.
- If a policy contained different sections which are underwritten by different insurers they may each issue a different IPID but may equally agree the format of a single IPID. Remember that the approach is designed to provide the consumer with a clear and concise summary of the cover being made available which would suggest that a single IPID would be preferable.
- The need to include bespoke information such as the policy start and end dates, premiums and any disclosable remuneration may, according to the FCA, be incorporated in the IPID by reference to, for example, a policy schedule which will avoid the need for an IPID to otherwise be an interactive document which must change for each insured. However, where this approach is taken the policy schedule should be provided with the IPID, as the IPID being a pre-contractual document would otherwise be incomplete as a form of providing pre-contractual disclosure without this information.
- Approach the tick/cross/exclamation mark formatting as if they are bullet points and be very brief to remain within the length limit.
- Take the same approach as was used for the Policy Summary when including details of the cover provided.
- If this it is a long-established product, review complaints and claims MI – if there are specific clauses which regularly result in claims not being paid or give rise to complaints this is a good indicator of an exclusion which should be included in the IPID.
- There must be one IPID for each product. Add-ons are treated as a separate product and must have their own IPID.
- Annual policies require a new IPID each year the policy is renewed. While there is no requirement for a new IPID to be issued if there have been mid-term changes the manufacturer will need to ensure that mid-term changes in the terms and conditions are reflected in any IPID issued on renewal.
- Due to the prescriptive nature of the IPID manufacturers are not permitted to include in the document other prescribed information which must be provided to a consumer such as the process for making complaints. These must be dealt with in other documentation.
- If your key facts policy summaries are incorporated in your actual policy wording rather than in a standalone document, then preparations should be made to remove these before the implementation date, as you cannot distribute both.
These changes brought about by the introduction of the IDD have and will continue to create some additional workflow for insurers and intermediaries. At least initially, there is also likely to have been some reconfiguration of software systems adding to the responsibilities of IT, compliance and underwriting departments. Once that interruption is over we do not believe that the additional requirements will cause insurance product distributors considerable additional work. Consideration of what may be required to be included within an IPID is likely to form a part of the product development process and the continuing product governance process because, if a product changes during its lifecycle the changes will need to be reflected within the IPID on renewal.