European rule makers have long wanted to align the legal and regulatory frameworks applicable to insurance-based investment (IBIPs) and investment products. Indeed, back in 2007 when the PRIIPs (Packaged Retail and Insurance-based Investment Products) initiative was born, its stated objective was to align the product disclosure framework to certain insurance and investment products. This was based on the rationale that such products were comparable enough to warrant a common set of rules. There was much debate at the time as to whether insurance and investment products were truly so alike as to be explained to consumers through a common template – history now tells us that there was in fact great complexity behind that initial objective of simplification and comparability.
The forthcoming Insurance Distribution Directive (IDD), and in particular the provisions applicable to IBIPs, originate from a similar line of thinking. If certain insurance products share a degree of similarity with investment products, then the rules applicable to the distribution of such products should also be aligned. IDD has emerged as the second major initiative designed to converge the legal and regulatory frameworks of insurance- based investments and other investment products.
IDD takes many pages out of the MiFID rulebook and introduces higher standards for ensuring that an insurance-based investment product is suitable for a client in the context of an advised sale.
Establishing the demands and needs of the customer is no longer sufficient and greater scrutiny of the client’s knowledge and experience, financial situation and investment objectives is required. Furthermore, IDD specifies that the distributor (a term that notably covers not only insurance intermediaries but also the employees of an insurance company selling directly) may agree to carry out a recurrent review of such suitability.
Insurance distributors, whose products are long-term investments and are perhaps less likely to see their clients as frequently as, say, bankers will have to strike the right balance in order to determine when and how this review is required to optimally serve their clients.
In a similar vein, the new IDD Product Oversight and Governance is strongly inspired by MiFID and will ensure, where this was not already the case, that the customer is put at the very heart of the product development process. Insurers will no doubt benefit from the wealth of documentation and guidance generated in the context of MiFID, but should not underestimate the differences and the adaptations required.
Finally, rules on inducements will also sound familiar to the MiFID-literate, although again, elements are similar but not identical. Rather than introducing a ban, the IDD lays out a series of conditions for inducements permitted, and stipulates that intermediaries and insurers will need to conduct a risk assessment to determine whether an inducement may cause consumer detriment and thus should be avoided. The rules contained in the IDD will not however displace any market- specific (more stringent) provisions on
the subject, such as, for example, those introduced under RDR (the UK’s Retail Distribution Review) or AssurMifid in Belgium.
Overall, it's a strong family resemblance but not quite a DNA match. Interestingly, the European Parliament Committee on Economic and Monetary Affairs (ECON) reflected in a June 2018 study on the marketing, sale and distribution of financial products that MiFID II should perhaps have covered IBIPs too.
With this level of regulatory complexity, it’s important to work closely with providers who have the expertise and understanding in how to support you through these changes. Lombard International Assurance, with a proven track record of issuing policies from multiple jurisdictions, is uniquely positioned to navigate through this evolving regulatory landscape. Our long-standing collaboration with private banks and investment partners allows us to draw on the experience of MiFID to deliver solutions that support you in building effective wealth and succession planning strategies for your clients. More than ever, our expertise is the differentiating
factor that will allow us to fully leverage the possibilities offered by IDD.
Check out "Demystifying the IDD. Part.1" here!
By Valérie Mariatte-Wood
Associate Director - Head of Regulatory Proposition
Lombard International Assurance
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