Europe’s new regime on insurance distribution: Germany adopts controversial approach to implementation

Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) (IDD) sets a new European legal framework for insurance distribution. The IDD has to be implemented in the member states by 23 February 2018, and first steps are being taken in this direction.

On 21 November 2016, the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) published a first draft of an IDD Implementation Act which was subject to much discussion. Nevertheless, on 18 January 2017, the German Cabinet adapted the draft with basically only one significant change.

The implementation mainly affects the German Commercial Code (Gewerbeordnung) which is the law governing insurance intermediation but also the German Insurance Supervisory Act (Versicherungsaufsichtsgesetz) and the Insurance Contract Act (Versicherungsvertragsgesetz) to the extent there is insurance distribution by insurers.

Major issues
In Germany there will continue to be a differentiation between two types of insurance intermediaries: insurance agents (Versicherungsvertreter), acting on the side of the insurer, and insurance brokers (Versicherungsmakler), acting on the side of the insured. In addition to that, a new concept of honorary insurance consultants (Honorar-Versicherungsberater) is implemented. Authorisation may only be granted as either insurance agent, insurance broker or honorary insurance consultant.

The issue of remuneration is subject to major discussion: pursuant to the draft IDD Implementation Act, insurance intermediaries may obtain remuneration for their intermediation services only from the insurers. Only for consultation services (i.e. not intermediation services) provided to business customers, insurance brokers may obtain a fee from such business customers themselves.

On the other hand, honorary insurance consultants may only receive remuneration from their customers and must not obtain an economic advantage/contribution from insurers. In case the honorary insurance consultant mediates insurance coverage that includes contributions, he must immediately ensure that the contributions are paid to the insured.

Criticisms expressed are, for example, based on the argument that the draft goes beyond the scope of the Directive, which allows services for a fee as long as this is agreed upon with the customer in advance.

Insurance brokers see themselves at a considerable disadvantage, arguing that this would create the impression that an assignment to the insured’s or insurer’s side depends on the nature of payment (fee or commission) and that only honorary insurance consultants which are paid by the insureds act on their side – an assumption entirely in contrast with the concept of insurance brokers under German law so far.

Further, an exemption to this principle was demanded at least for the commercial/industrial sector. Here, it is quite common that insurance brokers are paid by the customer and net premiums offered. The customer should be able to choose the compensation model. Following these criticisms, the draft as adapted by the German Cabinet on 18 January 2017 provides for such an exemption for the industrial sector – the only significant change to the draft while passing the German Cabinet. However, some industry associations are still claiming that this exemption does not go far enough.

Finally, there is seen to be an unjustified advantage for honorary insurance consultants due to there not being a rule on cancellation liability regarding life insurance contracts affecting them – in contrast to the intermediaries. Also, there are no provisions that deal with a status change from insurance intermediary to honorary insurance consultant, neither is the nature of fee that can be obtained sufficiently specified (currently the provisions seem to allow also a success fee which is most likely not intended).

Much debated is the issue of a ban on passing on commissions. According to the draft Implementation Act, insurance intermediaries must not grant or promise insureds or beneficiaries a special compensation in relation to an insurance contract, meaning in particular that they must not pay forward the commission received in whole or in part (Provisionsabgabeverbot).

This is a rather surprising development since the majority of experts expected that the ban on special compensations – previous provisions on that were highly controversial and subject to court decisions – would be dropped in the course of the IDD implementation.

It is argued that granting or promising compensations would set the customer’s focus on short-term cash incentives rather than to satisfy the customer’s long-term needs. Further, the fear is that not having such a ban would have a negative impact on consultation quality. It remains to be seen what the implications for the practice are, e.g. how models of fintechs, where commission is not forwarded to the customer but donated to a good cause, will be treated in the light of such a ban.

What comes next
Comments to the Draft Implementation Act were invited until 12 December 2016. In total, three federal ministries were involved in reviewing the statements before submitting the draft to the federal government. The German Cabinet adopted the draft with some changes on 18 January 2017 and afterwards submitted it to the federal council. The first reading with the federal council is scheduled for end of March 2017. The final decision will come from the German parliament, which is expected to decide on the Implementation Act at the beginning of July 2017.

Considering the major discussions and comprehensive statements, it is still possible that there will be certain amendments to the draft in the further legislative process. However, it is hard to predict what the final outcome will be. Taking into account that no expert expected there to be a ban on special compensations and this now being provided for, it is hard to imagine that this will be withdrawn completely again.

Also, an updated draft will most likely still not allow for complete flexibility in relation to services against fee. However, the exemption for the industry sector is an expected adjustment following major criticism. Further, it remains to be seen which adaptions will be made to the Insurance Mediation Regulation (Versicherungsvermittlerverordnung), which further specifies the legal framework for insurance intermediaries (e.g. details on registration and mandatory insurance coverage).

There is still a way to go.