CEIOPS tells EC to exclude big risks as FERMA nears conclusion of transparency deal

The advice given by CEIOPS to the Commission, sent by chairman Gabriel Bernadino, will not be welcomed by FERMA that hopes that the Commission will drop the current exclusion of complex risks and reinsurance from IMD2 to help create a more level playing field for buyers.

Meanwhile FERMA and BIPAR, the European brokers’ federation, are expected to announce a groundbreaking protocol on transparency this week. The two groups have worked hard on this effort for over a year now to find a market solution and avoid the imposition of potentially unnecessarily tough new rules for the corporate insurance market by regulators.

FERMA announced that it was keen to seek a voluntary market resolution to ongoing transparency concerns about broker remuneration that have persisted since former New York Attorney General Eliot Spitzer blew the whole issue open in the US earlier this decade.

Talks between the two federations began formally in January as Peter den Dekker, President of FERMA presented buyer’s concerns and aims at a BIPAR meeting. FERMA in particular was keen to have the agreement sealed before the Commission holds its public hearing on IMD2 in Brussels on December 10.

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It is likely that the two federations have agreed that their protocol, that will be applied by national associations, should be based on transparency about remuneration on an ‘on request’ rather than automatic basis.

It is thought that the agreement will demand that brokers tell their customers about in what way and how much they are paid for the placement and servicing of business if asked. It is also likely to insist that brokers tell insurance buyers about any other payments they receive from insurers if it affects their payment terms.

This is a historic moment for the large corporate insurance market and it is thought that an agreement of this type is the first of its kind worldwide.

The CEIOPS advice to the Commission on the review of the IMD, however, suggested that the supervisors believe that the large corporate insurance and reinsurance market does not have a big conflict of interest problem and can look after its own interests.

CEIOPS was formally asked by the Commission to consider whether an exemption from the IMD for intermediaries of reinsurance and large risks is still justified. It was also asked to consult on whether a more flexible regime might be an option and if there might be advantages gained from enhanced transparency requirements.

The current exemption (Article 12 (4)) states that the information that other insurance intermediaries must disclose need not be given in the intermediation of reinsurance contracts and large risks.

The CEIOPS members reviewed the application of the exemption and concluded that: “The exemption was implemented in all the Member States participating in the Survey; Member States did not find it necessary, from a national regulatory policy perspective, to regulate the matters of information requirements/advice regarding intermediation of large risks and reinsurance contracts; Member States reported that they were not aware of any particular problems and/or national discussions (past and/or on-going) regarding the application of the exemption; and, Member States were not able to identify any practical evidence to support removing the exemption.”

“Members recognized that these customers are usually sophisticated in terms of knowledge and financial capability and normally receive information and advice often tailored to their needs and rendered by professionals. The degree of information asymmetry is considered to be minimal and these types of customers typically have long-standing relationships with the reinsurer/intermediary, formally reviewed. Given the above, it is the view of members that the exemption in Article 12(4) should be maintained. Members have not seen any reasons to go further in relation to this subject,” continued CEIOPS.

CEIOPS said that there are advantages and disadvantages connected to the ‘many possible ways’ to regulate disclosure of remuneration.

The committee presented a number of options to its members. Its first option was a non-mandatory, ‘on request’ system, such as that FERMA and BIPAR are expected to have agreed upon.

“In terms of costs, the first option represents a better solution for the intermediary as only the customers who value this information as part of their decision making will ask for it, whereas mandatory disclosure could impose costs, without any real benefits particularly where customers choose not to use commission information. In other words, there is a smaller administrative burden associated with this solution than with the mandatory disclosure regime which constitutes the second solution,” stated the CEIOPS advice.

“On the other hand, the mandatory disclosure regime can constitute a way of guaranteeing the efficient and wide availability of the information about the remuneration paid to the insurance intermediary, which could potentially offset the increased administrative burden. In that sense, mandatory disclosure might be the best solution also having regard to the risk that the information on the customer’s right to ask about the remuneration paid to the intermediary could be confused with the other information given prior to the conclusion of a contract. The additional costs of a mandatory regime with a risk-based approach would be limited to the identified types of insurance, thus following the principle of proportionality as to the costs and benefits,” continued the committee.

CEIOPS said that the majority of its members regard an ‘on request’ regime is the minimum harmonisation regime, because it also leaves the door open for Member States to impose stricter requirements on the improvement of the transparency of remuneration.

“Under the ‘on request’ regime, the intermediary should be obliged to inform the customer if the intermediary receives any kind of remuneration,” stated the committee.

CEIOPS did say, however, that a safeguard could be introduced in the form of a notification procedure ‘in rare circumstances’ to ensure that stricter provisions are not introduced ‘without reason.’

The majority of supervisors agreed that the disclosure of information ‘need not be given either when the insurance intermediary mediates in the insurance of large risks, or in the case of intermediation by reinsurance intermediaries.’

CEIOPS also reported that its members are not so sure about the position of wholesale or master brokers. It said that a variety of approaches exist amongst Member States on the regulation of wholesale brokers and there appears to be ‘some doubt’ about whether the scope of their activities is captured under the provisions of the current IMD provisions.

CEIOPS reported that some members also questioned the level of ‘responsibility to the Consumer’ conferred on these types of intermediaries.

The Committee said that some members feel that this should be targeted for ‘further analysis’ especially as this activity often engages cross-border relationships.

This could focus on, at the very least, some of the following areas regarding liability and applicable law: Accountability and (type of/respective) liability of the several insurance intermediaries intervening; The definition of the location/place where the services are rendered; or which are the obligations of (each of) the insurance intermediaries involved?,” stated CEIOPS in its advice to the Commission.

CEIOPS reported that its members had concluded that the current provisions in the IMD should not be amended to introduce any separate treatment of wholesale intermediaries but added:.”Member States may wish to modify their national legislation to take into account any specific requirements relating to these types of intermediaries.”