Debate on IMD hots up as insurers and buyers state case

He told CRE that FERMA has noted that the commission ‘unfortunately’ had not invited a representative of the large corporate insurance buyers’ lobby to sit on any of the panels at the hearing in Brussels late last week.

 The IMD revision comes because the commission has found the directive, agreed in 2002 for implementation by EU member states by 15 January 2005, inadequate on topics such as remuneration, charges and the status of intermediaries.

Karel van Hulle, head of the insurance and pensions unit in the commission’s internal market directorate, said that the IMD’s minimum harmonisation approach to requirements for insurance intermediaries had led to a patchwork of national regulations, as various states increased their requirements beyond the minimum.

“This has led to significant gaps and inconsistencies as far as the activity of insurance mediation is concerned,” concluded a commission study. 

”Some member states have gone way beyond the minimum of what the directive says,” Mr Van Hulle told the IMD hearing. “Minimum harmonisation has led to problems in cross-border business.”

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The commission is now consulting publicly on the revision until the end of January 2011, before issuing a final proposal late in 2011. A parallel commission review of the selling of packaged retail investment products (PRIPS), including products packaged as insurance policies, and a revision of the Markets in Financial Instruments Directive (MiFID), including a review of the rules for selling PRIPS, are complicating the IMD revision.

IMD2 will take account of PRIPS and what the commission calls poor product information, conflicts of interest in product distribution and fragmentary and inconsistent regulation in the retail investment market.

The commission plans to use two benchmarks: Undertakings for Collective Investment in Transferrable Securities (Ucits) directive rules on pre-contractual disclosures and MiFID sales rules on avoiding conflicts of interest and on business conduct.

Also, IMD2 is intended to extend the benefits of risk-based solvency and increased transparency rules to policyholders, in line with the Solvency II directive which will introduce a risk-based solvency regime for insurers.

Although the new IMD is likely to cover direct sales by insurers for the first time, there is likely to be continued exemption of reinsurance and large risks from some consumer protection provisions, on the basis that commercial buyers are sophisticated enough to have no need of protection. 

Mr Den Dekker questioned the exemption, especially as brokers cover both large and small risks and the line between the two is not clear-cut. He added that small businesses might still buy cover for large risks.

In a follow up note, FERMA surmised its position as: “FERMA sees the Protocol with BIPAR (European Federation of Insurance Intermediaries) on Transparency as the appropriate benchmark for large risks. Its core principles should be reflected in the future Directive as minimum binding standards. Maintaining the exemption for large risks would fall short of a minimum level playing field on disclosure remuneration standards for at least two reasons: First, In the absence of EU minimum standards, some Member States may well continue to consider that there is no need to introduce any national rules on disclosure for large risks; and second, some other Member States may introduce (or maintain) less stringent rules than those set out in the Protocol. The effective application of the Protocol between FERMA and BIPAR could otherwise be jeopardized by the existence of conflicting national legislations – a situation that the IMD Directive, as revised, intends to address.”

Paul Carty, who chairs the EU committee of the European Federation of Insurance Intermediaries (BIPAR), said that brokers do not in practice distinguish between small and large risks.

However, Mr Den Dekker accepted that the IMD rules should be proportionate to the risks and the buyer sophistication in different parts of the market: “I think large risks should not be exempted but I am aware that different groups need different protection.” Nevertheless, commercial insurance buyers are not always very knowledgeable about the market, he added.

Allison Philips, responsible for IMD in the UK’s Financial Services Authority, agreed that a single set of IMD rules for the whole market could be inappropriate.

She added that a recent UK study showed that disclosure was only ranked seventh or eighth in terms of importance by commercial insurance buyers. “Any disclosure comes at a cost,” she added. “In the work that we have done the case [for mandatory disclosure] has not been proven.”

She also said more generally that, although awareness of a broker’s remuneration played a role in a buyer’s choice of product, “It can act as a distraction from customers really understanding the risks of the cover they are taking out.”

Dr Christian Cassebaum, a board member of German insurer Allianz, suggested: “Greater transparency does not lead to more consumer protection in all cases.” The opposite could be the case, if insurance buyers focused more on intermediaries than their own interests, he said.

BIPAR’s Mr Carty also told the Brussels hearing that the recently announced agreement with FERMA on voluntary disclosure by brokers for commercial insurance worked: “I see no reason to change from that position.”

However, as IMD2 is on the way, the European insurance federation, the CEA, and others favour a minimum harmonisation directive, adaptable to diverse national markets.

“The CEA believes that the review should focus on the true needs of consumers. It is therefore important that the future directive is a minimum harmonisation directive so that it is flexible enough to adapt to local consumers’ needs and to accommodate existing diversity between markets and differences in their development,” stated the Brussels-based body in a statement.

Speaking at the hearing, Alastair Evans, chair of the CEA’s single market committee, said: “Insurance distribution channels vary across markets and this existing adaptation to national habits should remain possible in the future.”

Others are not so sure about this approach because it could again, however, result in a patchwork of national rules, with unfair competition and barriers to cross-border insurance, leading to a further revision by the commission.