The IDD introduces a new obligation on insurance distributors to always act honestly, fairly and professionally, in accordance with the best interests of their customers (Article 17(1), IDD). One way in which insurance distributors are to comply with Article 17(1) is to ensure that they are not remunerated, and that they do not remunerate or assess the performance of their employees, in a way that conflicts with their duty to act in their customers' best interests (Article 17(3), IDD). In particular, the IDD explains that remuneration arrangements and sales targets should not provide an incentive to recommend a particular insurance product to a customer when a different product could be offered that would better meet the customer's needs (Article 17(3), IDD). The term "remuneration" is defined widely in Article 2 (1)(9) of the IDD to mean any commission, fee, charge or other payment, including an economic benefit of any kind, or any other financial or non-financial advantage or incentive offered or given in respect of insurance distribution activities.

All information related to the IDD, including marketing communications, addressed by an insurance distributor to customers or potential customers must be fair, clear and not misleading (Article 17(2), IDD). Article 17(2) states that its provisions are without prejudice to the Unfair Commercial Practices Directive (2005/29/EC) (UCPD).62 Article 18 of the IDD provides for the obligation for general information. In good time before the conclusion of an insurance contract, an insurance intermediary or insurance undertaking must disclose to customers: (a) its identity and address, and the fact that it is an insurance intermediary or insurance undertaking, as appropriate; (b) whether it provides advice about the insurance products sold; (c) the procedures enabling customers and other interested parties to register complaints as referred to in Article 14; (d) the out-of-court complaint and redress procedures referred to in Article 15. In addition to the information listed above, an insurance intermediary must disclose to customers the register in which it has been included and the means for verifying that it has been registered and whether it is representing the customer or is acting for and on behalf of an insurance undertaking. In accordance with Article 19 of the IDD, there is a need for disclosing the nature of the remuneration received relating to the insurance contract, i.e. whether, in relation to the insurance contract, it works on the basis of a fee, i.e. the remuneration paid directly by the customer, or on the basis of a commission of any kind, i.e. the remuneration included in the insurance premium, or on the basis of other types of remuneration, including an economic benefit of any kind offered or given in connection with the insurance contract, or on the basis of a combination of any type of remuneration set out above. Where the fee is payable

61Paś (2020).

62Unfair Commercial Practices Directive (2005/29/EC) (UCPD).

directly by the customer, there is a need to disclose the amount of the fee or, where this is not possible, the method for calculating it. Also there is an obligation of disclosures for any payments made by the customer under the insurance contract after its conclusion, other than ongoing premiums and scheduled payments. Hence, an insurance undertaking need only communicate, in good time before the conclusion of an insurance contract, to its customers, the nature of the remuneration received by its employees relating to the insurance contract and any disclosures for any payments made by the customer under the insurance contract after its conclusion, other than ongoing premiums and scheduled payments.

As per the IDD, all information addressed by the insurance distributor to customers or potential customers should be "fair, clear and not misleading". 63 Articles 18 to 24, and 29 address the content, as well as the form and procedures that insurance distributors should perform in the disclosure of information to the client. First of all, before the conclusion of an insurance contract the insurance intermediary and undertaking should disclose: (i) its identity and address and that it is an insurance intermediary or undertaking; (ii) whether it provides advice about the insurance products sold; (iii) the procedures enabling customers and other interested parties to register complaints about insurance intermediaries and the out-of-court complaint and redress procedures.64 Before the conclusion of the contract, the insurance distributor should specify the demands and needs of the customer, provide the customer with objective information about the insurance product in an understandable form, but also ensure that the contract proposed is consistent with the client's demands and needs.65

Recital 41 to the IDD explains that these disclosure obligations have been imposed on insurance undertakings to avoid the distortion of competition. Otherwise, insurance undertakings would have an advantage of avoiding disclosure obligations by selling direct to customers, rather than through intermediaries. The Commission's original IDD legislative proposal included more detailed and onerous remuneration disclosure provisions for intermediaries. However, these proved very contentious and were removed from the agreed text during the EU legislative process.

#### 3.2 Advice Requirement

Where advice is provided before a specific insurance contract is concluded, an insurance distributor must provide the customer with a personalised recommendation (Article 20(1), IDD). Recital 45 to the IDD explains that this is in addition to specifying the customer's demands and needs. The personalised recommendation

63Article 17(2) IDD and Article 24(3) MiFID II.

64Article 18 IDD.

65Art 20 (1) IDD.

should explain why a particular product would best meet the customer's demands and needs. The details referred to in Article 20(1) IDD are to be adjusted according to both the complexity of the insurance product being proposed and the type of customer (Article 20(2), IDD). When an insurance intermediary informs a customer that it provides advice on the basis of a "fair and personal analysis", it must give advice on the basis of an analysis of a sufficiently large number of insurance contracts available on the market. This will enable the intermediary to make a personal recommendation on which insurance contract would be adequate to meet the customer's needs (Article 20(3), IDD). In the event the insurance intermediary gives its advice on the basis of a fair and personal analysis, it should advise on the basis of an analysis of a sufficiently large number of insurance contracts available on the market.66 Moreover, the insurance intermediary should communicate the register in which it has been included and the means for verifying that it has been registered and whether it is representing the customer or it is acting for and on behalf of the insurance undertaking.67

The insurance intermediary should also provide information concerning potential conflict of interests, such as whether it has a holding, direct or indirect, representing 10% or more of the voting rights or of the capital in a given insurance undertaking, or whether a given insurance undertaking or parent undertaking of a given insurance undertaking has a holding, direct or indirect, representing 10% or more of the voting rights or of the capital in the insurance intermediary.68 Similarly, in relation to the contracts proposed or advised upon, it should inform whether: (i) it gives advice on the basis of a fair and personal analysis; (ii) it is under a contractual obligation to conduct insurance distribution business exclusively with one or more insurance undertakings; or (iii) it is not under a contractual obligation to conduct insurance distribution business exclusively with one or more insurance undertakings and does not give advice on the basis of a fair and personal analysis.69 Information concerning all costs and related charges should be promptly disclosed to the customers, to allow them to understand the overall cost as well as the cumulative effect on the return on the investment.70

In assessing whether the number of contracts and providers considered by an insurance intermediary is sufficiently large to constitute a fair and personal analysis, Recital 47 to the IDD explains that appropriate consideration should be given to the customer's needs, the number of providers in the market, the market share of those providers, the number of relevant insurance products available from each provider, the features of those products. The Recital goes on to state that the IDD should not prevent member states from requiring insurance intermediaries that wish to give

66Article 20(3) IDD.

67Article 18 (a) IDD.

68Article 19 (1) (a-b) IDD.

69Article 19(1)(c) IDD.

70Article 29(1) IDD.

advice on the basis of a fair and personal analysis to do so on an analysis of all the insurance contracts each intermediary distributes.

#### 3.3 Exemptions from Information Requirements

Article 22(1) of the IDD explains that the information referred to in Articles 18, 19 and 20 does not need to be provided when an insurance distributor carries out distribution activities relating to the insurance of large risks. In addition, member states may decide that the information relating to insurance-based investment products referred to in Articles 29 and 30 does not need to be provided to professional clients (Article 22(1), IDD).

#### 3.4 Stricter Information Provisions

The IDD71 is a minimum harmonisation directive meaning that member states have the express option of maintaining or adopting stricter national provisions in a number of key areas, including in relation to the IDD72 information provisions. Under Article 22(2) of the IDD, member states are allowed to gold plate the Chapter V information requirements provided the national provisions comply with EU law. In particular, member states may: (a) make the provision of advice referred to in Article 20(1) mandatory for the sales of any insurance products, or for certain types of insurance product (Article 22(2), IDD). In these cases, insurance distributors, including those exercising the free "passporting" service option, must comply with the stricter national provisions when concluding insurance contracts with customers who have their habitual residence or establishment in that member state, and limit or prohibit the acceptance or receipt of fees, commissions or other monetary or non-monetary benefits paid or provided to insurance distributors by any third party or a person acting on behalf of a third party relating to the distribution of insurance products (Article 22(3), IDD).

Any member state that proposes to apply and applies provisions in addition to those set out in the IDD must ensure that the administrative burden stemming from these provisions is proportionate with regard to consumer protection, and remains limited (Recital 52, IDD). Any member state that decides to exercise the discretion available under Article 22(2) must notify the Commission and EIOPA of its stricter national provisions (Article 22(2), IDD). To ensure a high level of transparency, EIOPA must ensure that the information it receives relating to national provisions is also communicated to customers, as well as insurance and reinsurance distributors

71Directive (EU) 2016/97, op. cit.

72Directive (EU) 2016/97, op. cit.

(Article 22(4), IDD). Member states must also ensure that their National Competent Authorities (NCAs) publish information about whether and how the member state has chosen to apply the stricter provisions (Article 22(2), IDD).

#### 3.5 Information Conditions

Under Article 23(1) of the IDD, all pre-contract information to be provided in accordance with Articles 18, 19, 20 and 29 must be communicated to customers on paper; in a clear and accurate manner, comprehensible to the customer; in an official language of the member state in which the risk is situated or the member state of the commitment, or in any other language agreed by the parties; free of charge.

However, under Article 23(2) to (6), instead of providing this information to the customer on paper, it may be provided either: (a) using a durable medium other than paper, where the use of the durable medium is appropriate in the context of the business conducted between the insurance distributor and the customer; the customer has been given the choice between information on paper and on a durable medium, and has chosen the durable medium; and a paper copy of the information is provided to the customer on request and free of charge; or (b) by means of a website, if it is addressed personally to the customer, where the provision of the information by means of a website is appropriate in the context of the business conducted between the insurance distributor and the customer and it is considered appropriate if there is evidence that the customer has regular access to the internet, such as for example, if there is evidence that the customer has an email address; where the customer has consented to the information being provided by means of a website; where the customer has been notified electronically of the website's address, and the place on the website where the information can be accessed; where the information remains accessible on the website for such a period of time as the customer may reasonably need to consult it; and where a paper copy of the information is provided to the customer on request and free of charge. In the case of telephone sales, the pre-contract information given to the customer, including the Insurance Product Information Document ("IPID"), must be provided in accordance with EU distance marketing requirements. Moreover, even if the customer has chosen to obtain prior information on a durable medium other than paper, the information must be provided by the insurance distributor to the customer in accordance with Article 23(1) or (2) immediately after the conclusion of the insurance contract (Article 23(7), IDD).

#### 3.6 New Information Requirements

For the sake of better consumer protection, insurance distributors will have to act honestly, fairly and professionally in accordance with the best interests of their customers. In particular, they cannot make any arrangements by way of remuneration or sales target that could provide an incentive to recommend a particular product to a customer when they could offer a different product that would meet the customer's needs better.

Regarding IBIPs, there is no ban on commission or fees introduced in the IDD. This situation should be welcomed as every intermediary has the right to be fairly remunerated for his or her services. The IDD however, requires from member states, in all cases of packaging, to ensure that an insurance distributor specifies the demands and needs of the customer in relation to the insurance products that form part of the overall package or the same agreement. The IDD explicitly recognises the differences between IBIPs and investment products and that IDD is the place to regulate them (Recital 10), but at the same time indicates that there is need for alignment with MiFID II and that, due to their specific character, there is need for a separate chapter on IBIPs (Recital 56).

Intermediaries and undertakings have to make (proportionate) arrangements to prevent conflicts of interest from adversely affecting the interests of their customers and must take steps to identify conflicts of interest.

Information regarding the distribution and all costs and related charges has to be provided in good time, before the conclusion of the contract. Where the MiFID II Directive requires benefits to enhance the quality of the service to the client,73 and not against the criteria to act honestly, fairly, professionally and in the best interests of the client, the IDD allows them, if there is no detrimental impact on the quality of the service and it is not against the criteria to act honestly, fairly, professionally and in accordance with the best interests of its customers. In addition, the IDD explicitly foresees the possibility for member states to go beyond (e.g. prohibition of commissions, return to the client).

#### 3.7 Conflict of Interest

The IDD and its delegated regulation74 follow the MiFID II Directive provisions and those of its Delegated Regulation.75 Article 23 of MiFID II, and article 28 of the IDD

73Commission 2012 staff working document executive summary of the impact assessment accompanying the document proposal for a Directive of the European Parliament and of the Council on insurance mediation; Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU http://data.europa.eu/eli/dir/2014/65/oj.

74Articles 3-7 of the Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/oj.

75Commission Delegated Regulation (EU) 2017/565. See also the Explanatory Memorandum, Commission Delegated Regulation (EU) 2017/2359, p. 3.

does not define or prohibit conflicts of interest. However, in the relevant Delegated Regulation76 we find provisions specifying certain situations which should be taken into account in the assessment of conflict of interest,77 and the requirement for insurance intermediaries and insurance undertakings to establish, implement and maintain specific conflicts of interest policy to be followed for the identification, prevention and management of such conflicts of interest.78 In particular, insurance intermediaries and insurance undertakings shall assess whether they, a relevant person or any person directly or indirectly linked to them by control, have an interest in the outcome of the insurance distribution activities, in the event such an interest: (a) is distinct from the customer's or potential customer's interest in the outcome of the insurance distribution activities; and (b) has the potential to influence the outcome of the distribution activities to the detriment of the customer.79

As for the conflict of interest policy, this should include the circumstances, related to the specific insurance distribution activity, which constitute or may give a rise to a conflict of interest which could damage the customers' interest, as well as the procedures to be followed and the measure to be adopted for the management of such conflicts.80 The policy should be assessed and periodically reviewed, on an at least annual basis, and amended in case of any deficiency.81 As regard to the insurance intermediaries, who are under a contractual obligation to conduct insurance distribution business exclusively with one or more insurance undertakings,

76Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/oj.

77Article 3 of the Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/oj.

78Article 4 of the Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/oj.

79Article 3(2) of the Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/oj.

80Article 4(2) of the Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/oj.

81Article 7(1) and Recital 5 of the Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/ oj.

EIOPA has clarified that the conflict of interest policy remains a requirement under the responsibility of that intermediary.82

As in MiFID II, the disclosure of a conflict of interest should be avoided, except for the situations in which the organizational and administrative arrangements are insufficient for the prevention of risks of damage to the interests of the customer.83 In such a case, the disclosure should be made on a durable medium and include sufficient detail,84 which means that it should provide a specific description of the conflict of interest in question, explain its general nature, sources, and associated risks for consumers, and state that the organizational and administrative arrangements established within the conflict of interest policy are not sufficient to ensure, with reasonable confidence, the prevention of such risks.85 Finally, the senior management of the insurance distributors should receive, at least annually, written reports on the situations in which a conflict of interest arose, and of these the insurance intermediary of undertaking should keep a record.86

#### 4 Product Oversight and Governance

Article 25 of IDD sets Product Oversight and Governance ("POG") rules forth and the European Commission is empowered to adopt delegated acts to further specify the principles set out in this article, taking into account in a proportionate way the activities performed, the nature of the insurance products which were sold and the nature of the distributor. Thus, POG rules of the IDD are supplemented by Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017,87 which is based on the Technical advice provided by the EIOPA in February 2017.

82EIOPA (2018).

83Article 6(1) and Recital 5 of the Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/ oj.

84Article 28(3) of the Directive (EU) 2016/97, op. cit.

85Article 6(2) and Recital 5 of the Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/ oj.

86Article 7(2) and Recital 5 of the Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products, http://data.europa.eu/eli/reg\_del/2017/2359/ oj.

87Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight

The Commission Delegated Regulation88 specifies the criteria and practical details for the application of POG rules, affirming that these rules are mainly addressed at manufacturers of insurance products and oblige them to maintain, operate and review a POG policy in order to ensure on a continuous basis that all insurance products marketed are appropriate for their specific target market. Insurance distributors have to support this by operating product distribution arrangements to ensure that they have all the information needed to sell the product in line with the POG policy set by the manufacturer. The POG rules are built around both the manufacturer and the distributor because the POG imposes separate duties to both of them, as well as general provisions. In addition, the same entity can play the role of manufacturer and distributor.89

The product oversight and governance (POG) rules in the IDD are a mere duplication of the rules in MiFID II, albeit with some slight differences.90 The set of rules on POG do not address a specific life insurance product. POG sets the duty for disclosure to the supervisory authority of the way in which the products are manufactured and the purposes actually pursued with these products by the insurance undertakings.91 Hence POG allows for the implementation of transparent and auditable product approval frameworks for new products the design of which is not compromised by profit or time pressures. With regards to "bancassurance", manufacturers have to provide assistance where sales were conducted through banks, without relying on the assumption that banking staff in sales functions had the necessary product knowledge.

For the life insurance sector, the rules on POG guarantee the design and distribution of products that satisfy the interests and needs of customers belonging to the target market and to whom those specific products are distributed, and safeguards the customer's protections to the point of sale as it forges the protection of customers with respect to poorly designed products. Manufacturers are the main recipients of POG rules. Both insurance undertakings and insurance intermediaries can qualify as manufacturers depending on the role they play in designing insurance products.92 In the case of insurance undertaking playing a "passive" role or a non-exclusive role in the decision-making process, a distinction should be made whether the insurance undertaking has (i) outsourced the design activities or (ii) contributed to the design of the product with another entity.

and governance requirements for insurance undertakings and insurance distributors http://data. europa.eu/eli/reg\_del/2017/2358/oj.

88Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors http://data. europa.eu/eli/reg\_del/2017/2358/oj.

89Marano (2019).

90Marano (2019, 2020).

91Marano (2020) and Śliwiński and Marano (2020).

92See Article 25(1) of the Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) http://data.europa.eu/eli/dir/2016/97/oj.

The IDD does not rule out that the co-manufacturing is done by two insurance undertakings without involving an insurance intermediary. This is the case of a life insurance product combining two different classes, e.g. unit-linked and assurance on survival to a stipulated age or on earlier death, each of them managed by one of the two insurance undertakings, whilst the product is distributed through the distribution channel selected by one of the undertakings.

Articles 9 and 10 of Commission Delegated Directive (EU) 2017/593 of 7 April 201693 supplementing MiFID II could be a useful reference for the Member States as regulation on financial products deals with this issue. The IDD shall not affect a Member State's law in respect of insurance and reinsurance distribution activities pursued by insurance and reinsurance undertakings or intermediaries established in a third country and operating on its territory, provided that equal treatment is guaranteed to all persons carrying out insurance and reinsurance distribution activities on that market.94 The principle of equal treatment therefore requires national legislation to apply POG rules to products marketed in the country without taking into account the nationality of the manufacturer. Thus, the same principle can apply in the case of activities carried out by insurance entities based in third countries.95

#### 5 Impact of the IDD

An essential focus of regulatory supervision is market conduct in insurance distribution, which is challenged by the IDD through the imposing of minimum advice quality and transparency standards for insurance distribution within EU member states. The IDD also implies that the member states may implement even stricter rules where necessary.

At first glance, it seems that the Europeanisation of the regulatory and supervisory system will lead to greater transparency for policyholders, new minimum standards for certain rules of cross-border business, more and better tools to supervise insurance intermediaries and general rules to sanction intermediaries that breach the provisions of the IDD, and ensure that insurance products with investment elements are protected in a similar way to other financial investment products in the EU. The new minimum harmonisation also equalises costs across various sales channels, largely through increased transparency to consumers, hopefully reducing barriers to the pursuit of fair insurance purchases.96 Overall, a solid regulatory framework can

93Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/ 65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits, http:// data.europa.eu/eli/dir\_del/2017/593/oj.

94See Article 1(6) of the Directive (EU) 2016/97, op.cit.

95Marano (2019).

96Klumpes and Schuermann (2011).

enhance the efficiency of insurance markets and lead to lower costs of insurance coverage. The U.S., where insurance is still regulated at the state level, might benefit from a unified regulatory framework. The new EU framework may thus serve as an example for the U.S.

Nevertheless, ensuring compliance with legal requirements implies bureaucratic costs, which are ultimately borne by the policyholders, and the implementation of the new IDD involves some major challenges for many EU countries. An important question to be addressed is whether this new EU-wide harmonisation regulation is an expedient and cost-efficient solution. The benefits of harmonised rules might not always outweigh the substantial costs of implementation, which will be different in each EU Member State. While such increased bureaucracy is unavoidably associated with a certain amount of costs involved in the process of meeting regulatory goals, "inefficient" regulation may lead to unnecessary costs. Inappropriate regulatory provisions might even result in useful insurance products disappearing from the market since potential policyholders are no longer willing to pay the resulting higher premiums.97 However, there are diverse and conflicting provisions in different areas in the U.S. as well, which might also result in additional costs (for instance, compliance costs) that are passed on to consumers and may lead to rising prices and possibly even to the disappearance of certain products from the market.

In the case of the new IDD, potentially high administrative costs for the involved parties in some Member States might arise, for instance through the introduction of the new online EU insurance distribution register. The design of such an online register, as well as its continued maintenance, may amount to additional costs for the insurance supervisor. A second example, for non-life insurance products is the Insurance Product Information Document ("IPID"), which will incur costs of developing the setting-up of the document technology infrastructure to manage the population of documents, as well as ongoing costs related to the circulation and renewal of IPIDs and other costs of record keeping.98

Another challenge is the alignment of new IDD requirements with other legal provisions, which might overlap, or be redundant or even contradict IDD requirements, and might ultimately lead to further unnecessary bureaucracy costs. Insufficiently harmonised parallel reform measures or lack of coordination between regulations circulated on different regulatory levels might result in a shortcoming of legal certainty and could bring about new risks and costs for the insurance industry. An example is the alignment of IDD requirements with MiFID II standards. In particular in the life insurance market, requirements have to be imposed to conform to MiFID II rules.99 Some other requirements such as the assessment to

97GDV (2015), p. 19.

98Final Report on Consultation Paper no. 16/007 on draft Implementing Technical Standards concerning a standardised presentation format for the Insurance Product Information Document of the Insurance Distribution Directive (EIOPA-BoS-17/055), available at https://register.eiopa. europa.eu/Publications/Reports/IDD%20Final%20Report%20on%20draft%20ITS%20on% 20IPID.pdf; Köhne and Brömmelmeyer (2018).

99Clifford Chance (2013) and Köhne and Brömmelmeyer (2018).

ascertain the suitability and appropriateness of a product (Art. 30 IDD) might impose an additional administrative burden.

Moreover, the expected increase in reporting and disclosure requirements might involve excessive bureaucracy and it remains questionable whether the aspired goal of strengthened consumer protection can be reached. Not least, the additional administrative expenditure might imply a rise in premiums to the full detriment of consumers. The new regulatory changes do not take fully into account that some consumers are competent enough to research and purchase investment options and insurance products themselves. These consumers will prefer to buy insurance directly from insurance companies or via the Internet. With some insurance products disappearing from the marketplace for the above reasons, these consumers are clearly made worse off by some requirements of the new IDD. Additionally, future continuing professional training requirements might prove costly for insurance intermediaries.100 These costs will likely be passed on to consumers through fees or taxes. The additional costs to consumers may be worthwhile if increased education and transparency reduce the likelihood of bad advice by intermediaries. However, a potentially unintended consequence of the regulation is that stricter standards may lead insurance distributors to engage in defensive selling practices (i.e. recommending more insurance than is needed) in order to avoid professional liability claims. This motivation may be strengthened if the practice also leads to more commission income.

#### 5.1 Impact with Regards to the Life Insurance Sector

The EU financial services regulation is increasingly cross-sectoral. The IDD introduces additional requirements for insurance-based investment products with the collective asset and the long term orientation being important differentiators of life insurance contracts and retail investment products. In relation to collective asset, ownership, retail investors individually purchase units or shares, whereas policyholders typically do not acquire the underlying assets of their life insurance contract but a contractual right towards the insurance undertaking. This contractual right materialises upon occurrence of the insured event such as death, disability, and longevity. The ownership of the underlying assets is held by the insurance undertaking which protects policyholders from the 'timing risk', i.e. when to buy and to sell. By concluding an insurance contract, the policyholder joins the community of insured, sharing all risks and costs based on the principles of solidarity and risk pooling. The policyholder's capital market and biometric risk, which are independent from each other, are pooled and coordinated by the insurance undertaking. As a result, policyholders receive twin benefits from investment and insurance protection under a single integrated contract. In relation to long term orientation, the holding

100Hogan Lovells (2017) and Köhne and Brömmelmeyer (2018).

period of retail investment products is defined ex post and comprises often only a few years, including the option to exit at any time. By contrast, the holding period of life insurance contracts is defined ex ante and usually comprises several decades with restricted exit options. The long term orientation of life insurance is further underlined by the fact that customer intervention during the contract period is usually fairly limited, and contractual option(s) such as lump-sum payment or annuities can be exercised typically only at maturity.

Notwithstanding the differences outlined above, the IDD reflects an individual and short term approach. In relation to the correlation between product distribution and dealing on own account any potential conflicts of interest shall be assessed by taking into account whether the insurance distributor 'is likely to make a financial gain, or avoid a financial loss, to the potential detriment of the customer.

In contrast to the distribution of retail investment products, there is typically no correlation between the profit/loss made by the policyholder and the profit/loss made by the insurer. Therefore, it deserves further scrutiny whether, and how, this conflict of interest situation should be upheld in an insurance context. In relation to periodic assessments, insurance distributors shall inform their customers whether a periodic assessment of the suitability of the insurance-based investment products will be carried out.101 However, life insurance contracts are characterised by a long term orientation that precludes short-term customer intervention. Quite the contrary, ex post changes to insurance contracts, such as surrender or withdrawal, mostly imply disadvantages with regards to costs and fiscal treatment.

In the customer's best interest, the stable, long term character of life insurance should not be undermined by artificial volatility caused by short-term customer intervention. In relation to periodic reports, at least annually, the customer has to be informed about any 'transactions' that have been undertaken on his behalf. In an insurance context, the wording 'on behalf' seems unsuitable as any investment activity by insurers is typically carried out on behalf of the entire community of insured. In the insurance sector, this issue could be resolved by specifying that this provision only applies to 'transactions made upon explicit request of the individual customer.' 102

#### 5.2 Assessment of Suitability

The IDD provides specific conduct of business rule, not derived from MiFID IIregime, known as the demands and needs test. The scope of this test is not prescribed in the IDD or the Delegated Regulation103 and is subject to national implementation. However, EIOPA provided some guidance regarding minimum

101IDD, Art. 29(1)(a).

102Pscheidl (2018).

103Commission Delegated Directive (EU) 2017/593, op. cit.

expectations for this test and how it may relate to the assessment of suitability.104 Recital 7 of Delegated Regulation 2017/2359105 clarifies that the assessments of suitability and appropriateness are without prejudice to the obligation, for insurance intermediaries and insurance undertakings, to consider and specify, prior to the conclusion of any insurance contract, on the basis of information obtained from the customer, and the demands and needs of that customer.

The demands and needs test provides a protection for customers to avoid cases of mis-selling (Recital 44, IDD) and it applies to all insurance contracts, not just IBIPs. Article 30, IDD applies "without prejudice" to the demands and needs test as covered by Article 20(1), IDD. The demands and needs test has to be performed in any event prior to the conclusion of the contract and is distinct from the suitability assessment in advised cases, and the suitability assessment can also be provided at any time during the customer relationship. The assessment of demands and needs is required whether or not advice is being provided and the specifying of the demands and needs would not amount to a suitability assessment. Depending on the national implementation, where advice is being provided, the demands and needs test and assessment of suitability could be seen as a continuum, rather than as a break.

The main information concerning the customer's needs, typically includes, for example, personal information (age, profession, place of residence etc.) or the information particularly linked to the type of product requested. This information should enable the insurance intermediary or insurance undertaking to assess whether certain products can be offered or not according to their capacity of meeting the demands and needs of the customer. This could lead to a selection of a range of comparable products for consideration during the suitability assessment where advice is being given or during the appropriateness assessment where no advice is given.

Where the customer is provided with advice the information, which will be obtained by the insurance intermediary or the insurance undertaking, will need to include other more specific and detailed elements, like the customer's financial situation, including their ability to bear losses, their investment objectives, including their risk tolerance, and other correlated information. Under the IDD and the Delegated Regulation,106 the provisions concerning the assessment of suitability and appropriateness are almost identical to the corresponding provisions under MiFID II and its specific Delegated Regulation.107 In particular, the suitability assessment requires that the insurance intermediary or undertaking, in the case of sales with advice, gathers information about their client's knowledge, experience,

104EIOPA (2018).

105Commission Delegated Regulation (EU) 2017/593 op.cit.

106Articles 9-19 of the Commission Delegated Regulation (EU) 2017/2359 op.cit.

107Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, available at http://data.europa.eu/eli/reg\_del/2017/565/oj.

investment objective and risk tolerance—in order to recommend to the client the IBIPs that are best aligned with the client's profile,108 which means that it meets the client's investment objectives, risk tolerance, financial situation and that its nature and characteristics are adequate in respect to the client's knowledge and experience.109

The insurance intermediary or undertaking should adopt measures to ensure that the information collected about the clients is reliable, and communicate them that the suitability assessment is performed in their best interest.110 It should then provide the customer with the so-called 'suitability statement', which includes an outline of the advice given, as well as information about how the recommendation meets the customer's investment objectives, risk tolerance, financial situation, knowledge and experience.111

The appropriateness requirement provides that, in the event of sales requiring no advice, the insurance intermediary or insurance undertaking gathers information on the client to assess if the product or services offered or demanded were appropriate for the customer.112 In the event the product is deemed not appropriate for the customer, the insurance intermediary or insurance undertaking should warn the customer or potential customer.113 Article 19(3) of Delegated Regulation 2017/ 2359 contains requirements for records to be kept in relation to the appropriateness assessment, in particular regarding the result of the assessment, warnings given to the customer and storage in an accessible manner for future reference. As under MiFID II, this assessment is not required concerning non-complex products as defined by MiFID II.114 However, due to the specific structures of insurance products, the Commission Delegated Regulation under IDD provides, among the criteria for non-complex IBIPs, an additional condition concerning products including a specific guarantee.115

Moreover, the insurance intermediary or insurance undertaking should establish a record of documents agreed with the customer containing rights and obligations of the parties, as well as other terms related to the provision of services to the customer. The customer should also be provided with periodic reports on the service, which include a number of communications proportionate to the type and complexity of the IBIP involved.116

108Article 30(1) of the IDD.

109Article 9(2) of the Commission Delegated Regulation (EU) 2017/2359 op.cit.

110Article10 and 11 of the Commission Delegated Regulation (EU) 2017/2359 op.cit.

111Article 14(1) of the Commission Delegated Regulation (EU) 2017/2359 op. cit.

112Article 30(2) of IDD and Article 14 of the Commission Delegated Regulation (EU) 2017/2359 op. cit.

113Noussia and Siri (2019).

114Article 30(3) IDD and 25(4)(a) MiFID II.

115Article 16(a) of the Commission Delegated Regulation (EU) 2017/2359.

116Articles 30(4) and (5) IDD.; Noussia and Siri (2019).

#### 6 A Comparison of the EU and U.S. Insurance Distribution Regulatory Regime

Whilst the IDD attempts to reduce cross-sectoral and cross-border inconsistencies by establishing a more uniform regulatory framework in the European insurance market, via the introduction to insurance distribution systems of minimum quality standards and disclosure requirements to insurance distribution systems, "the U.S. insurance regulation mostly continues to be the purview of state government, leading to cumbersome and conflicting provisions as well as higher compliance costs". 117

The new IDD attempts to reduce cross-sectoral and cross-border inconsistencies by establishing a more uniform regulatory framework in the European insurance market. For this purpose, minimum quality standards and disclosure requirements are introduced to insurance distribution systems. In contrast, "U.S. insurance regulation mostly continues to be the purview of state government, leading to cumbersome and conflicting provisions as well as higher compliance costs". 118

"In the US, insurance regulation is almost entirely the responsibility of the individual states, the individual state insurance commissioners and the National Association of Insurance Commissioners (NAIC). The NAIC drafts the model insurance laws, however the NAIC Model Acts are mainly advisory tools. The primary body of law applied to insurance intermediaries is the Producer Licensing Model Act (PLMA)". 119

"The most striking difference between the PLMA and the IDD is that the PMLA is written from the perspective of the individual U.S. state legislators constitutes a suggestion of an advisory body whereas the IDD is a mandatory Directive". 120

The IDD also enhances standards related to information requirements and conduct of business rules (Chapter V, IDD). The IDD marks another step in further harmonising the European market for insurance regulation and creating a level playing field. It imposes new requirements which broaden the scope of regulatory oversight of insurance distribution channels as well as imposing new constraints on business conduct, including continuing professional training for sales people and compensation disclosure to enhance market conduct regulation. "Chapter V of the IDD delineates the information requirements for intermediaries, and the rules applicable to their business conduct. Section 12 of the PLMA lists prohibited actions which can lead to an insurance intermediary's license revocation and a civil penalty. Despite that the IDD language is written in a prescriptive manner and the PLMA is written in a proscriptive manner, there are some similarities." 121 Article 17 of the

117Defever (2021), p. 198; Hofmann et al. (2018).

118Defever (2021), p. 198; Hofmann et al. (2018).

119Defever (2021), p. 198.

120Defever (2021), p. 200.

121Defever (2021), p. 201.

IDD requires that insurance distributors always act honestly, fairly and professionally in accordance with the best interests of their customers. Section 12 A. (8) of the PLMA forbids an insurance producer from using fraudulent, coercive, or dishonest practices, or demonstrating incompetence, untrustworthiness or financial irresponsibility in the conduct of business. "What is strikingly missing from the PLMA is the requirement that U.S. insurance intermediaries act with the best interests of their customers, as is required of European intermediaries. Another requirement present in the IDD that is glaringly absent from the PLMA is that marketing be "fair, clear, and not misleading." 122 The PLMA places only two restrictions on the remuneration of insurance producers—one, that a producer must be licensed in order to receive commissions, and two, that the producer must disclose a compensation agreement with an insurer if the producer is also receiving compensation from the customer.123 In contrast, the IDD mandates that Member States shall ensure that distributors and their employees are not remunerated in a way that conflicts with their duties to act in accordance with the best interest of their customers;124 that they reveal business holdings that create conflicts;125 that they reveal whether advice is based on fair and personal analysis or not, or whether there is exclusivity with an insurance company;126 and that they reveal the nature of remuneration received, i.e. fee, commission, or other, and the amount, and whether it ties to employee remuneration." 127

In terms of regulatory scope, the IDD allows insurance intermediaries to sell products across multiple EU Member States where previously parity did not always exist. The U.S. has attempted to provide some kind of uniformity in cross-state producer licencing with the GLB Act (passed in 1999)128 and NARAB II Regulation (passed in 2015).129 Additionally, the IDD introduces minimum requirements for all distributors of insurance and reinsurance policies, including direct sales, agents, brokers and others, to comply with new disclosure and training requirements to enhance consumer protection independent of the distribution channel. Nevertheless, the IDD is a minimum harmonisation Directive leaving the Member States with the opportunity to implement even stricter rules. U.S. intermediary regulation is not uniform between retail, wholesale and reinsurance sales. Individual state and national laws govern these transactions separately, which may impact consumer protection measures differently, depending on the distribution channel.

The IDD requires insurance distributors to be registered with a competent authority in their home member state (Art. 3(1) IDD), and member states have to implement an online EU insurance distribution register and ensure that a single

122IDD Art. 17, 2.

123Defever (2021), pp. 201–202.

124IDD Art. 17, 3.

125IDD Art. 19, 1. (a) and (b).

126IDD Art. 19, 1. (c).

127IDD Art. 19, 1. (d), (e), 2., and 4.; Defever (2021), pp. 201–202.

128Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, (Pub.L. 106–102, 113 Stat. 1338, enacted November 12, 1999).

129NARAB II Regulation, Public Law No: 114-1 (01/12/2015).

information point exists.130 Similarly, in the U.S. all intermediaries have to obtain a licence (depending on the type of insurance, e.g., a Property and Casualty licence, or a Life, Accident and Health licence) in order to sell insurance.

According to the IDD, a basic level of advice quality has to be guaranteed, and continuing education of insurance intermediaries is required, but Member States may impose additional standards on producers. The NARAB Board in the U.S. imposes minimum continuing professional training standards for licenced producers, but individual states may vary their re-licencing standards for the intermediaries licenced there. Many states require a portion of continuing education to focus on ethics, but otherwise licencees may choose their own training so that the actual training may lead to considerable differences regarding the knowledge and competency of intermediaries.

With regards to information requirements and conduct of business the IDD provides strengthened consumer protection and requires from the intermediary to inform the consumer of any potential conflicts of interest before the insurance contract is finalised (e.g., Art. 18 IDD). These disclosure requirements exceed any standard disclosures provided by U.S. insurance intermediaries. As part of this disclosure, the IDD imposes additional standards on insurance producers related to compensation, i.e. they need disclose to the consumer the amount of compensation they receive for the sale of the insurance product (Art. 19 IDD); previously, this compensation disclosure requirement varied by EU member state. In the U.S. there is no standard requirement to disclose producer compensation, but again this varies by state, leaving consumers with a certain lack of clarity regarding their rights.131

Moreover, in the EU, compensation of insurance distributors may be a commission paid by the insurer, a fee paid by the insured, or any other remuneration within the contract, but always provided that this does not conflict with the distributor's duties to act in the best interest of its customers (Art. 17(3) IDD). In addition, in the U.S. there is not just one standard compensation scheme for insurance intermediaries: compensation varies with regard to the type of insurance sold and the nature of the relationship between the producer and insurer. Beside the standard commissions, intermediaries can also receive a contingent commission.

Other new IDD disclosure requirements to improve consumer protection are requirements that are placed on insurance distributors in relation to advice and how this advice is provided. Depending on the complexity of the insurance product and consumer type, there is a requirement to specify the demands and needs of the customer and provide objective information in a comprehensible format. For certain non-life insurance products this has to be summarised in the IPID, which mandates policy-level disclosures (e.g., coverages, exclusions and restrictions) to the insured. In the U.S. there is no comparable standard document, and requirements vary by state. Whether intermediaries have a duty to advise their client also depends on the state.

130Köhne and Brömmelmeyer (2018) and Hogan Lovells (2017).

131Scism (2012) and Köhne and Brömmelmeyer (2018).

Furthermore, the IDD requires insurance undertakings to comply with new POG requirements to ensure certain suitability for the defined target market and a focus on consumer protection measures. In addition, consistency between Member States is ensured.

Similar to non-life insurance products, the IDD also enhances the information and disclosure requirements for IBIPs. Additionally, insurance intermediaries must assess the suitability and appropriateness of the product for the customer (Art. 30 IDD), which again highlights the increased focus on consumer protection in the EU and aims to improve the alignment and consistency between the regulation of financial and insurance markets. In the U.S., life insurance contracts may be subject to regulation by (1) the Securities and Exchange Commission if the contracts qualify as securities that are not exempt under the U.S. federal securities laws, and (2) by the U.S. Department of Labor if they are offered in connection with employee benefit plans.

While insurance regulation in the U.S. continues to be the purview of state government, some federal regulation and standardised practices affect insurance distribution systems nationally. Most notably, the NARAB II regulation (passed in 2015)132 provides reciprocity between states for licenced insurance providers. However, insurance regulation in the EU appears to consistently move towards more harmonisation across Member States. The IDD marks another change in the divide between EU regulatory uniformity and U.S. regulatory dispersion and can maybe set an example for the U.S.

An essential focus of regulatory supervision is market conduct in insurance distribution, which is challenged by the IDD through the imposing of minimum advice quality and transparency standards for insurance distribution within EU member states. The IDD also implies that the member states may implement even stricter rules where necessary.

At first glance, it seems that the Europeanisation of the regulatory and supervisory system will lead to greater transparency for policyholders, new minimum standards for certain rules of cross-border business, more and better tools to supervise insurance intermediaries and general rules to sanction intermediaries that breach the provisions of the IDD, and ensure that insurance products with investment elements are protected in a similar way to other financial investment products in the EU. The new minimum harmonisation also equalises costs across various sales channels, largely through increased transparency to consumers, hopefully reducing barriers to the pursuit of fair insurance purchases.133 Overall, a solid regulatory framework can enhance the efficiency of insurance markets and lead to lower costs of insurance coverage. The U.S., where insurance is still regulated at the state level, might benefit from a unified regulatory framework. The new EU framework may thus serve as an example for the U.S.

132NARAB II Regulation, Public Law No: 114-1 (01/12/2015).

133Klumpes and Schuermann (2011).

"The primary difference between the IDD and the PLMA is that the IDD is mandatory and the PLMA is voluntary. Due to its advisory nature, the PMLA has been inconsistently adopted and inconsistently enforced. The bodies of regulations applying to insurance producers remain in a piecemeal state, and the PMLA has done very little to close the gaps". 134

"The takeaway for EU Member States should be that uniformity will not be achieved until and unless they adopt and apply the mandatory penalties provided in the IDD and achieve a sufficient level of transparency to aid consumers in avoiding bad actors, and to act as a deterrence to producers. The IDD's more prescriptive, rules-based insurance regulations will be the first of their kind to be applied across such a wide and diverse territory like the EU Member States." 135

The benefits of the new IDD can only be evaluated after introduction of the Directive when a direct comparison with the status quo becomes possible. It seems that some of the envisaged provisions include redundancies for several Member States and will lead to duplicate requirements, which may make implementation even more complicated. However, some important questions remain: Do consumers feel better informed? Do consumers make better decisions? Can important losses be prevented? An important challenge is that the insurance industry in Europe might fail to recognise the integration of borderless markets. As argued by Schiro136 many insurance markets continue to transcend borders such that national regulation may increasingly spill over from one local jurisdiction to another, thereby leading to the risk of conflicting regulations.

Nevertheless, the IDD will, despite the challenges of implementation, likely help to establish a harmonisation of European insurance markets through more uniform standards and regulation. This will reduce legal uncertainties and facilitate fair competition between insurance companies and intermediaries in different EU Member States. Notably, consumer protection across all financial sectors can be improved by aligning the regulatory system for insurance and financial markets. All in all, the new IDD will enhance the efficiency of European insurance markets. Through more uniform and consistent regulation, in conjunction with extended transparency requirements, it can ensure that consumers throughout the EU are equally well protected. Therefore, these more uniform regulations could set an example for dispersion in U.S. insurance regulation.

134Defever (2018); Defever (2021), p. 215.

135Defever (2018).

136Schiro (2006) and Köhne and Brömmelmeyer (2018).

#### 7 Conclusions

At the age of transparency, the IDD has a direct application in the life insurance sector in relation to the improvement of quality of products delivered to the customers.137 The IDD acts as a minimum harmonisation directive, allowing stricter rules at national level to be imposed. It promotes transparency and the insured's customer's protection and in doing so accomplishes a large harmonization impact and effect in the insurance industry overall, in line with the view for a single harmonised market.

The requirements set by the IDD for life insurance products require a minimum necessary knowledge of IBIPs, of the various financial risks, of the life policies and of the organisation and benefits guaranteed by the various investments products. Insurance distributors need always act honestly, fairly and professionally in accordance with the best interests of their customers and disclose their general personal information and redress and opt out procedures so as to enhance transparency. A duty to advise and provide a personalised recommendation as needed also exists. The IDD allows insurers to accept and retain fees, commissions or any monetary and non-monetary benefits from third parties, and particularly from issuers or product providers regarding the distribution of an IBIP as long as the payment of such remuneration does not impact negatively the provision of insurance and does not impair the distributor's professional capacity and obligations. The IDD also introduces additional requirements for IBIPs with the collective asset and the long term orientation being important differentiators of life insurance contracts and retail investment products.

Overall, following the wave of other regulatory changes, such as MiFID II and PRIIPS Regulation,138 the IDD intends to strengthen consumer protection, improve the competitive landscape of the European insurance industry, and reduce crosssectoral inconsistencies. The IDD also introduces product oversight and governance requirements similar to MiFID II. In relation to assessing the suitability and appropriateness of this is conducted by insurance companies that provide advice to customers on IBIPs so as to enable them to recommend to the customer or potential customer the IBIPs that are suitable for that person. IBIPs are an essential feature of insurance industry. However, it has not always been easy to make them widely known to the wider public due to the slow opening of the market for financial services within the EU. IDD will hopefully provide a more harmonized and more efficient legal framework, fostering the convergence of investor protection within the financial sectors as a whole.139

137Śliwiński and Marano (2020).

138Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs), http://data.europa.eu/eli/reg/2014/1286/oj.

139Noussia and Siri (2019).

To be able to make a critical assessment of the IDD, the individual rules and regulations must be evaluated in terms of their sense and appropriateness. As far as the IBIPs are concerned, it is problematic that the scope of their regulation remains doubtful and that apart from the unresolved problem of classifying existing life insurance products in relation to IBIPs, the IDD also remains vague in terms of the further distinction between complex and non-complex IBIPs, which renders the application of IDD and IDD-related provisions even more complicated.140

The legislator provides for an IDD evaluation to be carried out after 3 years. However, this is questionable and difficult to achieve due to a lack of market-wide costs. Hence, future research will be required with regards to the individual rules and regulations so as to achieve a verification of the level of target achievement at before and at an early stage from the introduction of the rules, and thereafter at certain intervals.141

#### References

140Köhne and Brömmelmeyer (2018).

141Köhne and Brömmelmeyer (2018).

#### Legislation

Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors. http://data.europa.eu/eli/reg\_del/2017/2358/oj

#### Documents

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The images or other third party material in this chapter are included in the chapter's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

## Insurance-Based Investment Products: Regulatory Responses and Policy Issues

Michele Siri

#### 1 Introduction

Investor protection can be defined as the set of rules and principles expected to preserve the interests and the rights of a person in its role as the investor or the defensive protection of the vulnerable investor against unscrupulous market participants.1 The aim of investor protection regulation is to allow investors to make informed financial decisions which are better aligned with their interests and profile. Following the financial turmoil in 2007, and considered the increasing complexity of financial markets, the EU has strengthened its regulatory efforts in setting a proper level of protection and transparency in the area of investment services.2 In particular, by introducing the Directive on Markets in Financial Instruments (MiFID),3 the related Markets in Financial Instruments Regulation (MiFIR),4 the Insurance Distribution Directive (IDD)5 and the Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs),6 the EU has

M. Siri (\*)

© The Author(s) 2021

1 Clarck (1976), p. 26.

2 Colaert (2017a), pp. 229–244; Moloney (2015), pp. 736–765; Moloney (2010).

3 Directive 2004/39/EC (MiFID I), recently revised by Directive 2014/65/E (MiFID II). See Liverse (2016), p. 45. See also Moloney (2014), chapter IX.

4 Regulation 648/2012/EU.

5 Directive 2016/97/EU. See Hofmann et al. (2018), p. 740 ss.; Köhne and Brömmelmeyer (2018), p. 704 ss.; Ramharter (2016), p. 221 ss.

6 EU Regulation 1286/2014/EU of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs).

University of Genoa, Law Department, Genoa, Italy e-mail<EMAIL_ADDRESS>
P. Marano, K. Noussia (eds.), Insurance Distribution Directive, AIDA Europe Research Series on Insurance Law and Regulation 3, https://doi.org/10.1007/978-3-030-52738-9\_5

recently provided the main—sometimes overlapping—criteria to be followed by financial intermediaries in conducting their activities.

The IDD plays a significant role in the promotion of consumer protection within the distribution of insurance products across the EU, especially considering that MiFID II does not cover the distribution of insurance-based products. In particular, the IDD ensures greater transparency by insurance distributors in relation to the price and costs of their products but also provides higher standards as regards product information and conduct of business (COB) rules. In performing this function, the IDD provides many rules echoing the corresponding MiFID II rules. However, many differences persist and present a risk of segmentation and regulatory arbitrage.7 Moreover, while MiFID II aspires to a maximum harmonisation, the IDD expressly aims at a minimum harmonization (as stated in Recital 3), which means that any Member State can impose stricter rules to protect customers. The IDD has been supplemented by two delegated regulations—based on the European Insurance and Occupational Pensions Authority (EIOPA) Technical Advice to the Commission8 concerning product oversight and governance requirements for insurance undertakings and insurance distributors, information requirements and conduct of business rules.

The IDD aims explicitly to harmonise national provisions concerning insurance and reinsurance distribution across the European Union, and targets not only—as in the past—insurance brokers or intermediaries, but several types of persons or institutions which distribute insurance-based investment products (IBIPs) to third parties, such as agents, 'bancassurance' operators, insurance undertakings, travel agents and car rental companies. However, customers—regardless of the distribution channel—should benefit from the same level of protection and equal treatment. In particular, in line with the MiFID II regime for financial instruments and structured deposits, within the IDD regime customer protection is ensured by specific provisions concerning the conduct of business rules and product governance requirements.9 In this regard, since the IDD empowers the Commission to adopt specific Delegated Acts concerning such requirements, on February 2016, the European Commission requested the EIOPA for its technical advice for the development of IDD Delegated Acts. Two Commission Delegated Regulations were published in autumn 2017 and specifically targeted conduct on business rules for IBIPs and product and oversight governance applicable to all insurance contracts, including IBIPs.10

7 Kern (2018), p. 31; Colaert (2017b), pp. 589 ss.

8 EIOPA 17/048, Technical Advice on Insurance Distribution Directive (1 February 2017). See Noussia (2019), pp. 119–136.

9 Rokas and Siafarika (2019), p. 3 ss.

10Respectively, Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products; and Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the

#### 2 Disclosure of Information

Traditionally, product information has been sectoral or even product-specific, with a change of approach only recently represented by the PRIIPs Regulation.11 In the PRIIPS Regulation, the Key Information Document (or KID) is a basic information leaflet on the essential features of a wide range of packaged retail and insurancebased investment products such as structured products, insurance-based investment products or investment funds that retail investors can buy directly from manufacturers of those products or indirectly through financial intermediaries, by means of the internet, or otherwise.12

The PRIIPs KID must be made available to retail investors prior to any sale, either in a paper format or through a durable medium or a website. The KID is required to contain pre-contractual information to help the retail investor understand the features of the product and compare it with other products. This includes comprehensive information on the product's objectives and how it will achieve them, on its riskreward profile (including maximum possible loss) and the assumptions on which this is based, on all costs to be directly or indirectly borne by the retail investor, and on the product's recommended holding period.13 By capturing a wide variety of retail investments, PRIIPs seeks to ensure comparability across and within sectors as well as across borders, without imposing specific requirements in relation to business models, product designs or legal forms.

Solvency II contains a series of pre-contractual disclosure requirements which have to be complied with by insurance undertakings. These include general information about the applicable law and the insurance company and, in the case of life insurance, a series of basic elements of information on the contract, such as coverage, terms of the contract, conditions for termination, payment of premiums, an indication of surrender and paid-up values, tax arrangements, and rules on complaint handling. The insurance undertaking must also inform policyholders about their right to cancel the contract within a cooling-off period.14

The IDD provides a set of basic disclosure rules which apply to the distribution of all insurance products. These require the provision of information to the customer about the insurance intermediary or insurance undertaking selling the product, about the provision of advice and about the remuneration received in relation to the insurance contract. The insurance distributor must also gather information from

Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors.

11Colaert (2019), p. 303 ss.

12Kyriaki and Siri (2019), p. 39 ss.; Colaert (2016).

13Articles 5–12 PRIIPs Regulation. See also for further details about the KIID's content, Commission Delegated Regulation (EU) 2017/65313. As far IBIPs are concerned, see EIOPA, Costs and past performance, 2020 Report, April 2020.

14Articles 183ff Solvency II.

the customer in order to establish his/her insurance demands and needs.15 If the insurance product sold is an IBIPs, the insurance intermediary or insurance undertaking has to comply with the additional requirements set out in the IDD.16 These requirements are largely aligned to those of MiFID II and include disclosure of all costs and charges in an aggregated form under the same conditions as provided in MiFID II.17 However, contrary to MiFID II,18 the requirements set out in the IDD are not further detailed in Level 2 legislation.

#### 3 Conflicts of Interest

The IDD and its delegated regulation19 follow MiFID II provisions and those of its delegated regulation.20 Neither Article 23 of MiFID II or Article 28 of the IDD defines or prohibits conflicts of interest. However, in the relevant delegated regulations, we find provisions specifying certain situations which should be taken into account in the assessment of conflicts of interest,21 and the requirement for insurance intermediaries and insurance undertakings to establish, implement and maintain specific conflicts of interest policy to be followed for the identification, prevention and management of such conflicts of interest.22 In particular, insurance intermediaries and insurance undertakings shall assess whether they, a relevant person or any person directly or indirectly linked to them by control, have an interest in the outcome of the insurance distribution activities, in the event such an interest: (a) is distinct from the customer's or potential customer's interest in the outcome of the insurance distribution activities; and (b) has the potential to influence the outcome of the distribution activities to the detriment of the customer.23

As for the conflicts of interest policy, this should include the circumstances related to the specific insurance distribution activity—which constitute or may give rise to a conflict of interest which could damage customers' interest, as well as the procedures to be followed and the measure to be adopted for the management of such

15Articles 18ff IDD.

16Articles 26ff IDD. Please see Noussia and Siri (2019), p. 39 ss.

17Article 24 MiFID II. About MiFID II disclosure rules, among others: Della Negra (2019), p. 34ff. 18Articles 44ff Commission Delegated Regulation (EU) 2017/565.

19Articles 3–7 Commission Delegated Regulation (EU) 2017/2359.

20The above-mentioned Commission Delegated Regulation (EU) 2017/565. See also the Explanatory Memorandum, Commission Delegated Regulation (EU) 2017/2359, p. 3.

21Article 3 Commission Delegated Regulation (EU) 2017/2359 and Article 33 Commission Delegated Regulation (EU) 2017/565.

22Article 4 Commission Delegated Regulation (EU) 2017/2359. For investment firms, cf. Article 34 Commission Delegated Regulation (EU) 2017/565.

23Article 3(2) Commission Delegated Regulation (EU) 2017/2359.

conflicts.24 The policy should be assessed and periodically reviewed, on an at least annual basis, and amended in case of any deficiency.25

As regards insurance intermediaries, who are under a contractual obligation to conduct the insurance distribution business exclusively with one or more insurance undertakings, EIOPA has clarified that the conflicts of interest policy remain a requirement under the responsibility of that intermediary.26 EIOPA considers it essential that intermediaries who distribute exclusively on behalf of one or more insurance undertakings are required to establish, implement and maintain an efficient conflicts of interest policy, set out in writing and suited to their size and organisation and the nature, scale and complexity of their business in accordance with Article 4 (1) of Delegated Regulation 2017/2359. This requirement "does not prohibit intermediaries who distribute exclusively on behalf of one or more insurance undertakings, from receiving assistance and guidance from an insurance undertaking to which they are tied, in developing a conflicts of interest policy". However, EIOPA holds that the regulatory responsibility of establishing, implementing and operating the policy remains with the insurance intermediary.

As in MiFID II,27 the disclosure of a conflict of interest should be limited to situations in which the organisational and administrative arrangements are insufficient to prevent the risks of damage to the interests of the customer.28 In such a case, the disclosure should be made on a durable medium and include sufficient detail,29 which means that it should provide a specific description of the conflicts of interest, explain its general nature, sources, and associated risks for consumers, and state that the organizational and administrative arrangements established within the conflicts of interest policy are not sufficient to ensure, with reasonable confidence, the prevention of such risks.30 Finally, the senior management of the insurance distributors should receive, at least annually, written reports on the situations in which a conflict of interest arose, and of these the insurance intermediary of undertaking should keep a record.31

In EIOPA's view,32 an insurance intermediary or insurance undertaking is not exempted from further managing conflicts of interests if it discloses the conflicts of interest to the consumer. The legal basis for such conclusion is the Recital 5 of

24Article 4(2) Commission Delegated Regulation (EU) 2017/2359.

25Article 7(1) and Recital 5 Commission Delegated Regulation (EU) 2017/2359. Cf. Article 34 (5) Commission Delegated Regulation (EU) 2017/565.

26EIOPA, Q&A on Regulation (2018), No. 1622.

27Article 34(4) of the Commission Delegated Regulation (EU) 2017/565.

28Article 6(1) and Recital 5 Commission Delegated Regulation (EU) 2017/2359.

29Article 28(3) IDD.

30Article 6(2) and Recital 5 Commission Delegated Regulation (EU) 2017/2359.

31Article 7(2) and Recital 5 Commission Delegated Regulation (EU) 2017/2359. Cf. Article 35 Commission Delegated Regulation (EU) 2017/565.

32EIOPA, Q&A on Regulation (2018), No. 1625. See also No. 1627 as regards to the application of proportionality in relation to the measures set out in the IDD for managing conflicts of interest.

Delegated Regulation 2017/2359 which clarifies that the disclosure of conflicts of interest by an insurance intermediary or an insurance undertaking cannot exempt it from the obligation to maintain and operate the organisational and administrative arrangements that are the most effective means of preventing damage to customers. EIOPA considers, being "disclosure [...] a measure of last resort", that the insurance intermediary or insurance undertaking has to take "all reasonable steps to prevent the conflicts of interest from adversely affecting the interests of its customers and only when the conflicts of interests cannot be prevented, disclosure of the conflicts of interest to the customer is expected". As part of the disclosure, EIOPA considers it important that "the customer is advised that organisational and administrative measures established to prevent or manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage" to the interests of the customer will be prevented. Such a report is not addressed to the insurance undertaking, given the reference in Art. 7 only to report on conflicts of interest to their senior management of the intermediary.

#### 4 Inducements

According to the IDD, the insurance intermediary should inform the client whether, in relation to the insurance contract, any inducement,33 i.e. any fee, commission or non-monetary benefit paid or provided by any party except the customer, is paid. The payment of inducements is allowed (and insurance intermediaries and insurance undertakings are regarded as fulfilling their obligations) if it '(a) does not have a detrimental impact on the quality of the relevant service to the customer, and (b) does not impair compliance with the insurance intermediary's or insurance undertaking's duty to act honestly, fairly and professionally in accordance with the best interests of its customers'. 34 This seems a less stringent discipline compared to that provided in MiFID II, which imposes specific bans and strict limitations to fees and commission paid, especially in connection with independent financial advice and portfolio management.35

However, inducements rules in the insurance sector appear stricter when looking at EIOPA's interpretation of IDD provisions: in fact, any sort of rebates can be considered an inducement, irrespective of their origin. Thus, even receiving rebates with different rates from fund managers is covered and such rebates must be assessed under Article 29(2) IDD to ensure that they do not have a detrimental impact on the quality of the relevant service to the customer and that do not impair compliance with the insurance intermediary's or insurance undertaking's duty to act honestly,

33Article 19(1)(e) IDD. About this part, please see Noussia and Siri (2019), p. 47 ff.

34Article 29(2) IDD.

35Art 24(7), (8) and (9) MiFID II. For a comparison between MiFID II and IDD as regards inducements, see Colaert and Incalza (2019), p. 377.

fairly and professionally in accordance with the best interests of its customers.36 Furthermore, a rebate should be assessed in accordance with Article 29(2), IDD regardless of whether a personal recommendation is provided.37

Moreover, EIOPA states that the insurance undertaking which receives the rebate is obliged to consider "all relevant factors which may increase or decrease the risk of a detrimental impact on the quality of the relevant service to the customer, and which have potential to impair compliance with the insurance undertakings duty to act honestly, fairly and professionally in accordance with the best interests of its customers, including the fact that different rates are received from fund managers". Insurance undertakings must also take into account EIOPA's Opinion on monetary incentives and remuneration between providers of asset management services and insurance undertakings38 in which the risk of customer detriment related to the practice of receiving rebates from asset managers is addressed, including the application of the Product Oversight and Governance requirements.39

As requested by the IDD,40 the Commission further specified in a delegated act the criteria for assessing whether inducements paid or received increase the risk of a detrimental impact on the quality of the relevant service.41 In particular, an inducement has to be considered to have a detrimental impact on the quality of the relevant service to the customer when "it is of such a nature and scale that it provides an incentive to carry out insurance distribution activities in a way that is not in compliance with the obligation to act honestly, fairly and professionally in accordance with the best interests of the customer". 42 Furthermore, insurance distributors should conduct an overall analysis taking into account "all relevant factors which may increase or decrease the risk of a detrimental impact on the quality of the relevant service to the customer', as well as 'any organizational measures taken by the insurance intermediary or insurance undertaking carrying out distribution activities to prevent the risk of detrimental impact". 43

The insurance intermediary or insurance undertaking is required to consider the amount of inducement being paid in comparison to the value of the product or service being provided. EIOPA holds that insurance intermediaries and insurance undertakings need to consider whether "the customer is receiving value for the

36EIOPA, Q&A on Regulation (2018), No. 1630.

37EIOPA Q&A on Regulation (2018), No. 1633.

38EIOPA, Opinion on Monetary Incentives and Remuneration Between Providers of Asset Management Services and Insurance Undertakings, 17/295 (2017).

39EIOPA Q&A on Regulation (2018), No. 1632 and 1633. About product governance, see in this volume Marano P, The Contribution of Product Oversight and Governance (POG) to the Single Market: A Set of Organizational Rules for Business Conduct. In the MiFID II/MiFIR legislation, see Busch (2016), p. 123 ss. As regards to the EU insurance supervisory law, see also Dreher (2019), p. 79 ss.

40Article 29(4) IDD.

41Article 8 Commission Delegated Regulation (EU) 2017/2359.

42Article 8(1) Commission Delegated Regulation (EU) 2017/2359.

43Article 8(2) Commission Delegated Regulation (EU) 2017/2359.

payment in relation to the services they have received". 44 In any case, the amount of the inducement being paid should not be disproportionate and not excessive to the services being provided.45

EIOPA considers important that insurance intermediaries and insurance undertakings demonstrate compliance with Article 8 of Delegated Regulation 2017/2359, which requires the same to perform an overall analysis of the inducement schemes, taking into account any relevant factors that may increase or decrease the risk of detriment to customers.46 Regarding the frequency of such assessments, EIOPA recommends that "insurance intermediaries and insurance undertakings consider all relevant factors which may increase or decrease the risk of a detrimental impact on the quality of the relevant service to the customer or risk of impairing compliance with the intermediary's or insurance undertaking's obligation to act fairly, honestly and professionally in accordance with the best interests of the customer, and assess for themselves at what frequency the assessment is required in order to maintain continual compliance with the criteria set out in Article 29(2), IDD". For example, if there are no changes or modifications to the inducement scheme, the frequency can be appropriately extended, where no other indicators (such as customer complaints or others) give reason to do so. Anyway, the details of the assessment should be recorded in order to demonstrate and enable competent authorities to monitor that the inducement complies with the criteria set out in Article 29(2) IDD.47

Anyway, despite the ambition to set up a level playing field between IBIPs and other financial investments, IDD requirements for inducements are opposite to those applied by MiFID II. While inducements are banned unless explicitly permitted, the IDD presumes they are permitted and are prohibited if they determine a 'detrimental impact' on the distributor's quality of the service.48 A further dis-alignment with MiFID II refers to the absence of an enhanced regime in case of the distributor of an IBIP provides advice on an independent basis. Under the IDD, in fact, Member States have the discretion to introduce a specific regime in this respect to better protect investors. Again, differences between national implementation rules remain and as far as the distribution of the IBIP is concerned the gold plating measures have the effect of fragmenting the internal market in the financial services at large.

44EIOPA Q&A on Regulation (2018), No. 1631.

45In this respect, EIOPA reiterates that in case of a rebate from a fund manager, insurance undertakings should consider again the already mentioned EIOPA's Opinion on monetary incentives and remuneration between providers of asset management services and insurance undertakings in which the risk of customer detriment related to the practice of receiving rebates from asset managers are addressed (Q&A No. 1631),

46EIOPA Q&A on Regulation (2018), No. 1623.

47Ibidem.

48Colaert and Incalza (2019), p. 386.

#### 5 Demands and Needs Test

IDD provides specific conduct of business rules, not derived this time from MiFID II regime, known as the demands and needs test. The scope of this test is not prescribed in the Directive or the Delegated Regulation and it is subject to national implementation. However, EIOPA has provided some guidance regarding minimum expectations for this test and how it may relate to the assessment of suitability.49 Recital 7 of Delegated Regulation 2017/2359 clarifies that the assessments of suitability and appropriateness are without prejudice to the obligation, for insurance intermediaries and insurance undertakings, to consider and specify, before the conclusion of any insurance contract, on the basis of information obtained from the customer, the demands and needs of that customer. The main information concerning the customer's needs, typically includes, for example, personal information (age, profession, place of residence, etc.) or the information particularly linked to the type of product requested. This information should enable the insurance intermediary or insurance undertaking to assess whether certain products can be offered or not, according to their capacity of meeting the demands and needs of the customer. This could lead to a selection of a range of comparable products for consideration during the suitability assessment where advice is being given or during the appropriateness assessment where no advice is given.

The 'demands and needs' test provides protection for customers to avoid cases of mis-selling (Recital 44, IDD), and it applies to all insurance contracts, not just IBIPs. Article 30, IDD applies "without prejudice" to the demands and needs test as covered by Article 20(1), IDD. The 'demands and needs' test has to be performed in any event prior to the conclusion of the contract and is distinct from the suitability assessment in advised cases, and the suitability assessment can also be provided at any time during the customer relationship. The evaluation of demands and needs is required whether or not advice is being provided and the specifying of the demands and needs would not amount to a suitability assessment. Depending on the national implementation, where advice is being provided, the demands and needs test and assessment of suitability could be seen as a continuum, rather than as a break. However, it is not clear whether a qualitative and timely suitability assessment would cover the demands and needs test.50 Since the 'demands and needs' test is subject to national implementation, a more extensive guidance from EIOPA would be in the interest to avoid the internal market fragmentation.

49EIOPA, Q&A on Regulation (2018), No. 1638.

50Busch et al. (2019), p. 366.

#### 6 Suitability and Appropriateness Assessment

As already mentioned above, the insurance intermediary or insurance undertaking has, in addition, to gather, as part of the advice process, information about the customer's knowledge and experience in the relevant investment field, the customer's financial situation and his or her investment objectives, in order to be able to recommend to the customer insurance-based investment products that are suitable for the investor. In case of advice provided to the client, the distributor has to consider other more specific and detailed elements, like the customer's financial situation, including their ability to bear losses, their investment objectives, including their risk tolerance, and other correlated information. In the EIOPA view, the final outcome should be a personalised recommendation where it is specifically explained why that particular product best meets the customer demands and needs.

Under the IDD and its Delegated Regulation,51 the provisions concerning the assessment of suitability and appropriateness are almost identical to the corresponding provisions under MiFID II and its specific Delegated Regulation.52 In particular, the suitability assessment requires that the insurance intermediary or undertaking, in the case of sales with advice, gathers information about their client's knowledge, experience, investment objective and risk tolerance—in order to recommend to the client the IBIP that is best aligned with the client's profile.53 To be recommended, the IBIP has to meet the client's investment objectives, risk tolerance, financial situation and that its nature and characteristics are adequate with respect to the client's knowledge and experience.54

If the insurance product is not suitable for the individual customer or the suitability cannot be determined, but the customer still wishes to conclude the contract it is up to the Member State's implementation law to establish if the contract can still be concluded. In the EIOPA's view, Paragraphs 5 and 6 of Article 9 of the Delegated Regulation 2017/2359 cover the cases where a recommendation cannot be made due to the insurance intermediary or the insurance undertaking not obtaining the necessary information or there being no products that are suitable for the customer or potential customer.55 In these circumstances, the customer may agree to proceed with concluding the contract as a sale without advice (in conformity with the applicable rules of national law), and subject to an assessment of appropriateness unless it is possible to sell the contract on an execution only basis (see recital 12 of Delegated Regulation 2017/2359). Where the distributor cannot obtain the necessary information to assess the appropriateness of the contract, the distributor shall warn the customer that the contract might not be appropriate. Only when the customer asks to proceed with concluding the contract despite this warning, the distributor

51Article 30 IDD and Articles 9–19 Commission Delegated Regulation (EU) 2017/2359.

52Articles 9ff MiFID II and articles 54ff Commission Delegated Regulation (EU) 2017/565.

53Article 30(1) IDD and Article 9 Commission Delegated Regulation (EU) 2017/2359.

54Article 9(2) Commission Delegated Regulation (EU) 2017/2359.

55EIOPA Q&A on Regulation (2018), No. 1639.

may perform the sale. In all cases, Article 20(1) IDD provides that any contract proposed must always be consistent with the demands and needs of the customer. The insurance intermediary or undertaking should adopt measures to ensure that the information collected about the clients is reliable, and communicate to the same that the suitability assessment is performed in their best interest.56 It should then provide the customer with the so-called 'suitability statement', which includes an outline of the advice given, as well as information about how the recommendation meets the customer's investment objectives, risk tolerance, financial situation, knowledge and experience.57

The appropriateness requirement provides that, in the event of sales requiring no advice, the insurance intermediary or insurance undertaking gathers information on the client to assess if the product or services offered or demanded were appropriate for the customer.58 In the event the product is deemed not appropriate for the customer, the insurance intermediary or insurance undertaking should warn the customer or potential customer. EIOPA believes that the level of detail will be case-specific and depend upon the individual circumstances of the sale including the nature of the product or service offered or demanded, the risks involved and the knowledge and experience of the customer.59 It is worth noting that Article 17(1) of Delegated Regulation 2017/2359 requires that the information obtained shall include information to the extent appropriate to the nature and type of product or service offered or demanded. Therefore, it should relate to the product overall, including where relevant, such as in the case of a unit-linked insurance contract, the underlying investment assets. Article 19(3) of Delegated Regulation 2017/2359 contains requirements for records to be kept in relation to the appropriateness assessment, in particular regarding the result of the assessment, warnings given to the customer and storage in an accessible manner for future reference. As under MiFID II, this assessment is not required concerning non-complex products as defined by MiFID II.60 However, due to the specific structures of insurance products, the Commission Delegated Regulation under IDD provides, among the criteria for non-complex IBIPs, an additional condition concerning products including a specific guarantee.61

Moreover, the insurance intermediary or insurance undertaking should establish a record of documents agreed with the customer containing rights and obligations of the parties, as well as other terms related to the provision of services to the customer. The customer should also be provided with periodic reports on the service, which include a number of communications proportionate to the type and complexity of the IBIP involved.62 In the context of periodic reporting to customers, the insurance

56Article 10 and 11 Commission Delegated Regulation (EU) 2017/2359.

57Article 14(1) Commission Delegated Regulation (EU) 2017/2359.

58Article 30(2) IDD and Article 14 Commission Delegated Regulation (EU) 2017/2359.

59EIOPA Q&A on Regulation (2018), No. 1636.

60Article 30(3) IDD and 25(4)(a) MiFID II.

61Article 16(a) Commission Delegated Regulation (EU) 2017/2359.

62Articles 30(4) and (5) IDD.

intermediary is also expected to develop and provide 'adequate reports on the service provided'. There could be some overlapping between the insurance intermediary primarily responsible for reporting to customers on costs and charges and providing periodic reports to customers, and the insurance undertaking which is always responsible for delivering information on the product, as required under the Solvency II Directive. According to EIOPA, with regard to the obligations to provide appropriate reporting under Articles 29(1) and 30(5), IDD and Article 18 of Delegated Regulation 2017/2359, it will depend upon who is providing the service.63 This may generally be expected to be an insurance intermediary, except where the insurance undertaking is providing services when distributing directly. Thus, the insurance undertaking remains always responsible for delivering information required by Article 185 of Directive 2009/138/EC (Solvency II).64

#### 7 Non-complex Insurance-Based Investment Products

Drawing from the relevant provisions in the IDD (Articles 30(3) (a), 30(6)) and MiFID II (Article 57) although an assessment of the suitability or appropriateness of an IBIP for the customer by the insurance distributor is generally required as part of an advised or non-advised sale (IDD Article 30 (1),(2)), Member States are allowed (IDD Article 30(3)) to derogate from these obligations and not to require either a suitability or appropriateness test to be conducted, where various conditions are satisfied. Such sales ("execution-only") although carried out only at the initiative of the customer still require the insurance distributor to specify the demands and needs of the customer prior to the conclusion of the contract (IDD Article 20(1)). One of the conditions specified in Article 30(3) to determine whether an IBIP can be distributed as an execution-only sale relates to the complexity of the IBIP. IBIPs can be considered non-complex when they only provide investment exposure to the financial instruments deemed non-complex under MiFID II and do not incorporate a structure which makes it difficult for the customer to understand the risks involved (IDD article 30(3)(a)(i)).

In accordance with Article 25(8) of MiFID II, the Commission is empowered to adopt delegated acts on the criteria to identify "other non-complex financial instruments" referred to in Article 25(4)(a)(vi) of the same Directive. Also, Article 30(3) (a)(ii) of IDD acknowledges the possibility that IBIP may not fall within the scope of Article 30(3)(a)(i), but may still be deemed a non-complex product. EIOPA has considered that where an IBIP incorporates a structure which makes it difficult for the customer to understand the risks involved, it is in all cases not fit for distribution via an execution-only sale.65 EIOPA's evidence-gathering has shown that there are

63EIOPA, Q&A on Regulation (2018), No. 1645.

64Articles 30(4) and (5) IDD.

65EIOPA 17/048, Technical Advice on Insurance Distribution Directive (1 February 2017), at 72ff.

only a limited number of IBIP types currently sold on an execution-only basis. Whilst numerous Member States allow for the sale of certain products on a non-advised basis, only a limited number allow for products to be sold by means of execution-only transactions. In relation to the criteria for the assessment of other non-complex financial instruments, EIOPA has included in its technical advice the relevant provisions of the Commission Delegated Regulation under MiFID II, where these criteria address product features, which are considered to be equally applicable to IBIPs. However, in these cases, it has been still necessary to modify some of the MiFID II requirements to reflect the insurance sector appropriately. In particular, regarding the provision in point (d) of the technical advice, given that exit penalties have been a feature of long-term IBIPs that are considered to have led to consumer detriment, this is intended to exclude products with unreasonable exit charges, including fiscal penalties. Regarding the nature of any guarantee provided by the insurance undertaking, where the latter provides a guarantee regarding the surrender and maturity value of an IBIP, the customer is not fully exposed to the performance of the financial instruments in which the insurance undertaking has invested or to which the customer's benefits are linked. In view of this, depending on the nature of the guarantee, IBIPs could be regarded as non-complex, even though the contract may provide investment exposure that is not limited to financial instruments deemed non-complex under MiFID II. In this case, EIOPA has considered that, as a minimum, the customer should be guaranteed to receive, at both surrender and maturity, at least the amount of the premiums that they have paid, minus legitimate costs levied.66

In accordance, EIOPA has issued the following technical advice: "An IBIP shall be considered as non-complex for the purposes of Article 30(3)(a)(ii) of Directive (EU) 2016/97 if it satisfies all of the following criteria: (a) the contractually guaranteed minimum surrender and maturity value is at least the amount of premiums paid by the customer minus legitimate costs levied; (b) it does not incorporate a clause, condition or trigger that allows the insurance undertaking to materially alter the nature, risk or pay-out profile of the IBIP; (c) there are options to surrender or otherwise realise the IBIP at a value that is available to the customer; (d) it does not include any explicit or implicit charges which have the effect that, even though there are technical options to surrender the IBIP, doing so may cause unreasonable detriment to the customer, because the charges are disproportionate to the cost to the insurance undertaking of the surrender; (e) it does not in any other way incorporate a structure which makes it difficult for the customer to understand the risks involved". 67

Contracts for IBIPs can be difficult to understand for consumers. Distributors, either insurance undertakings or insurance intermediaries, play therefore an important role in processing information for the consumer and guiding consumers in

66EIOPA 17/048, Technical Advice on Insurance Distribution Directive (1 February 2017), at 75–76.

67EIOPA 17/048, Technical Advice on Insurance Distribution Directive (1 February 2017), at 77.

choosing suitable insurance policies. Prior to the advent of the IDD, consumer protection standards for the sales of insurance-based investment products were not considered sufficient at EU level to reduce the risk of mis-selling of those products, as the IMD did not contain specific rules for the sale of life insurance products with an investment element. This was in spite of the fact that these products are generally more complicated and present higher risks for retail consumers than other insurance products. Hence, IDD has stipulated additional conduct of business rules for the sale of IBIPs, and it provided for the case that differentiation should exist between complex and non-complex IBIPs.

Where an IBIP is considered non-complex, Member States may allow insurance distributors to not undertake some of the assessments (suitability and appropriateness) during the sales process that is normally necessary for the distribution of IBIPs. The EIOPA technical advice on the criteria to be used to assess "other non-complex IBIPs" aimed to facilitate the identification of "other non-complex IBIPs", such that only those products for which the risks are readily understood by customers, can be sold by execution-only. It also aimed to promote the consistent application of the IDD with respect to the identification of "other non-complex insurance-based investments" to be consistent with the line taken in the delegated acts expected to be adopted under Article 25(8) of MiFID II. Those aims are aligned with those under the IDD, i.e. the aim of improving insurance regulation in a manner that will facilitate market integration, the aim of establishing the conditions necessary for fair competition between distributors of insurance products and the aim of strengthening consumer protection, in particular with regards to IBIPs. It follows that an overly strict approach would not only be disadvantageous for insurance undertakings and insurance intermediaries, but also for customers and potentially for NCAs.

Hence, the adoption of criteria based on MiFID II seemed like the best solution in many respects, i.e. firstly because it was considered as striking the appropriate balance between the interests of insurance distributors and those of their customers and because it was considered as enabling the necessary flexibility at NCA level via the provision of criteria for other "non-complex insurance-based investments" at EU level. Not least, at the customer level, it seemed reasonable to prevent insurance undertakings and insurance intermediaries from making insurance products available for sale via execution-only which do not meet the criteria, while enabling customers to execute an order for products if the criteria are met.68

68EIOPA, Technical Advice on possible delegated acts concerning the Insurance Distribution Directive, 1/2/2017, EIOPA-17/048. About this part, please see Noussia and Siri (2019), p. 47 ff.

#### 8 Sustainable Finance and IBIPs

The EU initiatives for the promotion of sustainable finance69—started in the end of 2016 with the appointment of the High-Level Expert Group (HLEG) on sustainable finance and formally launched in March 2018 with the adoption of the action plan on 'Financing Sustainable Growth', 70 is going to reshape the regulatory framework related to the distribution of IBIPs, with particular regard, on the one hand, to disclosure rules, and on the other, to Solvency II and IDD framework in relation to the integration of sustainability preferences and considerations in rules concerning investment advice, prudent person principle, conflicts of interest and target market assessment.

As to the first aspect—disclosure rules—the new Regulation (EU) 2019/2088 ('ESG Disclosure Regulation') 71 provides for financial market participants—including insurance undertakings which make available an IBIP72—and financial advisers—comprising insurance intermediaries and insurance undertaking providing advice with regard to IBIPs73—new sustainability-related disclosure duties towards end investors. In particular, the new rules, by applying a cross-sectorial approach, introduce a set of pre-contractual and on-going disclosure duties for a vast range of financial entities, concerning the consideration of sustainability factors, impacts and risks in the investment decision-making and advisory processes. The main aim of the regulation, aside from the reduction of market fragmentation and inefficiencies,74 is the diminution of information asymmetries that could ultimately prevent end investors from making fully informed investment decisions.75 As a consequence, transparency duties are imposed to financial market participants and financial advisers in relation to: (i) the integration of sustainability risks76 in investment decision-making processes or investment/insurance advice77 and in their remuneration policies;78 (ii) the consideration of adverse sustainability impacts of their decision-making/

77Articles 3 and 6 ESG Disclosure Regulation.

69Siri and Zhu (2019), pp. 1–23.

70EU Commission Communication, Action Plan: Financing Sustainable Growth, COM (2018) 97 final (March 2018).

71Regulation (EU) 2019/2088 of 27 November 2019 on sustainability-related disclosures in the financial services sector disclosure regulation.

72Article 2(1)(a) ESG Disclosure Regulation.

73Article 2(11)(a)(b) ESG Disclosure Regulation. It should be noted that Art. 17 exempts financial advisers which employ fewer than three persons from the application of the regulation.

74Recital 9 ESG Disclosure Regulation.

75Recitals 9, 10 and 20 ESG Disclosure Regulation.

76'Sustainability risk' is defined as "an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment". Article 2(22) ESG Disclosure Regulation.

78Article 5(1) ESG Disclosure Regulation.

advisory processes and at the financial product level;79 the (iii) the subsistence of sustainable investment80 as the main objective of a financial product;81 and (iv) the promotion of environmental or social characteristics in investment decision-making and in advisory processes.82

Such rules—which will apply as from 10 March 2021—will undoubtedly enhance transparency and prevent the diffusion of green-washing practices. However, the effectiveness of the new regulation is strictly connected to the prior finalization of the regulation on the establishment of a framework to facilitate sustainable investment (the 'Taxonomy Regulation'), which will establish uniform criteria to determine whether an economic activity is to be considered sustainable.

As to the second aspect, on 30 April 2019 EIOPA published the technical advice to the EU Commission83 on the integration of sustainability risks and factors in the delegated acts under Solvency II and the IDD with specific reference to organizational requirements, operating conditions, risk management (under Solvency II), and target market assessment (under IDD).84 It should be noted that, for the preparation of the technical advice, EIOPA has closely liaised with ESMA to ensure consistency across sectors to the extent possible.85 A first key proposal is made in relation to the integration of sustainability in the prudent person principle of Article 132 of the Solvency II Directive, within which insurance and reinsurance undertakings shall take into account sustainability risks when assessing the security, quality, liquidity, and profitability of the portfolio as a whole. In particular, EIOPA calls for the introduction of new requirements concerning the integration of sustainability risks by insurance and reinsurance undertakings in their investment decisions and underwriting practices, as well as the consideration of the potential long-term impact of their investment strategy and decisions on sustainability factors.86

79Article 4 and 7 ESG Disclosure Regulation.

80A 'sustainable investment' is defined as "an investment in an economic activity that contributes to an environmental or [...] to a social objective [...], provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices [...]. Recital 17 ESG Disclosure Regulation.

81Articles 9, 10 and 11 ESG Disclosure Regulation.

82Articles 10 and 11 ESG Disclosure Regulation.

83On 24 July 2018, the European Supervisory Authorities received a formal request from the Commission to provide technical advice supplementing the initial package of proposals and to assist the Commission on potential amendments to, or introduction of, delegated acts under Directive 2009/65/EC (UCITS), Directive 2009/138/EC (Solvency II), Directive 2011/61/EU (AIFM), Directive 2014/65/EU (MiFID II) and Directive 2016/97/EU (Insurance Distribution Directive—IDD) with regard to the integration of sustainability risks and sustainability factors. See Letter from DG FISMA on sustainability risks and factors, FISMA C4 SG/acg (2018)4365900.

84EIOPA (2019) Technical Advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and IDD, 30/04/2019, EIOPA-BoS-19/172.

85EIOPA (2019) Technical Advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and IDD, 30/04/2019, EIOPA-BoS-19/172, at 4.

86EIOPA (2019) Technical Advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and IDD, 30/04/2019, EIOPA-BoS-19/172, at 25.

Further amendment proposals concern conflict of interests rules under the IDD, as EIOPA calls for the integration of ESG considerations in the identification of conflicts of interest whose existence may damage the interests of the customer, and suggests that when insurance distribution is carried out in relation to IBIPs, insurance undertakings and insurance intermediaries should take all appropriate steps to identify and manage any conflicts of interest that may arise in relation to ESG considerations and in the course of any insurance distribution activities.87 In respect to product oversight and governance, EIOPA calls for the amendment of the IDD Delegated Regulation 2017/2358, suggesting the introduction of a clear reference to ESG considerations and preferences. In particular, according to EIOPA's policy proposals, ESG factors should be taken into account by manufacturers throughout the entire target market assessment of each insurance product, but also in the context of product testing, monitoring and review processes and with regard to distribution arrangements.88

Finally, on 4 January 2019, the European Commission published draft rules to ensure—by amending the IDD—that investment firms and insurance distributors take sustainability considerations and preferences into account when providing advice to their clients on IBIPs.89 In particular, the Commission proposed to amend the IDD by requiring insurance intermediaries and insurance undertakings to assess their customers and potential customers' ESG preferences as a part of their suitability assessment, but also to explain in the suitability statement provided to customers how their recommendation took into account such preferences. The new delegated regulation has not been published yet, but it will enter into force 20 days after its publication on the Official Journal of the European Union and will apply 18 months after it enters into force.

However, some commentators raised many concerns with such proposal, especially in relation to the concept of 'ESG preferences', defined by the delegated regulation as "a customer's or potential customer's choice as to whether and which environmentally sustainable investments, social investments or good governance investments should be integrated into his/her investment strategy". 90 In particular, many stakeholders required further clarification or even substitution of such wording, since its vagueness could lead to divergent approaches by retailers and

87EIOPA (2019) Technical Advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and IDD, 30/04/2019, EIOPA-BoS-19/172, at 33. See Marano (2019), pp. 59 ff.

88EIOPA (2019) Technical Advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and IDD, 30/04/2019, EIOPA-BoS-19/172, at 37.

89Draft Commission Delegated Regulation (EU) .../... amending Delegated Regulation (EU) 2017/2359 with regard to environmental, social and governance preferences in the distribution of insurance-based investment products.

90Draft Commission Delegated Regulation (EU) .../... amending Delegated Regulation (EU) 2017/2359 with regard to environmental, social and governance preferences in the distribution of insurance-based investment products, Article 1(1).

ultimately to increased confusion among clients.91 Moreover, such definition seems inconsistent with the one provided in the draft delegated regulation amending MiFID II, as it seems to assume that all customers have ESG preferences, while it should be clarified—as done in the draft delegated regulation amending MiFID II—that customers may or may not have ESG preference.92

As one may infer from this brief overview of EU legislative proposals and measures on sustainable finance, the integration of ESG considerations, risks and preferences in the distribution of IBIPs requires, again, the challenging implementation of a cross-sectorial approach, where the need for legal certainty has to coordinate with the flexibility required in the light of the peculiarities of each financial sector and of the novelty of the still-evolving sustainable financial market.

#### 9 Policy Issues and Next Steps

As outlined in the introduction, current IBIPs investor protection rules in EU legislation rely on sectoral rules largely derived from the MiFID II paradigm. The "silo" approach is, at least partially, a consequence of the market structure at the level of distributors of insurance-based financial products. The long-term horizon of life insurance products as well as the variety of distribution channels in life insurance markets, including agents and brokers, need flexibility and proportionality in respect of intermediaries providing advice in the financial sector.93 However, significant differences between the legal frameworks affect the decision-making of retail investors. In particular, the rules related to disclosure, suitability assessment and inducements, may not work as intended and probably affect the decision-making of retail investors when they shop around for savings product.94

At the same time, the PRIIPs "horizontal" framework has proven somehow not adequate to address the legal differences across the variety of retail investment products. As others have already observed, the existing protection regime may result in efficiency losses and information asymmetries. As regards these shortcomings, a cross-sectoral mapping exercise could identify possible redundancies, inconsistencies, overlaps and gaps and evaluate the extent to which those issues could hinder retail investors from taking sound investment decisions. This comparison may add

91See feedbacks on Commission Delegated Regulation (EU) .../... amending Delegated Regulation (EU) 2017/2359 with regard to environmental, social and governance preferences in the distribution of insurance-based investment products, available at https://ec.europa.eu/info/law/ better-regulation/have-your-say/initiatives/1185-Institutional-investors-and-asset-managers-dutiesregarding-sustainability/feedback?p\_id¼237222. 92Draft Commission Delegated Regulation (EU) .../... of XXX amending Delegated Regulation

(EU) 2017/565 as regards the integration of Environmental, Social and Governance (ESG) considerations and preferences into the investment advice and portfolio management.

93Pscheidl (2018), p. 211 ss.

94Busch et al. (2019), p. 343 ss.

value to a review of the existing disclosure regime only if the type of the legislative instrument applied in each piece of the current rules is also included in the scope. For instance, as described above, rules on pre-contractual and on-going disclosure requirements are set out in the MiFID II, IDD, PRIIPs, Solvency II, as well as in national legislation. Without a common core at EU level, hopefully, encapsulated in an EU Regulation, a further step in the harmonisation process would be proven costly and ultimately unsatisfactory. As a benchmark, the new pre-contractual and on-going disclosure requirements set out in the PEPP Regulation should be tested to uniform the comparability of information items, both across products and across the Member States. The new PEEP information document may represent a tool to assess the clarity and comprehensiveness of the information documents of the IBIPs as well the other PRIIPs products.