There is more to regulation than Solvency II. David Adams explains the relevance of the Insurance Mediation Directive (IMD), or IMD2; and the new Block Exemption Regulation (BER)

One imagines that industry regulators would like to be seen as powerful entities that create order out of chaos. As for regulation itself, that is not the way it is commonly perceived. The common conclusion is that that there is either too little or too much of it; and the idea that it entails onerous and expensive operational change has become stronger in the collective consciousness since the acceleration of harmonisation measures by the European Union over the past 25 years.

The latest high profile regulatory headache to afflict European insurers is Solvency II, an updated set of requirements due to be implemented in 2012, that sets rules for measuring assets and liabilities and defines the principles used to match risk management to capital requirements. But while it is hogging the headlines there are other important changes underway, in particular the forthcoming revision of the Insurance Mediation Directive (IMD), referred to as IMD2; and the new Block Exemption Regulation (BER), which came into force in April.

Proposed changes to the IMD, which facilitates the operation of insurance intermediaries across the EU, are scheduled to come into effect in the first quarter of 2011. They have yet to be finalised, but we do have a good idea as to what they might be, thanks to the presence in the public domain of a letter sent from Jörgen Holmquist, director-general for General Internal Market and Services at the European Commission, to the EU’s Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), in late January 2010.

THE PROPOSALS

The letter emphasises the importance “from a policy holder perspective” of establishing “a level playing field between the sales of insurance products through insurance intermediaries and those sold by insurance undertakings”. It also highlights the need to align revisions with the ongoing work of the Commission on Packaged Retail Investment Products (PRIPS) and revisions to the Markets in Financial Instruments Directive (MIFID).

The letter asks CEIOPS for advice on seven topics: the legal framework for the Directive; its scope; the international dimension of insurance mediation; professional requirements for intermediaries and other “actors” selling insurance products; improving the notification system used by national regulators to communicate with each other; management of conflicts of interest and transparency; and (to the amusement of cynical, regulation-phobes) ways to reduce the administrative burden and costs associated with IMD implementation.

Steve White, head of compliance and training at the British Insurance Brokers Association (BIBA), says BIBA is pleased by the emphasis placed on the directive’s scope. “To our mind a level playing field is the right way to go – and it looks like the European policywriters agree,” he says. “But there seems to be an appetite within the Commission to look again at the introducing aspect and at taking introducing out of the scope.”

He outlines the practical implications of such a move: “In the UK we have price comparison websites. They don’t sell insurance, they just get you excited about buying it and then you click onto the person that makes the sale. So are they just introducing it? We need to be careful that [the IMD] doesn’t let price comparison sites out of the scope, which would not be acceptable.”

There are other exceptions that need to be more clearly defined within the scope of the Directive, such as travel agents, who were excluded from the original IMD and car rental companies, which have been regarded as falling both within and outside the scope by national regulators in different EU Member States.
The letter asks how best IMD2 might further harmonise requirements in the knowledge and ability of insurance intermediaries “and/or all actors involved” in the selling of insurance products. Bearing in mind the differences in detail between interpretations within Member States; the Commission is only seeking advice on high level principles at this stage.

Arguably the most important issue touched upon in the letter is the Commission’s intention to adopt clear rules governing conflicts of interest and transparency regulating the distribution of investments packaged as life insurance policies. It states: “As regards the sale of classical insurance policies not covered by the scope of PRIPs, the Commission intends to introduce more transparency on the way intermediaries are being remunerated as well as on mechanisms to ensure effective management of conflicts of interest.”

INDUSTRY RESPONSE

This is an area in which representatives of various parts of the UK insurance industry take a keen interest. Airmic chief executive John Hurrell says his organisation has been closely involved with the drive to ensure greater transparency in the sources of insurance intermediaries’ incomes, but that “as we don’t know where IMD2 is going to end up we’ve stayed silent. We are absolutely in favour of and will support anything that will increase transparency.”

BIBA’s White is more expansive on the practical difficulties involved. “There is no standardised approach across Europe for the recognition and management of conflicts of interest and transparency of remuneration,” he says. “In the UK we have the law of Agency, which decrees that you must tell your principal how you are being remunerated and if they want that quantified you must disclose it. But the law of Agency is Anglo-Saxon. They don’t have it in Scotland or in mainland Europe. If you take the Italians, for example, their system is based on Napoleonic Law – they don’t have to disclose anything like that. How can these principles be reconciled for all actors?”

He notes that the FSA favours the adoption of the UK’s solution: full disclosure upon request by the customer. “The FSA would like that to be the European solution and the FSA has an influential voice within CEIOPS.”

The final issue covered in the letter is the drive to reduce administrative and cost burdens associated with IMD implementation. But this is unlikely to lead to any reduction in the responsibilities currently born by insurers and intermediaries in terms of providing information to the customer, says White. “There’s a view in the UK, which the regulators here, I believe, share, that the more information you give a customer the less inclined they are to do anything with it,” he says. “But CEOIPS tends to take the opposite view. They say give the customers the information. So we are managing expectations among our members: telling them, ‘You won’t be able to do away with all the disclosures’.”

But overall, the letter does offer a clear picture of the likely changes and their probable impact. Industry associations reacted in a positive, if guarded fashion. “There are a wide range of complex issues raised by the review of the IMD,” says ABI spokesperson Erfan Hussain, “and the ABI is working with our members to consider these as the review progresses.” The response from CEIOPS to the Commission is expected some time in June, after which there will be some form of public consultation, with the Commission planning to implement the revisions in the first quarter of 2011.

Meanwhile, in March the Commission announced a partial renewal of the Block Exemption Regulation (BER), exempting joint compilations, tables and studies as well as insurance pools from the EU’s general prohibition of practices judged to be anti-competitive. The new BER also allows for the exchange of information in order for insurers to assess risks accurately. However, agreements on standard policy conditions and on security devices, the other two previous exemptions, were judged as being not specific to the insurance sector, so will be excluded from the new BER. But the Commission did acknowledge that these two forms of cooperation may give rise to some consumer benefits and it intends to address them within its guidelines on horizontal cooperation agreements, upon which it has issued a consultation that runs until late June 2010.

“This was a welcome outcome, as the Commission had intended to completely remove this regulation along with their wish to remove all industry Block Exemptions,” says the ABI’s Erfan Hussain.

It’s impossible to predict the net effect of these changes and the longer term impact of Solvency II and other regulations. But while they are undoubtedly a source of inconvenience, they also present innovative companies with new opportunities in a changing, expanding European insurance market. So, hopefully, this is a case not of ‘comply or die’, but of ‘comply and thrive’.

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