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The Insurance Distribution Directive (IDD) and its consequences for law firms

What is IDD?

 As from the 1st October 2018, the Insurance Distribution Directive (IDD) will introduce a new regime for those involved in insurance sales, even if selling insurance is not your primary business. This will replace the Insurance Mediation Directive (IMD).

The IDD is designed to strengthen insurance customer protection, and will also apply to all businesses involved in the insurance supply chain, including where insurance is sold alongside other products.

What is meant by insurance distribution activities?

The IDD makes a distinction between the types of businesses that carry on insurance distribution activities and prescribes different requirements in relation to each. These are insurance intermediaries, reinsurance intermediaries and a new category of insurance intermediaries; ancillary insurance intermediaries (AII).

Firms who carry on financial services activities under Part 20 of FSMA as exempt professional firms (EPFs) can be classed as ancillary insurance intermediaries (AII) for the purposes of IDD.  Most SRA authorised law firms are classed as ancillary insurance intermediaries. SRA authorised firms that are not EPFs (because they provide mainstream financial services and are directly authorised by the FCA to undertake those activities) will need to familiarise themselves with the changes that the FCA make.

This will cover, for instance, the proposal and supply of after the event costs insurance in a personal injury matter or defective title indemnity insurance in a conveyance. There may be other insurance products that firms advise on or arrange for their clients.

What are the requirements for engaging in insurance distribution activities as an ancillary insurance intermediate?

(a)              There needs to be evidence of registration with the regulator to undertake such activities;

(b)              Those involved need to be of good repute and possess appropriate knowledge and ability to advise on and propose insurance products;

(c)               This will entail training on products and on what formalities need to be addressed when engaging with clients.  The specific requirements for individuals to undertake 15 hours CPD relating to the provision of Insurance Intermediary Activities do not apply; and

(d)              A manager must be appointed to ensure compliance and records must also be kept to demonstrate compliance.

What are the rules on remuneration?

The IDD is keen to avoid conflict of interests when it comes to advising and supplying insurance products. Firms must disclose if they have 10% or more voting rights or capital in an insurer, or vice versa. They must also disclose whether they give advice based on fair and personal analysis of the market. If a firm is contractually bound to place business with a specific insurer or insurers, it must provide the name of these insurers.

Firms must disclose the nature and basis of any arrangement by way of remuneration, sales targets or otherwise that could provide an incentive to the firm or their employees to recommend a particular insurance product to a client when the caseworker could offer a different insurance product which would better meet the client’s needs.

This will also mean a firm will not be able to be paid a commission or other advantage for the supply of indemnity insurance without full accountability to the client.

What information needs to be given to the client at the point of the retainer?

The client care retainer will need to be reviewed. Precise and clear information on what the firm can do and not do under the IDD needs to be given.  The firm’s regulator must be stated and the complaints procedure for dealing with complaints about the provision of and advise on insurance products must be made clear.

What information must be given before the insurance cover is put into force?

The requirement for a demand and needs statement remains and is extended.

(a)              sets out the client’s demands and needs on the basis of the information provided by the client;

(b)              where a recommendation has been made, explains the reason for recommending that contract of insurance; and

(c)               reflects the complexity of the insurance contract being proposed.

There is an obligation to also provide the client with objective and relevant information about the insurance product in a comprehensible form to allow that client to make an informed decision while taking into account the complexity of the insurance product and the type of client. This shall be provided by way of a standardised insurance product information document (“IPID”) on paper.

The IPID

THIS WILL BE SUPPLIED BY THE INDEMNITY INSURANCE SUPPLIER AND SHALL INCLUDE:

(a)              information about the type of insurance;

(b)             a summary of the insurance cover, including the main risks insured, the insured sum and, where applicable, the geographical scope and a summary of the excluded risks;

(c)              the means of payment of premiums and the duration of payments;

(d)             main exclusions where claims cannot be made;

(e)              obligations at the start of the contract;

(f)               obligations in the event that a claim is made;

(g)              the terms of the contract including the start and end dates of the contract; and

(h)             the means of terminating the contract.

What obligations are there when recommending to a client which insurance cover to run with?

Where a caseworker recommends a contract of insurance, the client must be informed this is made on the basis of a fair analysis of the products available within the market. This will involve looking at a sufficiently large number of insurance contracts to enable a recommendation of a product, which would be adequate to meet the clients’ needs. The caseworker will need to ensure that the client can make an informed decision about the product by looking at the extent of the cover, whether the cover has an escalation clause, the rating of the insurer within the market and the conditions of the cover. 

Where firms are only using one insurance provider, they should consider other providers for comparable products or to a provider that can supply a list or number of similar products for selection.

Conclusion 

If a policy is required the key is to ensure the client is presented with all of the information required under the IDD and is left to make the decision on which policy he or she wishes to take out.  Providing the appropriate policy is correctly identified, firms should only provide general advice to clients on the difference in insurer ratings and the benefits of escalation clauses when proposing insurance options. It should be made clear that cheaper cover may not always be the best option.