One of the most determining factors before purchasing a product or service is having all the information and the best advice. You may think that the issue does not suit you, but when it comes to rights protection …
Law of Insurance Distribution. Or what is the same, the rule that replaces the repealed Insurance Mediation Law?
You may think that it is an issue that does not affect you at all, neither in your business nor in your personal life. Well, you are wrong!
Look, one of the most determining factors before purchasing a product or hiring a service is having all the information and the best advice. And in insurance, the product is as important as who sells it. So this article is about that, about the actors involved in the distribution of insurance.
The publication and entry into force of the new Insurance Distribution Law mean adapting legislation to the European Insurance and Reinsurance Distribution Directive. A regulatory framework is established that modifies the traditional insurance market and therefore also obligations with consumers.
The objectives of the new Insurance Distribution Law
On February 5, RDL 3/2020 was published. It has taken more than three years since its parliamentary process began for the rule to finally see the light.
This new rule will change the traditional way of selling insurance. Until now, the mediator was in charge of selling the products made available to him by the insurer to his clients. From now on, the distribution becomes comprehensive and can be carried out by all those involved in the insurance market.
At the same time, the mechanisms that allow the single insurance market within the European sphere are regulated, which will undoubtedly influence greater competitiveness among mediators. The direct consequence of this situation should translate into a greater benefit for the insured.
This benefit is necessarily linked to greater protection. And this is only achieved by adapting the products to particular needs, making them more understandable. Also increasing transparency, both in relation to the products and in the activities carried out by the insurance distributor.
The new features incorporated into the new Insurance Distribution Law
The impact of having to adapt the legislation on insurance mediation to the European guidelines has resulted in the promulgation of this new standard. And it comes loaded with news, these are some of the most relevant.
1. New operators
From now on, traditional mediators are no longer alone. Insurance distributors are considered to be the insurance companies themselves, and their employees when they participate in the active sale of their products. Insurance comparators are also included and the figure of the complementary insurance mediator is created.
Although they were already in the market, it is now when the activity is incorporated as one more insurance distributor. They must be an Agency or Brokerage, and they must provide the client with all the information corresponding to the type of mediator in question.
In the insurance distribution, they will have to provide all the information related to the insurance contracts according to the choice made by the customer online or through the web. In addition, when the client can contract directly or indirectly through the web, they must provide a classification of the products with prices, discounts, and a comparison between them.
Mediators who use online means or use websites for the distribution of insurance must develop written policies that guarantee their transparency. These policies must always be available for their supervision. The websites must inform about the ownership and condition of the same so that the user can exercise the rights that assist them.
The complementary insurance mediator
This new figure is reserved for the natural or legal person who carries out the distribution of insurance as a complementary nature to the main activity and only distributes certain insurance products complementary to the product or service specific to its activity. Investment companies or credit institutions may not be a complementary insurance mediator. It is about regulating the insurance distribution activity where the main activity is another. An example of this can be travel agencies or car rental companies.
It will be an essential requirement to be registered in the administrative registry of insurance distributors of the DGSFP. In addition, in the case of legal entities, administrators, the person responsible for the distribution activity and the people who are part of the management bodies responsible for distribution must also be registered.
The lack of activity of the complementary insurance mediator may lead to the loss of the authorization. Lack of activity is understood when it has not started or for two consecutive years, the distributed premiums do not exceed 30,000 dollars.
On the other hand, the figure of the external Collaborator of the mediator undergoes some changes. From now on, the “advisor collaborator” whose only function was limited to presenting clients disappears.
2. More information, greater transparency
The new Insurance Distribution Law establishes what information and how it must be provided to the client before signing the insurance contract. It also places special emphasis on information related to insurance-based Investment Products and the rest.
In general, the information must be clear, precise, and understandable for the client. It must be provided on paper and in the official language of the State where the risk is located, the State where the commitment is established, or in any other language by mutual agreement between the parties.
In addition to being on paper, it will be possible to report on durable media or through a website.
The durable medium must allow the information addressed to the client to be stored. At the same time, it must allow the reproduction without changes and that it can be accessed later for the necessary time. The condition for offering this medium is that the customer has chosen the durable medium instead of choosing to receive it on paper.
Informing the client through the website requires that the client has accepted that the information is made by this means. It must be a suitable place for the insurance operation and the client has had to be informed of everything related to the web address. You must have the guarantee that the information will be available for consultation for the time reasonably necessary.
The Information Document prior to contracting the insurance.
The law establishes that before contracting the insurance, the distributor must present to the clients a document that contains all the relevant information about the product.
The Prior Information Document must have a standardized format and will be used in all NO-VIDA products, excluding major risks.
The IPID will be prepared by whoever designs the product, normally it will correspond to the insurance entities. In the event that the product has been designed by the broker, he will be the one to do it.
The most important requirements that the IPID must meet are specified in that it will have a clear structure that allows easy reading. It will be accurate and not misleading and will include a statement that the pre-contractual and contractual information for the product are provided in other documents. It will contain all the information related to the type of insurance, coverage, and insured amounts, the risks excluded, the geographical scope of application, the duration, and the means of payment. It should also refer to how the contract can be canceled or terminated and the means of dispute resolution.
One last point is that it must be delivered effectively to the client by all insurance distributors and intermediaries.
On the obligation to report the remuneration of the distributor
In addition to the above information, the obligation to inform the client before the conclusion of the contract of the remuneration that the distributor will receive is established. Depending on the nature of the remuneration, this can be:
- By fees: the remuneration paid directly by the client.
- By commission: remuneration is included in the insurance premium.
- Any other remuneration: This is any economic advantage offered and granted in connection with the insurance contract.
- Combined: A combination of the previous types.
If the agreement contemplates the payment of fees to the insurance mediator, the latter must inform the amount or when it is not possible, the method for its calculation. This obligation, which affects all distributors, must be stated clearly and precisely. The same is applicable for payments made by the policyholder, other than periodic premiums.
3. Marketing of products
The Insurance Distribution Law introduces different sales models (informed, advised, in execution), the combined sale, or related products.
It is worth highlighting the differences established by the standard on sales models, distinguishing between:
- Informed: It is one that is carried out in accordance with the demands and needs of the client, based on information obtained from the same, and that seeks to provide objective and understandable information about the insurance product so that the client can make an informed decision.
- Advised: it is based on the existence of a personalized recommendation made to the client, at his request or at the initiative of the insurance distributor, regarding one or more insurance contracts.
- In execution: The customer has chosen the product on their own and simply has to execute the purchase order on their behalf.
Distribution of Insurance-based Investment Products (IBIP’s)
IBIPs are insurance products where the maturity or redemption value is totally or partially subject to market prices.
With the primary purpose of protecting the client, insurers and insurance intermediaries will have to offer the client of Insurance-based Investment Products (IBIP’s), clear guidelines, and recommendations on the risks inherent in said products. This information should include all associated costs and expenses, including advice. In addition, when they carry out advisory work, they must collect accurate information about the client’s financial knowledge and experience, their financial situation and the objective pursued.
Prevention of conflicts of interest.
The new Insurance Distribution Law gives special relevance to conflicts of interest. These usually appear when one or more people have conflicting interests, and professional independence and objectivity may be compromised. To prevent them, the norm provides that the insurance distributor may not establish any remuneration, sales target, or another system that may constitute an incentive for this or its employees to recommend a certain insurance product if it can offer a different one that is better fit the customer’s needs.
In addition, mediators and insurance entities must detect, prevent, and report any possible conflict of interest.
The practice in Combination Sale and Linked Sale
The new insurance distribution rule goes on to regulate the practices in the combined and linked sale. It is established that the insurance distributor will have the duty to inform the customer when the insurance contract is offered together with an auxiliary service or product if the different components can be purchased separately.
In the combined sale, the insurance can be purchased separately and maybe the main product or an accessory or auxiliary product of a good or service that is not insurance.
When it comes to linked sales, insurance is auxiliary to a good or service that is not insurance but is an inseparable part of the product in question.
Before contacting the insurance, the distributor will expressly inform the client about whether a combined or linked sale is being made. The costs and expenses of each component of the product or service must be reported separately. In addition, on the effects that the non-contracting or individual cancellation of the insurance or any of the linked products would have on the rest. It is also necessary to inform you about the differences between the joint offer and separately.
4. Product governance
Product governance is a new concept introduced in the new insurance distribution standard. It refers to the requirements in the design, approval, and control of insurance products.
Prior to the marketing of insurance, insurance distributors who design products for sale must prepare, maintain, and review the approval process for each product. New requirements are established in the design, approval, and control to ensure that the customer’s needs are taken into account in all phases of the product.
This product governance affects both insurers and insurance brokers who design insurance products to sell to their clients.
5. Separate accounts
Another novelty that the new Insurance Distribution Law brings is the obligation that insurance intermediaries have to separate the funds received from clients from the economic resources of the company. That is to say nothing about everything coming in and out of the same bag.
From now on, they have to allocate a specific account in which they will only be able to deposit the premiums received from the client or the amounts delivered by the insurance companies as compensation or reimbursement of the premiums destined for the clients.
6. Infractions and sanctions
With the new Insurance Distribution Law, infringements are reinforced and penalties are considerably increased.
In the case of serious infractions, the sanctions can range from the cancellation of the registration in the administrative register or the temporary suspension for a maximum period of 10 years, to fines whose amount varies according to:
If it is a legal person, the fine can reach up to 3% of the annual business volume according to the latest accounts approved or one million euros. It may also be twice the amount of the profits made or the losses avoided with the infringement if that can be determined.
In the case of a natural person, the fine may be greater than 100,000 dollars or twice the amount of the profits obtained or the losses avoided with the infringement, if it can be determined.
These sanctions are substantially increased if the offense committed is due to the distribution of IBIP’s.
To the economic sanction or to the cancellation or suspension of the authorization to operate, the publicity to the constitutive conduct of the infraction may be imposed.
However, this is not all, because the disciplinary regime does not stop only at the insurance dealer. It is also attributable to those who hold administrative positions, the person responsible for the distribution activity, or those who are part of the management body responsible for the distribution activity. And if the offense is personal, the sanction is also personal, and can even go as far as being disqualified from holding positions of administration and management.
7. Training in the Insurance Distribution Law
Training is another of the sections in which the new insurance distribution law has incorporated new requirements. On the one hand, the concept of the relevant person is established for the purposes of training. It is understood that a relevant person is one who, being an employee or not, participates directly in the distribution of insurance, informing or advising clients.
Therefore, relevant persons are the person responsible or those who are part of the management team responsible for the distribution in the insurance companies. The same consideration in the case of insurance intermediaries, reinsurance brokers, legal entities, and external collaborators of the intermediaries.
Continuous training, a necessary requirement
Another innovation in training refers to the abolition of the old groups’ A, B, and C. In the development of this new law, the following levels of training are considered.
Level 1: Includes the person responsible for the distribution in the case of an individual or, where appropriate, half of the people who form the management body responsible for the distribution of insurance companies, insurance and reinsurance brokerages, and safe banking operators. They will need to complete initial training of at least 300 teaching hours and continuous training with a minimum of 25 hours per year.
Level 2: Includes insurance agents, employees of insurance companies, and insurance intermediaries who provide advice to clients on insurance or reinsurance products. Likewise, it includes the people who make up the distribution networks in the safe banking operators and the external collaborators of the mediators. They will have to carry out initial training of 200 teaching hours and continuous training with a minimum of 25 hours per year.
Level 3: This level includes all the people of level 2, but with the difference that they only carry out information tasks on insurance products, but without advice. Initial training is limited to a minimum of 150 hours, with continuous training that may not be less than 15 hours per year.
It has taken more than two years to see the light of the new Insurance Distribution Law. And he has, as they say in basketball, on the horn.
If you work in the world of insurance distribution, all your activity, obligations, or how to do things are regulated in this rule. We have seen some of the highlights of what they are new in the distribution of insurance. And also some of the main objectives:
- Establish mechanisms that favor the single insurance market within the European framework, in terms of competitiveness.
- Benefit the interests of insurance consumers, reinforcing transparency, and guaranteeing homogeneous client protection.
So far my participation. Now it’s up to you to leave us your answer to the questions in the comments.