Insurance Distribution Directive and its Effects on Insurtech Initiatives

On 20^th of December, the European Commission postponed the application date of the Insurance Distribution Directive (IDD) from March 2018 to 1^st of October. This very crucial decision will affect insurance and reinsurance companies deeply. Their journey for rounding the Insurtech curve obviously will be their first line of defense.

IDD regulates “the way of insurance products are designed and sold by insurance intermediaries and directly by insurance undertakings. It specifies:

• The information that should be given to consumers before they sign an insurance contract.
• Conducting of business and transparency rules on distributors.
• Procedures and rules for cross-border business.
• Rules for the supervision and sanctioning of insurance distributors in case they breach the provisions of the IDD.”

In European Union unique insurance market, distribution of insurance products is regulated by the “Insurance Mediation Directive (IMD)” since 2002. However, IMD regulates only brokers and other insurance intermediaries and covers mainly the tradition distribution channels. Furthermore, IMD has very limited scope on selling process of insurance and reinsurance companies.  Now with IDD, the scope of regulation covers not only insurance intermediaries, but also insurance companies, their employees, ancillary insurance intermediaries as well as online distribution.

Beside confidence, IDD provides other valuable benefits to customers as:

• Greater transparency in price and costs of insurance products (“Easy”)
• A simple, standardized insurance product information document (IPID) providing clearer information on non-life insurance products (“Easy”)
• Where insurance products are offered in a package with another product or service, for example when a new car is sold together with motor insurance, consumers will have the choice to buy the main product or service without the insurance policy (“Me”)
• Rules on transparency and business conduct to help consumers avoid buying products that do not meet their needs (“Me”)

Another brand new requirement comes with IDD is IPID (Insurance Product Information Document). This document is a simple brief about main features; like type of insurance, obligations of parties, how claims process will be handled and insurance cover; of insurance contract. IPID will be mandatory only for non-life insurance products and a standardized format was already prepared by EIOPA.

Another crucial point of IDD is its approach to insurance products with investment elements. According to EIOPA, insurance-based investment products increase misdirection of customers. IDD obliges additional requirement on distributors about these types of insurance products. The main motivation behind this requirement is preventing and managing possible conflicts of interests among customers and distribution channels. The requirement obliges providing not only a high match between customer needs and product but also assessing appropriateness of customer’s knowledge about investment field. Frankly speaking, this is the greyest point of the regulation.

In previous article “Me, Free, Easy”, we described the three main dimensions of brand new insurance business. One of these dimensions, free, refers to an insurance sector without intermediaries or minimum contribution of intermediaries into customer’s product journey. From my point of view, an insurance experience with possible highest operational efficiency has a negative correlation with participation of intermediaries. Unfortunately, more intermediaries mean less operational efficiency.

Today, with insurtech initiatives, insurance companies are able to create their own distribution channel with low operational costs. Especially big data management, blockchain and AI allow insurance companies processing their own data within few seconds and bringing supply with demand owner together on right time and in right place.

With their leading regulation activities, EIOPA and the European Commission work as a strong partner of insurance companies during their insurtech adventure. With brand new regulations like GDPR and IDD, regulatory bodies of European Union give the same message to customer: “I will protect your benefits under every technological circumstance”. Needless to say, this strong message makes customers more cheerful for sharing their personal data with insurance companies even via on-line tools. Furthermore, with IDD, EIOPA shows us again the importance of guaranteeing fair competition among all players.

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#TheEuropeanCommision, #Insurtech, #DisruptiveTechnologies, #AI, #IoT, #Blockchain, #BigDataManagement, #ZeynepStefan

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