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Document 52012SC0192
COMMISSION 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
COMMISSION 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
COMMISSION 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
/* SWD/2012/0192 final */
COMMISSION 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 /* SWD/2012/0192 final */
COMMISSION 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 1. Overview of relevant EU legislation and
current policy initiatives || Insurance || Investment Relevant products || life insurance, motor insurance, liability insurance, property insurance, cargo insurance etc. as well as insurance products with investment elements, such as unit-linked life insurance. || shares, bonds (including structured bonds), investment funds, derivatives, etc. Capital requirements || Solvency II taking up and pursuit of business, supervision, reorganisation and winding-up procedures for insurance and reinsurance companies || CRD (Capital Requirements Directive) IV taking up and pursuit of business, supervision, reorganisation and winding-up procedures for credit institutions and investment firms Distribution || IMD Registration and authorisation rules (including qualification of staff), selling practices of all insurance products, cross-border, conduct of business, supervision, etc. Sales of insurance products with investment elements, such as unit-linked life insurance are regulated under IMD. || MiFID II Registration and authorisation rules, organisational requirements (including qualification of staff), selling practices of all investment products, cross-border, conduct of business, supervision, etc. MiFID has an exemption for investment products with an insurance wrapper, such as unit-linked life insurance. Product disclosure || SOLVENCY II PRIPS UCITS Insurance products Insurance products with investment elements Investment products In order to ensure cross-sectoral consistency,
the revision of the IMD will take into account the on-going revision of MiFID as
well as the upcoming PRIPs initiative. It means whenever the regulation of
selling practices of life insurance products with investment element (PRIPs
insurance) is concerned, IMD should meet at least similar consumer protection
standards as the revised MiFID. PRIPs insurances are retail
investment products packaged as life insurance, such as unit-linked life
insurance for example. 2. Problem definition The outstanding issues with the current
IMD legal framework, which will be detailed further in this section, can be
grouped into two problem categories: problems related to the sale of all
insurance products (life and non-life insurances) and problems related to the
sale of PRIPs insurances. 2.1. Problems related to the
sale of all insurance products The scope of the Directive does not include direct writers and some other sales channels of insurance products (such as
travel agencies and car rental companies). This leads to a widespread problem
that consumer protection is different depending on where (through which sales
channel) the consumer purchases an insurance product. Besides undermining
consumer protection, this situation also creates unequal regulatory compliance
costs across sales channels. Some after-sale market players (claims handlers
and loss adjusters) are also excluded from the scope of IMD at present. These
professions make part of the sales process of the insurance products and could
be exposed to conflicts of interest. The second substantial problem relates to conflicts
of interest between the seller of insurance products and the consumer due
to the remuneration structures of sellers. Conflicts of interests stemming from
remuneration structures can lead to consumer harm in two slightly different
ways: either through a lock-in of the intermediaries into quasi exclusive
dealing arrangements with a single upstream insurance company (whereby
consumers turning to the intermediary will not have sufficient choice to best
satisfy their needs); or through advising products to the consumer which are the
best remunerated for the seller, rather than best suited to consumers' needs
(this latter case is dealt with below, together with other problems concerning
advice). The third group of important issues relate to advice,
where we can distinguish two different problems. ·
Biased advice could
be given to consumers due to the above described conflicts of interest stemming
from remuneration of sellers. ·
Low quality advice occurs in areas where the professional qualification requirements
for sales personnel are insufficient. Currently the rules of professional
qualifications vary widely across Member States and across sales channels,
leaving many consumers with low quality of advice. Access to cross-border markets is burdensome for sellers of insurance products and currently there
is very little entry across European markets. Mutual recognition of
professional qualifications, freedom to provide services and freedom of
establishment are not specified in the text of IMD1. There is no single
register where consumers could find information about the sellers of insurance
products in every EU Member State. With regards to the problem with lack of
harmonisation of sanctions, it has been detected as an issue in almost all
current revisions of financial services legislation. The reason for that is
lack of deterrent effect of sanctions in some Member States and large
differences between the sanctioning powers of the competent authorities. 2.2. Problems related to the
sale of PRIPs insurances Consumer protection standards for the sale of
insurance PRIPs are not sufficient at EU level as IMD 1 does not contain
special rules for the sale of complex life insurance products with investment
elements. Currently, those products are sold under the general rules for the sale
of insurance products although these products are very different in nature and
represent higher risks for unprofessional buyers. There
is market evidence of a very high number of complaints regarding the sale of
unit-linked insurance products in many Member States. There is evidence about
regulatory arbitrage existing due to differences in the regulation of the sale
of PRIPs through different sales channels. The
potential consumer detriment stemming from the sale of unsuitable unit-linked
life insurance products could be estimated to be a maximum of €1.1 trillion for
EU 27. Importantly, in the insurance market, due to costs of exit and higher
costs of products - unsuitable advice can lead to investors paying more in fees
and being locked into products with penalties for leaving that were not
understood well enough by the investor when making the investment. Of course,
many factors impact on actual detriment for consumers, and sales advice is only
one factor. However evidence suggest that advice is crucial in retail markets
of financial products. Therefore, it appears that advice is a key element.
Given the size of this market the mis-selling cases could equate to a large
potential impact on consumer welfare. In the absence of EU rules, regulators
have responded by asking for increased cost transparency or, where their action
captures complex products in general, providing guidance on pre-contractual
disclosure or calling for a moratorium on the sale of such products. 3. Analysis of subsidiarity and
proportionality Member States acting on their own would not be
able to address at national level the problems of ineffectiveness due to
different regimes for direct writers and intermediaries across the EU,
non-harmonised standards of advice and consumer protection and differences in
qualification requirements. Moreover, the revision of the existing Directive
aims to improve consumer mobility, to facilitate cross-border trade and to
ensure a level playing field for all market players by aligning the regulatory
standards in different financial services sectors (i.e. aligning IMD with MiFID
rules on sales of insurance policies with investment elements). About 95% of registered insurance
intermediaries in the EU are micro enterprises and SMEs (as defined by other EU
Directives). Therefore, a proportionality approach needs to be ensured when
introducing aligning IMD with MiFID. 1. The sellers of simple insurance products who
sell insurance products on an ancillary basis (such as car rentals, travel
agents) and the after-sales services (such as loss adjusters and claims
managers) will go through a simplified notification procedure instead of
registration with the competent authorities. 2. There will be a general proportionality rule
applicable to all provisions which states that, since the Directive is a minimum
harmonisation instrument, Member States should impose requirements in a
proportionate manner taking into account the complexity of the products sold.
This would equally apply to EIOPA when it develops Level 2 measures on professional
qualification requirements. 3. MiFID rules pertaining to investor
protection (such as the ban on commissions for independent advice, mitigation
of conflicts of interest, suitability and appropriateness test) will be taken
over in IMD2 to ensure a level playing field between the sales practices of all
PRIPs products in the investment and insurance fields. IMD2 and Solvency II
will contain organisational rules (registration, notification, rules on
internal audit, risk management, etc., – similar to those contained in MiFID)
for insurance intermediaries and direct writers which will ensure equally high
standards - sometimes higher - in this regard as MiFID. As these rules take
organisational features of insurance intermediation and insurance into account,
the administrative burden is significantly less than using full MiFID rules
written for the investment sector. The countries using MiFID rules in full (NL,
IT, UK) in fact apply a proportionality approach to make the rules useful and
suitable for insurance intermediaries. 4. Comparison of Policy Options Scope: The
preferred policy option is to define more precisely the activities that are
within the scope of the IMD. This means maintaining the flexibility for Member
States to set the widest possible scope but allowing some exceptions to ensure
proportional treatment (to exempt sales of insurance complementary to the
supply of goods; and to exempt large risks insurance and professional buyers
from conduct of business rules). This includes also an introduction of
simplified declaration requirements for actors in the insurance value chain
(sellers of insurance products on ancillary basis such as travel agents, car
rentals and after sales players such as loss adjusters, claim handlers). This already has beneficial impact on consumers, while the impact on
market players selling on an ancillary basis would only be small in terms of
costs. This option substantially reduces the negative
impact on direct sellers and intermediaries in terms of competition, while
still remaining effective in achieving the pursued objectives. Conflict of interest: There are two preferred options: to introduce a European Business
Card standard disclosure format for all the sellers of insurance products and
to introduce at the same time a MiFID style regime (conduct of business rules
as contained in articles 23-25 of MiFID II) for the sellers of life insurance
products with investment elements. These options trigger improved consumer
protection by prevention (European Business Card and disclosure of
remuneration) and possible management and mitigation of conflicts of interests (MiFID-style
solutions). At the same time these options are cost efficient as they allow for
a proportionate approach depending on the complexity and the costs of the products
sold. Advice: There
are two preferred options related to advice: it would be not costly to
introduce a definition for advice in the Directive. This option will enable the
consumer to know as to whether he receives a personalised advice or not when
purchasing a product. The other preferred option is to introduce a MiFID-style
suitability test and a ban on commission for independent advice for the sales
of the most complex products. This will prevent consumer detriment that might
arise in cases of inappropriate selling of those products. As for the problem of low quality advice, the
preferred option is to ensure that the professional qualification of the seller
of the insurance product is proportionate to the complexity of the products
that he offers, for instance sellers of complex life insurance products should
receive special training about the features of the products that they are
offering. Due to the market structures and Member States competencies
related to professional qualification requirements, this should be combined
with a 'soft law' approach. Cross-border trade: The preferred option is to introduce FOS and FOE definitions and a
mutual recognition system, as well as a simpler notification process for those
insurance intermediaries who want to sell products on a cross-border basis, as
well as to create a centralised registration system where consumers can find
information about all sellers of insurance products which exist in the Member
States. These options are relatively cost efficient and would lead to important
consumer benefits linked to having more information and a wider range of choice
(improved competition). Sanctions: The
preferred option is to introduce a general sanction framework by establishing
harmonised minimum rules which are dissuasive enough to significantly reduce
the number of infringements. This option has been identified as being the most
cost-effective by several impact assessments of similar legislative initiatives,
such as MiFID and PRIPs. EIOPA is also largely in favour of this approach. It
should also be noted that a large number of potential offenders might be
cross-border operators with very considerable turnovers, for whom a sanction of
a 6 000 EUR for being an unregistered insurance intermediary (e.g. Spain) will
not have a dissuasive effect. 5. Objectives of EU initiative The revision of IMD1 seeks to improve
regulation in the retail insurance market in an efficient manner. It aims at
ensuring a level-playing field between all participants involved in the selling
of insurance products and at strengthening policyholder protection. 6. Assessment of impacts and costs All analysed policy options will result in
Member States incurring compliance costs in terms of developing and/or
incorporating rules into national law. According to a recent study, the costs
of developing and/or incorporating rules into national law are low to moderate.
As for administrative costs, since this initiative would by definition seek to
require the application of new selling rules and in some Member States the
provision of new information to retail customers, this would impose one-off
costs on all distributors and manufacturers. On-going costs are also likely to
occur. As for the extension of scope, this would have a marginal or no impact
on direct writers and other market players. As far as distribution of PRIPs
insurances is concerned, it should be noted that an estimation of the impacts
at level 1 for an initiative such as this is necessarily going to be rather
approximate; more accurate estimations will only be possible once analysis of
possible level 2 measures has been undertaken. The estimate of administrative
burden on the basis of the PWC study and industry statistics, adjusted by Commission
services, are around 617.000.000 EUR for the first year of application
of IMD2, which represents 0,06% of the total GWP for 2009 and will result, in
view of the large number of undertakings affected (about 1 million), in a
relatively moderate cost on an average of about 730 euro per undertaking.
Those costs will not be distributed between all undertakings in an equal manner
– those undertakings selling PRIPs insurances will be affected more than those
who only sell general insurance products. 7. Estimation
of benefits 7.1. For
consumers and society By introducing improved and harmonised advice
standards, consumers will gain benefits through an improved comparability of
offers, including across different distribution channels. This is likely to
lead to an improved understanding by consumers of the services and products on
offer. As a result, consumers will be inclined to compare offers and shop
around for products and deals better suited to their needs. This reduces the
cost/price paid by the consumer. The consumer needs to buy insurance policies
which fit his needs and financial situation. Otherwise, there is a high risk of
an early withdrawal on the unsuitable policy and consumer dissatisfaction. This
means that if a consumer cancels his/her insurance contract earlier, he or she
will lose all accumulated benefits and pay around 8% cancellation fees. There
may also be some unfavourable taxation consequences for the consumer following
a cancellation of a life insurance policy (for example if taxation has to be
levied on any surrender value of the policy). For instance, for the market of
one type of life insurance products, variable annuities statistics suggests
that in about 25% of cases consumers withdraw from the contracts before they
mature (level of 'defaults'). This could be linked to various factors, inter
alia inappropriate advice on the choice of the product. The benefits to
consumers and society as a whole from the introduction of high and harmonised
advice standards come through a reduction in early withdrawals (reduction in
defaults). 7.2. For sellers of insurance products The main benefits for insurance intermediaries
and insurance companies will be in the form of greater business opportunities.
These would stem from lower costs of operating cross-border and higher consumer
confidence and therefore demand. This should increase competition between
sellers. Similar impacts could be expected from policy options that encourage
insurance intermediaries’ cross-border activity. With regards to the effect of improved advice
standards, market players will save on some additional costs linked to
defaults. These include costs linked to re-calculations and calibrations of
risk management measures by insurers, which must manage a wide range of risks
under a long-time investment perspective. Finally, market actors should also
benefit from enhanced financial market stability. 7.3. For Member States Insurance plays an important social role since
it covers risks which are difficult or impossible to be faced by citizens under
normal circumstances. Member States might face lower costs and thus
benefits because reduced sales of unsuitable insurance products leading to
earlier cancelation of the policy would mean lower costs in terms of providing
assistance for consumers who are unable to absorb losses of their assets and
increased expenses incurred through mis-sales in insurance policies (e.g. life
insurance, unemployment insurance, home insurance, medical insurance). 8. monitoring and evaluation In order to evaluate whether the preferred
policy options have achieved their objectives, the Commission services envisage
to work closely with EIOPA, consumer groups (e.g. FSUG), main stakeholders and
Member States. An ex-post evaluation is to be performed five years after the
adoption of the revision of the Directive.