EIOPA report on the application of the Insurance Distribution Directive (IDD)

The European Insurance and Occupational Pensions Authority (EIOPA) published its second report on the Insurance Distribution Directive (IDD) application in January.   The report considers how the IDD has been applied in the different EU Member States. It also examines aspects such as changes in the insurance intermediary market structure, changes in cross-border activity, quality of advice and selling methods and whether national competent authorities are sufficiently empowered and have adequate resources to carry out their duties.

The report explores the effect of the IDD on consumers, insurance distributors and supervisory activities over the past two years, gathered from data collected by surveys commissioned by EIOPA. The following trends were observed:

Changes in the EU Insurance Distribution Market

  • Impact of inflation and increasing interest rates have been witnessed in many countries. One of the prominent effects has been the increase in the cost of claims and on insurance and pension real investment returns. It has been noted that not all insurance distributors and manufacturers are adequately examining the impact of expected inflation and increasing interest rates in their product governance processes.
  • It was observed that from 2018 to 2022, there has been a significant decrease in the number of registered insurance intermediaries. This decrease may be due to the stricter professional requirements, consolidation in the market, increasing age of intermediaries and difficulties in talent management in the market.
  • The number of intermediaries registered as legal persons continues to increase compared to the number of intermediaries registered as natural persons continue to decrease.
  • The number of insurance distributors with a passport has decreased slightly over the past year, however the majority of them conducted business on a freedom of service basis.
  • Hybrid customer journeys are transforming to become the new normal as insurance distributors are offering digital solutions in addition to traditional face-to-face communication.

Impact of the regulatory environment

  • It is noted that the level of professionalism and competence has improved in some member states with measures such as training and transparency obligations towards customers. However, some noted shortcomings for example CPD content on sustainability.
  • It highlighted that there is a need to adapt disclosure rules to the digital age which are easy to access, comprehensible and complete along with the need to provide additional guidance on the timing of disclosure. The use of new technologies has raised issues such as the lack of clarity of “insurance distribution” along with the lack of guidance on how to conduct demands and needs test using AI and Machine Learning, lack of transparency on robo-advice and comparison tools.
  • It is observed that the application of the IDD has improved the quality of advice and selling methods in some member states.
  • The integration of sustainability factors, risks and preferences into the IDD occurred on the 2nd of August 2022. However, there is limited quantitative data available to assess the new sustainability rules, however there is empirical evidence which evidences the risk of greenwashing, insufficient disclosure, lack of understanding by consumers and lack of knowledge of insurance distributors.
  • It highlighted the need to provide additional guidance on the regulatory framework:

Cross-selling of financial products has been identified as an issue that certain practices can harm consumers such as limited product choice, issues with products comparison and challenges with switching.

It was noted that some national competent authorities have identified issues with conflict of interests and remuneration. Several member states have adopted or plan to adopt national legislation to further restrict the payment of commission or increase transparency about the payment of commission. However, commissions remain as the predominant remuneration model in the insurance distribution market – in 20 out of 23 Member States, the commission-based model was the prevailing practice during 2022. It was further noted that in three Member States, insurance intermediaries in Ireland operated only, or predominately (Czech Republic and Netherlands) on the basis of a combination of a fee/commission.