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Introduction

The Insurance Distribution Directive (EU) 2016/97 (IDD) regulates how insurance products are designed and distributed in the European Union. It sets out to harmonise regulation of the insurance market across the single European market and to improve customer protection standards.

The IDD is applicable to entities whose activity consists of providing insurance or reinsurance distribution services to third parties, ie it applies to all businesses that are involved in selling (all types of) insurance. The IDD is aimed at minimum harmonisation and should therefore not preclude Member States from maintaining or introducing more stringent provisions in order to protect customers. 

Framework legislation

The IDD Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast)Text with EEA relevance

In August 2022, new provisions were introduced to the IDD requiring sustainability-related objectives and sustainability factors and preferences to be integrated into insurance distribution processes. Manufacturers of insurance products, including insurance undertakings and intermediaries are urged to factor in sustainability considerations during the product approval process and incorporate them into all aspects of product governance and oversight for those products intended for customers seeking insurance with a sustainability-focused profile. 

Implementing measures

Product oversight and governance

CDR (EU) 2017/2358 supplemented the IDD with regard to product oversight and governance (POG) requirements for insurance undertakings and insurance distributors (POG Delegated Regulation).  

Investment products

CDR (EU) 2017/2359 supplemented the IDD with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products (IBIPs) (IBIPs Delegated Regulation). The CDR (EU) 2021/1257 amends the aforementioned CDR as regards the integration of sustainability factors, risks and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products.

The CDR clarifies that "sustainability preferences" refer to a customer's (or potential customer's) selection of one or more of the following insurance-based investment products:

  • A product where the customer (or potential customer) specifies a minimum proportion to be invested in environmentally sustainable ventures.
  • A product where the customer (or potential customer) designates a minimum proportion for investment in sustainable projects.
  • A product that takes into account principal adverse impacts on sustainability factors, with qualitative or quantitative elements demonstrating such consideration as determined by the customer (or potential customer).

When gathering information for suitability assessments, insurance intermediaries and undertakings must collect data on the customer's (or potential customer's) sustainability preferences. An insurance intermediary or undertaking is prohibited from recommending any insurance-based investment product that does not align with the customer's (or potential customer's) sustainability preferences. Additionally, Insurance intermediaries and undertakings distributing insurance-based investment products should explain to their customers or potential customers the reasons for not doing so and keep records of those reasons.

In cases where no insurance-based investment product aligns with the customer's (or potential customer's) sustainability preferences, and the customer chooses to adjust these preferences, the insurance intermediary or undertaking must record the customer's decision along with the rationale behind it.

Furthermore, insurance intermediaries and undertakings are required to furnish a Suitability Statement that includes details on how the recommendation aligns with the customer's sustainability preferences.

Supervisory convergence

EIOPA’s Guidance on the integration of the customer's sustainability preferences in the suitability assessment under IDD of 31 January 2022.

The Guidance is a follow-up to a public consultation which EIOPA ran on draft Guidelines on integrating the customer’s sustainability preferences in the suitability assessment under the IDD.

The key requirements presented by EIOPA are:

  • Facilitating customers in gaining a clearer comprehension of "sustainability preferences" and their investment options.
  • Strategies for gathering information about sustainability preferences from customers.
  • Aligning customer preferences with products, utilizing product disclosures in accordance with the Sustainable Finance Disclosure Regulation (SFDR).
  • Establishing necessary arrangements to guarantee the suitability of insurance-based investment products.
  • Outlining the sustainable finance-related training and competence required for insurance intermediaries and undertakings providing advice on insurance-based investment products (IBIPs).

National implementation

European texts: IDD / CDR 2021/1257

Belgium has implemented the Insurance Distribution Directive (IDD) in several legal texts. The main ones are:
  • Act of 4 April 2014 on Insurances (Insurance Act)
  • Royal decree implementing Articles 5, 19° /1, 264, 266, 268 and 273 of the Act of 4 April 2014 on Insurances

Furthermore, the national competent authority that is responsible for supervision on product oversight and insurance distribution, the Financial Services and Markets Authority (FSMA), issues regulatory guidance interpreting and supplementing Belgian rules implementing the IDD.

Article 288 of the Insurance Act governs product governance rules and Article 296 of the Insurance Act the suitability assessment for insurance-based investment products (IBIPs).

In two communications of 29 April 2022 and 4 July 2023, the FSMA has published its expectations regarding the applicable rules on sustainable finance in the insurance sector. These expectations summarise EU rules and do not impose additional local requirements.

Contacts: Pierre Berger / Alexander Hamels 

European texts: IDD / CDR 2021/1257

In France, the implementation of the Insurance Distribution Directive (IDD) involved the introduction of several legal texts. The main ones are:

  • Order no. 2018-361 (16 May 2018) - This order pertains to insurance distribution.
  • Decree no. 2018-431 (1 June 2018) - Concerning insurance distribution.
  • Ministerial Order (29 June 2018) - This order was issued to support the IDD.
  • Ministerial Order (26 September 2018) - Relating to the list of eligible competencies for continuous training and professional development actions.

More specifically regarding Environmental, Social, and Governance (ESG) criteria in the insurance sector, the French Prudential Supervision and Resolution Authority ("ACPR") have issued significant guidelines:

ACPR Recommendation 2022-R-02 - On 14 December 2022, ACPR released Recommendation 2022-R-02, effective from 1 April 2023. This recommendation complements the earlier Recommendation 2019-R-01 (6 December 2019) concerning advertising in life insurance contracts. Recommendation 2022-R-02 addresses three types of advertising communications:

  • Promotion of non-financial characteristics of life insurance or capitalization contracts and offered investment options.
  • Highlighting non-financial characteristics of life insurance or capitalization without specific contract or investment references.
  • Emphasizing commitment or actions related to sustainability.

The regulator emphasizes that advertising must avoid misleading claims about sustainability criteria, clients' sustainability-related investments, and the extent of commitments (article 3.5.1).

Therefore, advertising should be based on accurate and objective information. Additionally, ACPR requires the incorporation of measures against "greenwashing" in advertising monitoring methods and procedures (article 3.6.1).

Contacts: Luc Bigel / Hamza Akli

European texts: IDD / CDR 2021/1257

In Germany, the Insurance Distribution Directive (IDD) has been implemented in various regulations and at various levels. The main ones are: 

  • Industrial Code (Gewerbeordnung) – Covering the licensing, registering and expertise/training requirements.
  • Insurance Intermediaries Regulation (Versicherungsvermittlerverodnung) – Detailing the requirements mentioned above. 
  • Insurance Supervisory Act (Versicherungsaufsichtsgesetz) – Relating to the distribution requirements applicable to insurance companies (also when cooperating with insurance intermediaries, including but not limited to the Product Oversight and Governance requirements).
  • Insurance Contract Act (Versicherungsvertragsgesetz) - Relating to the good conduct requirements to be complied with in relation to the customers/policyholders.

Within the product oversight and governance process according to Sect. 23 para. 1a et seq. Versicherungsaufsichtsgesetz, “insurance undertakings and insurance intermediaries manufacturing insurance products should consider sustainability factors in the product approval process of each insurance product and in the other product governance and oversight arrangements for each insurance product that is intended to be distributed to customers seeking insurance products with a sustainability-related profile.” (cf. recital 5 of the CDR 2021/1257). 

Furthermore , when conducting the distribution activities in relation to the customers/policyholders honestly, fairly and professionally in their best interests (cf. Sect. 1a para. 1 Versicherungsvertragsgesetz), “the sustainability factors of an insurance product should be presented in a transparent manner to enable insurance distributors to provide the relevant information to their customers or potential customers.” (cf. recital 8 of the CDR 2021/1257.

Gunne Bähr / Volker Lemmer

European texts: IDD / CDR (EU) 2021/1256 / CDR (EU) 2021/1257

In Ireland, the Insurance Distribution Directive (IDD) has been transposed by the European Union (Insurance Distribution) Regulations 2018 (S.I. 229 of 2018) and the Commission Delegated Regulations (EU) 2021/1256 and (EU) 2021/1257 apply in Ireland and other Member States automatically without the need for further action.

More specifically regarding Environmental, Social, and Governance (ESG) criteria in the insurance sector, the Central Bank of Ireland (CBI) have issued draft Guidance:

Overarching Principles of Draft Guidance

A recognition that (re)insurers’ approach to assessing and managing climate change risks is one which is iterative and becomes more sophisticated over time.

  • The CBI expects that climate risk needs to be managed as a key risk.
  • The CBI expects that firms will consider the impact of “double materiality”
    • the impact which climate change has on the firm itself, and
    • the impact that the firm’s activities have on the climate.
  • The ORSA is central to adopting an integrated approach to managing climate change risk, emphasising that where firms seek to rely upon group policies and activities regarding climate change risk, they must be adapted for the local entity.
  • The draft Guidance leaves open the possibility that firms may choose to adopt other approaches which result in outcomes similar to those expected to be achieved by CBI.
  • Consider the draft Guidance as a holistic framework, also visually captured in a flowchart.

CBI Expectations Regarding Governance

  • The board is ultimately responsible for setting the risk appetite and ensuring that risks are identified, managed and controlled.
  • It is the responsibility of the board to ensure that the management of climate change risks are integrated into the risk management processes of firms.
  • Decisions, discussions and actions of boards and committees are to be documented and that ‘where appropriate’ climate change risk becomes a standing agenda item at board/sub-committee meetings.
  • Responsibility for risks related to climate change are allocated to senior managers, duties and responsibilities documented and these requirements will be enhanced by SEAR and the Individual Accountability Framework.
  • All key functions, but especially the Risk Management function and Actuarial function are expected to contribute to the board’s decision making in respect of climate change risks.
  • A remuneration framework caters for climate change related performance and risk management factors as an incentive.

Five Key Focus Areas of CBI Guidance

Within the draft Guidance there are five key focus areas concerning the assessment and management of climate change risks, those being:

  1. Materiality assessment
    Firms are expected to establish a baseline climate change scenario and then consider the firm’s current strategy and business model to fully understand the potential for exposure to climate change risk.
  2. Scenario analysis and the ORSA
    The CBI regards ORSA as an appropriate process for the consideration of climate change risk, but leaves open the possibility that firms may choose to adopt other appropriate levels of scenario analysis which result in outcomes similar to those expected to be achieved by CBI. 
  3. Strategy and business model
    Firms should fully assess the potential impacts of climate change risks on their business models and to integrate climate change risk in its overall strategy, considering climate change risks over the longer term, particularly with regard to prolonged, clustered, or repeated events, and reflect these in the overall strategy and business model.
  4. Risk appetite statement
    Understand the climate change risks to which the firm is exposed, and where material, incorporate climate change risk into their Risk Appetite Statement. The CBI expects firms to establish appropriate risk exposure limits and thresholds relating to climate change risks over the short, medium and long term and to define appropriate Key Risk Indicators to support them.
  5. Embedding climate change risk considerations across the business
    The strategy and business model set out actions relating to climate change risk and make these part of the business-as-usual activities of the firm with a focus on risk management, underwriting and pricing, reserving and capital, and investment decisions. 

For more information, please see our article: CBI spells out its expectations of (re)insurers on climate change risk

Contacts: Naoise Harnett / Lindi Raath | DLA Piper

European texts: IDD / CDR 2021/1257

The Insurance Distribution Directive (IDD) has been implemented in Italy through legislative decree no. 68 of 21 May 2018 which amended the Italian Insurance Code (i.e., legislative decree no. 209/2005).

Additionally, some specific Regulations have been adopted by the Italian Insurance Authority:

  1. IVASS Regulation no. 40/2018, laying down provisions on insurance and reinsurance distribution;
  2. IVASS Regulation no. 41/2018, laying down provisions on informative duties and design of insurance products;
  3. IVASS Regulation no. 45/2020, which implemented Delegated Regulation (EU) 2017/2358, in the matter of Product Oversight and Governance (POG).

With specific reference to ESG criteria, on 12 May 2023, IVASS issued Order no. 131/2018 introducing amendments, among others, to Regulations nos. 40/2018 and 45/2020 to implement the guidelines provided by EIOPA in its “Guidance on the integration of the customer’s sustainability preferences in the suitability assessment under IDD”.

As to IVASS Regulation no. 40/2018, the key amendments are the following: 

  • Conflicts of interests: the sustainability preferences of clients must be taken into account to achieve the best possible outcome for them. These preferences, notably, should influence the distribution of IBIPs.
  • Pre-contractual information: the description of risks associated with IBIPs must encompass sustainability risks, aligning with SFDR and the Taxonomy Regulation. 
  • Suitability assessment for IBIPs: the distribution of IBIPs, especially in advisory scenarios, must consider the sustainability preferences of the client. If no IBIP aligns with the sustainability preferences expressed by the client, and the client voluntarily adjusts these preferences, the suitability declaration should acknowledge this circumstance and provide relevant reasons. Conversely, if the policyholder opts not to adapt his/her sustainability preferences, insurance distributors offering advice should elucidate the reasons for the unavailability of the suitability declaration and maintain pertinent documentation.

As to IVASS Regulation no. 45/2020, the key amendments are the following:

  • Definition of target market: The identification of the target market must consider the sustainability objectives specified by clients. Specifically, sustainability factors should align with the identified target market, and the definition of a negative target market should not be exclusively based on sustainability factors.
  • Periodical assessment of product suitability: the periodic assessment of product suitability concerning the demands and needs of clients should also incorporate sustainability factors.
  • Distributors operating for EU companies in Italy: intermediaries operating on behalf of EU companies in Italy must implement measures to ensure that products are distributed in accordance with any sustainability targets indicated by clients.
  • Information from manufacturers: Information obtained by distributors from manufacturers must encompass sustainability factors related to the target market;
  • Competence of personnel and collaborators: Insurance intermediaries must ensure that their personnel and collaborators have the necessary competences to comprehend the sustainability factors, if applicable, associated with the products they intend to distribute.

In addition to the above, it is worth to mention article 31 of IVASS Regulation no. 41/2018 in the matter of insurance advertising, which states that the qualification of “etic” or “sustainable” product can be used only for certain specific insurance financial products which are subject to specific provisions set out by article 36 of the same Regulation.

Contacts: David Marino / Valentina Grande

In the Netherlands, the Insurance Distribution Directive (IDD) has been implemented by the Dutch Financial Supervision Act (Wet op het financieel toezicht) and regulations pursuant thereto, as well as the Dutch Civil Code, General Administrative Law Act (Algemene wet bestuursrecht), Pension Act and Mandatory Occupational Pension Schemes Act (Wet verplichte beroepspensioenregeling). The most relevant acts and regulations in relation to this Guide are:

  • Dutch Financial Supervision Act (Wet op het financieel toezicht) – This Act covers general market access, conduct and prudential requirements applicable to financial undertakings in the Dutch market.
  • Decree on Conduct of Business Supervision of Financial Undertakings under the Wft (Besluit Gedragstoezicht financiele ondernemingen Wft) – This Decree covers the rules relating to conduct of business of financial undertakings in the Dutch market.

In relation to supervision on financial institutions, the Dutch Authority for the Financial Markets (Autoriteit Financiele Markten, the “AFM”) is responsible for conduct supervision, and the Dutch Central Bank (De Nederlandsche Bank, “DNB”) for prudential supervision. AFM’s most important tasks relate to transparent product development, fair and understandable information provision, adequate choice guidance and quality of advice, also in relation to insurance products. DNB's prudential supervision focuses on the financial soundness and stability of (amongst others) insurers and protecting the rights of insureds.

In addition to the European framework, the AFM has issued multiple publications on sustainability claims. With its Guidelines on sustainability claims, the AFM aims to enhance the transparency on sustainability aspects required as part of the (pre-)contractual information requirements. The Guidelines set out three main principles and these are supplemented by further explanation, and practical examples. The AFM also published a  Position Paper on sustainability. The AFM recognizes the importance of the transition to a sustainable society and encourages financial institutions to play their part. The availability and quality of information throughout the entire chain continues to be one of the key focus areas of the AFM. 

 

Contact: Paul Hopman | DLA Piper Aline Kiers | DLA Piper

European texts: IDD / CDR 2021/1257

Norway has implemented the IDD in mainly two legal acts with accompanying regulations:

  • A new Insurance Distribution Act (Nor; “Lov om forsikringsformidling”), with regards to the provisions concerning regulation of insurance distributors and
  • Through amendments to the Insurance Contracts Act (“Forsikringsavtaleloven”), with regards to the provisions concerning product governance and suitability. These provisions apply to insurance undertakings and insurance distributors alike 

Sustainability as part of product governance:

  • Requirements regarding product governance also include integration of sustainability factors as set out in Commission Delegated Regulation (EU) 2021/1257 so that sustainability factors, risks and preferences of the customer are integrated into the product approval process for insurance undertakings and distributors. It also has to be considered in relation to business conduct and in any investment advice provided for insurance based investment products.

Contacts: Hugo-A. B. Munthe-Kaas, Head of Compliance | DLA Piper Marthe Oldernes, Associate | DLA Piper

The IDD was transposed into UK law through legislation, regulations and FCA rules, including by way of amendments to the FCA Handbook.

Sustainability factors were introduced into the IDD after Brexit. This means that UK regulations do not reflect the changes introduced at EU level with CDR 2021/1257. Thus there are no specific provisions integrating sustainability factors, risks and preferences into the general insurance distribution regulations in the FCA Handbook. 

However, UK-based insurance businesses may nevertheless feel the impact of these provisions, as there are likely to be demands for sustainability categorisation, and related data requirements, from EEA manufacturers, distributors or advisers in the distribution chain that will be subject to the IDD as implemented in the jurisdiction concerned. 

For UK insurers providing insurance-based investment products, or operating a personal pension scheme, stakeholder scheme, or a SIPP containing insurance-based investment products, compliance with the FCA’s ESG Sourcebook (Sourcebook) is required.

Under the Sourcebook, UK insurers providing insurance-based investment products are required to make climate related financial disclosures that are consistent with the Recommendations and Recommended Disclosures of the Taskforce on Climate related Financial Disclosures. (TCFD), which has developed a framework to help public companies and other organizations disclose climate-related risks and opportunities.

Under the Sourcebook, firms in scope must provide a TCFD entity report, and a TCFD product report, which describe any targets for managing climate-related risks and opportunities, including the Key Performance Indicators they use to measure progress against these targets. The Sourcebook does not include any provisions on the ‘sustainability preferences’ of customers and related suitability assessments, as provided for under CDR (EU) 2021/1257; however, to a certain extent, these requirements can be found in COBS, specifically COBS 9.2.

Contacts: George Mortimer / Matthew Hunter | DLA Piper

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