IDD: delivering clear, fair outcomes for consumers from the insurance sector

The Insurance Distribution Directive (IDD) replaced the Insurance Mediation Directive (IMD) on 1 October 2018. As a result, we have a number of requirements in our Handbook which apply to firms distributing insurance.

We expect firms to have already adapted their processes to meet the new requirements, but call on them to continue considering how they can improve outcomes for their customers. We are taking a keen interest in the way firms are applying these rules. This page sets out some important areas we expect firms to have considered in relation to the rules, and around which we will focus in our supervision.

We have previously published details of the difficulties firms found in complying with our renewal transparency rules, where we saw issues such as publishing the incorrect previous year’s premium on renewal notices, or failing to display key information clearly. We expect firms to have learned lessons from this, and to apply these when approaching regulatory change. Firms should place sufficient focus on systems, controls and resources to meet requirements. They should also ensure that accountability for responding to the changes and requirements is clearly allocated to appropriate individuals.

The IDD is focused on customers being better informed and firms providing products which meet their needs. This should then mean customers get good value from their insurance products and the services. As part of our implementation of the IDD, we have introduced several changes to our rules which further define regulation and consumer protection in the insurance sector, including requirements to:

Demands and needs

These requirements aim to strengthen customers’ ability to make informed decisions and minimise the risk of harm from purchasing products which do not meet their needs.

Firms can still carry out non-advised sales, and we do not always expect them to perform a detailed investigation into a customer’s circumstances. Firms will need to obtain information to identify the customer’s demands and needs. They must then consider this information alongside the products they have available to ensure that all products they then offer are consistent with those demands and needs. Firms must not offer customers products which do not meet their demands and needs.

 In our March 2017 Consultation Paper (CP17/7), we provided illustrative examples of likely compliant and non-compliant scenarios in this respect. Firms should have reviewed their sales processes to ensure they meet our requirements:

Scenario

Likely compliant?

Comments

The customer is concerned about their cat falling ill. The firm offers only those pet insurance products which cover all vet’s bills.

Yes

This is likely to be compliant as the firm has identified the customer’s demands and needs, and offered only products which meet them.

The customer is concerned about their cat falling ill. The firm offers all their pet insurance products, including accident only cover.

No

This is unlikely to be compliant as the firm has proposed contracts which are not consistent with the customer’s basic need.

The customer is concerned about their car not starting on a cold morning. The firm offers only breakdown insurance which offers cover at the home address.

Yes

This is likely to be compliant as the firm has identified the customer’s demands and needs, and offered only products which meet them.

The customer is concerned about their car not starting on a cold morning. The firm offers all its breakdown policies, including those which only cover >¼ mile from home.

No

This is unlikely to be compliant as the firm has proposed contracts which are not consistent with the customer’s basic need.

The firm offers the customer all their available products, and provides a generic statement with each product about the type of needs the product will meet.

No

This is unlikely to be compliant. Providing a generic statement may be sufficient to state the customer’s demands and needs, but the firm has taken no steps to identify the needs of the specific customer or ensure the products are consistent with those demands and needs.

Offering the customer only motor

policies which meet their demands

and needs, but then offering add-ons to all customers regardless of whether these add-ons are consistent with those demands and needs.

Yes/No

This is likely to be compliant for the motor policy but not for the add-ons. This is because the firm has taken no steps to identify the needs of the customer or ensure the add-on products are consistent with those demands and needs.

Product oversight and governance

A key, ongoing part of our Business Plan is to ensure that firms place sufficient focus on identifying vulnerable customers and treating them appropriately.

There are new rules in our Product Governance sourcebook (PROD) which apply to the manufacture and distribution of insurance products. All firms that have a role in manufacturing (eg creating, developing, designing and/or underwriting) an insurance product will need to meet the product governance and oversight requirements. A product may have more than one manufacturer and, in these cases, firms must set out their mutual responsibilities in a written agreement.

The rules require that, when firms develop new products or make significant changes to existing products, there is a product approval process. As part of this firms will need to identify the target market and ensure the product is compatible with the needs, characteristics and objectives of customers in that target market. The rules also place responsibilities on firms selling insurance products to understand the products being sold and the target market of customers.

Customer’s best interests

We have always expected firms to do what is right for their customers, and have set out clear rules - including the Principles - in this respect. The IDD introduces a rule which requires that all firms act honestly, fairly and professionally in the customers’ best interests regardless of their position in the distribution chain, and whether or not they have direct contact with the end customer. Throughout the distribution process, including the marketing, remuneration and the sales of products, firms must always focus on and meet this requirement.

The customer’s best interests rule applies to insurance policies regardless of whether they are sold on their own or in connection with another policy (eg they apply to an add-on policies as well as the primary insurance product they are sold alongside). This rule covers issues such as those covered around breakdown insurance in the demands and needs examples above. But it also extends throughout all elements of products and services. In terms of remuneration, firms must ensure that any remuneration they receive does not conflict with their duty to act in the customer’s best interests – for instance by giving them an incentive to sell a product which does not meet the customer’s needs.

In summary, the effective implementation of the IDD and our new rules by firms forms an important part of our focus on firms adopting a customer-centric culture. Our Supervision teams have been highlighting its significance when engaging with firms in recent months, and will continue to focus on how firms are complying with the new rules in a way that properly considers their customers.