TABLE OF CONTENTS

COMMISSION STAFF WORKING DOCUMENT.................................................................. 4

1........... General.......................................................................................................................... 5

1.1........ Overview of preparatory work........................................................................................ 5

1.2........ Procedural issues............................................................................................................ 6

1.3........ External expertise and consultation of interested parties.................................................... 6

2........... Policy context................................................................................................................. 9

2.1........ Legislative framework..................................................................................................... 9

2.1.1..... Legal situation before IMD1........................................................................................... 9

2.1.2..... IMD1 – its scope, purpose, main provisions and implementation...................................... 9

2.1.3..... Other relevant EU legislation and ongoing policy initiatives............................................. 11

2.2........ Structure of the insurance distribution markets in the EU................................................ 12

2.2.1..... Market size.................................................................................................................. 12

2.2.2..... Insurance products....................................................................................................... 12

2.2.3..... Market operators and distribution channels (Annex 8)................................................... 13

2.2.4..... Role of SMEs in the insurance markets.......................................................................... 14

3........... Identification of problems.............................................................................................. 15

3.1........ General problems related to IMD 1 on both insurance and insurance PRIPs products..... 15

3.1.1..... Narrow scope.............................................................................................................. 16

3.1.1.1.. Which sellers of insurance fall outside the scope of IMD1?............................................ 16

3.1.1.2.. Which buyers of insurance fall outside the scope of IMD1?............................................ 17

3.1.2..... Conflicts of interest....................................................................................................... 18

3.1.3..... Advice and professional qualifications............................................................................ 19

3.1.4..... Cross-border business.................................................................................................. 20

3.1.5..... Sanctions in insurance distribution.................................................................................. 21

3.2........ Problems relating to Packaged Retail Investment Products (PRIPs)................................ 22

4........... Subsidiarity................................................................................................................... 23

4.1........ How would the problem evolve without EU action? The base line scenario..................... 23

4.2........ The EU's right to act..................................................................................................... 23

5........... Objectives.................................................................................................................... 23

5.1........ Consistency of the objectives with other EU policies...................................................... 23

5.2........ Consistency of the objectives with fundamental rights..................................................... 23

6........... Policy Options.............................................................................................................. 23

6.1........ Proposed legislative structure of IMD2 and involvement of EIOPA................................ 23

6.2........ Identification of options................................................................................................. 23

7........... Analysis of Impacts and Comparing the Options............................................................ 23

7.1........ Extension of the scope.................................................................................................. 23

7.2........ Conflicts of interests...................................................................................................... 23

7.3........ Advice......................................................................................................................... 23

7.4........ Cross-border business.................................................................................................. 23

7.5........ Sanctions...................................................................................................................... 23

8........... Analysis of the impacts.................................................................................................. 23

8.1........ Overall impacts of the package..................................................................................... 23

8.2........ General expected impact of revised IMD on market structure........................................ 23

8.3........ IMD2 proposed rules and their proportionate application to SMEs................................ 23

8.3.1..... Are the preferred policy options proportionate for smaller market players selling insurance products? 23

8.3.2..... Impact on SME intermediaries selling insurance as their main activity (approx. 700 000 entities) - A and B categories..................................................................................................................... 23

8.3.3..... Impact on SME intermediaries selling insurance as an ancillary activity (approx. 80 000 entities) - C and D categories..................................................................................................................... 23

8.4........ Employment and social impact...................................................................................... 23

8.5........ Administrative cost and administrative burden................................................................ 23

8.6........ Overview of costs on the basis of the preferred options in million EUR........................... 23

8.7........ Estimation of benefits.................................................................................................... 23

8.7.1..... Quantitative approach to the calculation of the benefits................................................... 23

8.7.2..... Qualitative approach to the calculation of the benefits..................................................... 23

8.7.3..... Improved choice of insurance products for consumers................................................... 23

8.7.3.1.. Greater business opportunities for sellers of insurance products...................................... 23

8.7.3.2.. Reduced costs for sellers of insurance products............................................................. 23

9........... Monitoring and evaluation............................................................................................. 23

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Proposal for a Directive of the European Parliament and of the Council

on Insurance Mediation

COMMISSION STAFF WORKING DOCUMENT

Accompanying the document

Directive of the European Parliament and of the Council

on Insurance Mediation

Introduction

The Directive 2002/92/EC of the European Parliament and the Council on insurance mediation (IMD1) is the EU legislation which regulates the point of sale of insurance products[1] for the protection of policyholders. It was adopted on 9 December 2002 and had to be transposed by Member States by 15 January 2005. The Directive is a minimum harmonisation instrument containing high level principles and has been implemented in the 27 Member States in substantially different ways. The need to review IMD1 already became apparent during the implementation check carried out by the Commission in 2005-2008.

Current and recent financial turbulence[2] has underlined the importance of ensuring effective consumer protection across all financial sectors. In November 2010, the G20 asked the Organisation for Economic Co-operation and Development (OECD), the Financial Stability Board (FSB) and other relevant international organisations to develop common principles in the field of financial services in order to strengthen consumer protection. The draft G20 high level principles on financial consumer protection underline the need for proper regulation and/or supervision of all financial services providers and agents that deal directly with consumers. They stipulate that consumers should always benefit from comparable standards of consumer protection.

Supervisors (through CEIOPS now EIOPA) have also contributed to the common and uniform day-to-day implementation of IMD1 and in particular to its consistent application by national supervisory authorities. The adoption of the Luxembourg Protocol in 2006[3] provides a framework for cooperation between competent authorities with regard to the implementation of IMD1.[4] Despite this Protocol, in 2007 CEIOPS advised the Commission to amend IMD1 in order to provide legal certainty.

During the discussions in the European Parliament on the Solvency II Directive which introduces a risk-based approach in the supervision of insurance undertakings and makes supervision more efficient, a specific request was made to review IMD1. Some Members of the Parliament and some consumer organisations considered that there was a need for improved policyholder protection in the aftermath of the financial crisis and that selling practices for different insurance products, particularly life insurance products with investment elements (e.g. unit-linked contracts), could be improved.

In revising IMD1 to ensure cross-sectoral consistency, a request was made by consumer groups to take into account the ongoing revision of the Markets in Financial Instruments Directive (MiFID). Whenever the selling practices of life insurance products with investment element were to be specifically regulated, the proposed IMD2 should meet at least similar consumer protection standards to those in MiFID.

There were indications of potential market failure in respect of insurance brokerage in the Commission Communication on the Sector Inquiry on business insurance.[5] It concluded that the Commission intended to look at these issues in the framework of the review of the Insurance Mediation Directive.

This impact assessment evaluates the major policy choices relating to a revision of the rule on selling practices in IMD1 as well as their possible impact. The aim of the current revision of the IMD is to achieve a recast single market and consumer protection directive. There are two high level objectives in the new provisions: better consumer protection; and easier trading across borders.

1. General

1.1. Overview of preparatory work

Table 1

Major steps / inputs || Timing

CEIOPS Report on the Implementation of IMD || May 2007

DG Competition sector inquiry in business insurance || September 2007

EP request (Solvency II Framework Directive) || December 2009

Launch of Call for Advice || January 2010

EIOPA advice || November 2010

Public Consultation || November 2010

Public Hearing || December 2010

Publication of the results of the public consultation || April 2011

Expert Group meeting || April 2011

1.2. Procedural issues

The impact assessment work started in 2010.

The IA Board met on 23 November 2011. The Board recommended the following changes to the first text of the IA:

(1) The report should better clarify the scope of the initiative and provide further evidence on the effects of the problems identified.

(2) The report should better explain the policy options and demonstrate their proportionality.

(3) The report should provide a fuller assessment of the impact on business and SMEs.

(4) The report should provide more operational arrangements for monitoring compliance and for the evaluation.

On reviewing a further draft, on 2 February 2012 the Board recommended:

(1) The report should provide further evidence in problems identified.

(2) The report should better explain policy options justifying the choice of options.

(3) The report should provide a fuller assessment of the impacts on business and SMEs and explain how proportionality has been taken into account in the proposal.

On reviewing the final draft, on 30 March 2012 the Board recommended:

(1) The report should provide further evidence in problems identified.

(2) It should clarify which measures will be subject to level 2 measures.

(3) It should be clearer in terms of impacts on business and SMEs.

These recommendations were taken on board.

1.3. External expertise and consultation of interested parties

The Commission Services has consulted and obtained information from the following sources:

A. European Insurance and Occupational Pensions Authority (EIOPA) and its predecessor (CEIOPS) which have provided advice and own-initiative reports.[6]

B. Member States and stakeholders

· Representatives of the insurance sector (including CEA,[7] BIPAR, FFSA, VVO, and GDV);

· Consumer organisations (including BEUC and FSUG);

· National supervisors;

· DG MARKT public hearing, which focused on scope, information requirements, conflicts of interest, cross-border trade, and professional qualification requirements;[8]

· DG MARKT meeting with experts from Member States and EIOPA to discuss the results of the public consultation and the possible structure and contents of IMD2;[9]

· A meeting on anticipated costs related to possible revisions of the IMD was held with relevant stakeholders; and

· Other discussions with consumer representatives (FIN-USE, Financial Services Consumer Group, and Financial Services User Group), regulators (Financial Services Committee, European Securities Committee, European Insurance and Occupational Pensions Committee) and industry representatives.

The large majority of the stakeholders present at these meetings supported the direction of the revision of IMD1 as outlined by the Commission Services.

The consultation process revealed a variety of stakeholder views on the issues discussed in this impact assessment.

C. Public consultation

A public consultation relating to IMD1 revision was carried out by the Commission Services from 26 November 2010 until 28 February 2011. 125 contributions were received.[10] The answers to the consultation were broadly supportive of the direction of the revision as outlined by the Commission Services.[11]

D. Studies ordered by the Commission Services

Several specific studies ordered by different Commission Services were used to prepare this impact assessment.

· PricewaterhouseCoopers, Luxembourg (PwC), contracted by DG MARKT to conduct a study to provide a comprehensive overview of the functioning of insurance distribution in the EU[12].

· A study commissioned by DG MARKT in 2010 on the costs and benefits of potential changes to distribution rules for insurance products and for insurance PRIPs.[13]

· A study commissioned by DG SANCO to assess the quality of advice being offered across the EU.[14]

· A study ordered by DG SANCO on behavioural economic factors relating to investor decision making.[15]

· A study of the potential costs and benefits of different options for change in the area of sales rules for the distribution of non-MiFID PRIPs (early 2010) which provided evidence on market mapping and cost drivers.

E. Other studies

· Caceis Investor Services, Cross-border distribution of UCITS, May 2011[16] ;

· Retail Distribution Review proposals: Impact on market structure and competition, Oxera (2009)[17] ;

· Financial Services Authority, Conduct of Business sourcebook (COBS) post-implementation review: 2008 statement on interim findings (December 2008)[18];

· AVIVA study on consumer attitudes[19] ;

· City of London comparative report on the implementation of IMD1[20];

· Auswirkungen der EU – Vermittlerrichtlinie auf die deutsche Vermittlerlandschaft (March 2011)[21];

· CEIOPS' report on the implementation of the IMD key provisions[22].

2. Policy context

2.1. Legislative framework

2.1.1. Legal situation before IMD1

A first step to facilitate the exercise of freedom of establishment (FOE) and freedom to provide services (FOS) for insurance agents and brokers was made by Council Directive 77/92/EEC of 13 December 1976. Barriers to the taking-up and pursuit of the activities of insurance and reinsurance intermediaries in the internal market remained. Therefore, the objectives of that Directive have not been achieved.

2.1.2. IMD1 – its scope, purpose, main provisions and implementation

IMD1 aims to provide a high level of consumer protection through the establishment of a clear legal framework as well as a high level of professionalism and competence among insurance intermediaries. A registration system for insurance intermediaries ensures the oversight of professional requirements as well as facilitating cross-border activities by way of freedom of establishment and freedom to provide services.

Scope: The Directive only applies to persons who provide insurance mediation services to third parties in exchange for remuneration.[23]

Sales of insurance products conducted directly by insurance companies (direct writers) are not within the scope of the Directive.

There are also some intermediaries that are explicitly exempted from the scope,[24] and further exemptions from or inclusions in scope have been made by Member States when implementing the Directive (described in the problem definition).

Substantive requirements: IMD1 regulates the sales practices[25] of insurance agents and brokers and introduces some minimum basic registration, professional qualification and disclosure requirements. IMD1 is modelled from the perspective of a typical SME insurance intermediary (agent, broker) as most of intermediaries are SMEs (see section 2.2.4.)

Although all Member States have implemented the Directive, no uniform application of the Directive could be achieved across the Union because its provisions led to differing interpretations in the Member States.[26][27]

Implementation process: The Commission Services' check on the implementation of IMD1 from 2005-2008 showed that the transposition of the Directive varied considerably between Member States. The Commission opened 18 cases against 18 Member States, among which 13 have reached the first step of the infringement process (letter of formal notice) and 5 cases were referred to the Court. All cases are closed now as Member States complied with the Commission requests.

Among those 18 cases were:

14 cases of non-communication of national measures transposing the IMD1;

14 cases opened at own initiative by the Commission;

4 cases based on citizens' and business' complaints.

The Commission services regularly receive enquiries and complaints related to the application of IMD1. The Commission Services, the Member States and the supervisors were not in a position to achieve uniformity in the application of the Directive because its provisions are very high level and lead to different interpretation.[28]

The objectives of IMD1 were adequately met and the Directive has allowed an efficient protection of consumers as stated in CEIOPS' report on the implementation of the IMD key provisions (CEIOPS Doc 09/07, see supra). However, it could be considered that IMD1 was the first attempt to regulate the insurance sales market and as such it could not cater for the increased need for transparency and consumer protection in the sector without being up-dated[29].

A comparative report on the implementation of the IMD1 illustrated problems that can arise due to national differences in the implementation of IMD1.[30] The implementation check brought to light that in some Member States there are regulatory and/or supervisory gaps, e.g. insurance PRIPs are only regulated by the IMD to a minimum level while comparable and substitutable financial products are more substantially regulated by the MiFID. This concerns mainly investments packaged as life insurance policies (notably, unit-linked, index-linked and certain with-profits products see hereafter as "insurance PRIPs[31]").

2.1.3. Other relevant EU legislation and ongoing policy initiatives

Solvency II[32] includes rules on product disclosure [33]related to all insurance products (including general insurance and life insurance). Its main purpose is to introduce prudential rules on insurance and reinsurance undertakings. It does not deal with selling practices or include consumer protection rules.

MiFID[34] regulates the selling practices of investment products and serves as a benchmark for the revision of the IMD with regard to the selling practices of life insurance policies with investment elements.

The PRIPs initiative aims at ensuring a coherent horizontal approach to product disclosure with regard to investment products and insurance products with investment elements (so-called insurance PRIPs[35]), and provisions on selling practices will be included in the revisions of the IMD and MiFID.

The following table is designed to show the synergies and interrelations between different upcoming initiatives.

Table 2

|| 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[36] Insurance products Insurance products with investment elements Investment products

Currently sellers of insurance products with investment elements (insurance PRIPs) do not have to comply with consumer protection rules comparable to those selling investment products. This impact assessment will analyse how MiFID consumer protection provisions could be applied proportionately to sellers of insurance PRIPs, because of the complexity, the similarity and proven substitutability of these products[37]. It should be noted that when MiFID II passes through the Parliament and the Council, the IMD needs to follow its changes, in order to achieve consistency in legislation which regulates similar products.

2.2. Structure of the insurance distribution markets in the EU

2.2.1. Market size

The European insurance sector is the largest insurance sector in the world, with a 37% share of the global market[38]. At year-end 2009, the sector comprised a total of 4,753 undertakings, with annual gross written premiums for the sector being approximately €1,028bn[39]. The sector is diverse in its size (large insurance undertakings, mutuals, small insurance intermediaries, and some large multinational companies which represent only about 5% of the market), its nature (mutual and publicly listed) and its complexity (both complex and less complex). At the end of 2010, European insurers' investments in the global economy represented 54% of the GDP of the European Union. The European insurance industry employs almost 950,000 people directly and a further million are outsourced employees and independent intermediaries[40]. Many insurance products have a high social value because of the role they play in retirement and healthcare provision. They also have a high economic value by allowing individuals to be less risk-averse, thereby contributing to economic activity and stability.

2.2.2. Insurance products

Box 1 Categories of insurance policy

Life insurance is a contract between the policyholder and the insurer, whereby the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's or another individuals' death or some other event affecting such individual, such as terminal illness or critical illness. In return, the policyholder agrees to pay a stipulated amount (at regular intervals or in lump sums). The classes of life insurance are listed in Annex 2 of the Solvency II Directive. For the purpose of the revision of the IMD there are two categories of life insurance policies: the first category covers the riskier and more complex products which are, in substance, investments. Those products fall under the PRIPs initiative: they are so-called investments packaged as life insurance policies (notably unit-linked, index-linked and certain with-profits products, hereafter life insurances with investment elements). The second category covers life insurance products which are easily understandable for consumers and have a long tradition such as a term life insurance policy, which pays a specified amount of money if the policyholder dies during the term of the policy (pure life insurances).[41]

General insurance or non-life insurance policies, such as automobile and homeowners' policies, provide payments depending on the loss suffered from a particular event. General insurance comprises any insurance that is not determined to be life insurance. The classes of non-life insurance are listed in Annex 1 of the Solvency II Directive. The scope of this impact assessment covers all insurance products.

In some countries, a very high proportion of people have home, health or car insurance; for example, in the Netherlands 88% of people do so; in Sweden 88% and in Denmark 86%. In Bulgaria, however, only 20% of respondents say they have these insurance products, and 25% in Poland.

The geographical pattern is very similar in the case of life insurance. At least a third of citizens in 16 Member States have life insurance, whilst a majority holds this type of product in Sweden (60%) and Denmark (53%). Yet in three Member States, fewer than one in 10 have life insurance: Bulgaria (5%), Greece (6%) and Romania (8%). [42]

2.2.3. Market operators and distribution channels (Annex 8)

Insurance distribution structures across EU insurance markets are diverse and complex. Insurance products are sold directly by insurers and through insurance intermediaries. Both use different means of distance marketing (e.g. by telephone and, increasingly, through internet web-sites). The main market players include intermediaries (agents, independent brokers and bank-assurers), a significant proportion of which are SMEs, and direct writers (insurance companies). There are several types of intermediaries. Brokers sell and compare several insurance products. Tied agents are those who exclusively sell the products of one insurance undertaking. Multi-tied and non-tied agents work with several insurance undertakings but they do not sell competing products.

In Europe, non-life insurance products are mainly provided by intermediaries (i.e. agents, brokers and bank-assurers), but there are important national differences in market structure (examples):

· Agent- and broker-driven markets: the UK, Germany, the Netherlands, Belgium, Ireland, Italy, Poland, Austria, Portugal, Luxembourg, Bulgaria, Romania.

· Direct writer-driven markets: France, Spain, Finland.

The table below provides an example of how markets are organized in different Member States in view of the various distribution channels in the non-life insurance sector.

Table 3

Overall, in this group of 20 Member States, intermediaries accounted for slightly more than 80% of all insurance premiums collected in 2008. In none of these Member States the intermediaries’ share of total premiums (life and non-life) is less than 50%. [43]

2.2.4. Role of SMEs in the insurance markets

About 95% of registered insurance intermediaries in the EU are micro enterprises and SMEs (as defined by other EU Directives[44]). 80% of travel agents and car rental companies which sell insurance products are SMEs. Some loss adjusters and claim handling companies involved in after-sales services are also SMEs. No direct sellers or banks are SMEs.

Banks, internet operators and direct writers compete with insurance intermediaries. SMEs intermediaries make insurance more accessible to consumers and smaller businesses. Thanks to intermediaries, more people and businesses have access to a broad range of insurance products.

Insurance intermediaries: around 750 000 entities operating in the EU, of which SMEs: 95%

Direct writers: 4618 undertakings in the EU. Insurance companies cannot be SMEs due to prudential and consumer protection rules.

Travel agents: 68 000 undertakings in the EU, of which SMEs: 80%

Car rentals: 30 976 undertakings in the EU, of which SMEs: 80%.

3. Identification of problems

3.1. General problems related to IMD 1 on both insurance and insurance PRIPs products

The following main problem areas relating to IMD1 have been identified:

In this chapter we discuss the existing problems in these five areas. Most problems are similar for "classic" insurance (life and non-life insurance) and for PRIPs, but, due to the complex nature of the latter, certain aspects of these are dealt with in a separate section.

3.1.1. Narrow scope

3.1.1.1. Which sellers of insurance fall outside the scope of IMD1?

Under IMD1 the information requirements aiming to protect consumers apply only to those intermediaries that are in scope of the Directive. As explained above, insurance companies (direct writers) and sellers of certain insurance products on an ancillary basis who fulfil certain conditions and where the premium does not exceed EUR 500 per year (such as mobile phone sellers and travel agents) are excluded from scope.

Figures from all Member States – with the exception of Belgium, the Netherlands, Romania and Denmark - show that 49% of the sellers of insurance products and other market players involved in the after-sales process (e.g. direct writers, car rental firms, bank-assurers, travel agents, claims handlers, loss adjusters, etc.[45]) fall outside the scope of IMD1. This unevenness in terms of information provisions undermines consumer protection.

There is some evidence to suggest that a number of consumer complaints relate to sales by some of these sellers which are outside the scope, particularly, travel insurance sold by travel agents[46]. Studies shows that in the UK, 67% of consumers buying from a travel agent believe that most travel insurance policies are much the same. It has been found that 97% of consumers want all companies selling travel insurance to be required by law to explain to customers the details of the policy they are buying.[47] Association of travel agents and car rental/leasing companies agreed to be subject to a lighter version of the IMD.[48]

As for loss adjusters, the European Court of Justice recognises in one ofi ts judgements that a loss adjuster is not necessarily a technical expert. He protects the interests of his principal (the insurer). The activity of loss-adjustment is done during the investigation of claims. Nevertheless the final decision as to the amount to be paid rests with the insurer. The injured party cannot apparently bring an action against the loss-adjuster which leads to conflicts of interests.[49] During the preparatory work of the Directive, loss adjusters themselves advocated for sectoral passports/mutual recognition environment in order to boost their cross border trade.[50]

Several consumer organisations suggested that the definition of insurance intermediation should be built on a pure activity-based principle, meaning that any market player pursuing the activity of selling insurance products on a professional basis should be regulated by the Directive.[51]

Member States have interpreted the scope provisions of Article 1(2) differently. Whereas some Member States have extended the scope of the Directive only to cover direct writers, others, such as the UK included in its scope also travel insurance, as a relatively complex product yielding consumer protection benefits [52]. There are, however, some 68 000 travel agents and tour operators in the Union selling 90% of travel policies which are not subject to the IMD's requirements.

Similarly, people who give consumers information about insurance intermediaries or undertakings are regarded as within scope in the UK, but not in some other Member States. And finally in some Member States car rental companies are exempted when selling insurance products.

It is therefore clear that the scope of both the IMD and domestic regulation varies between Member States.

The responses to the public consultation and the discussions at the public hearing clearly identified the unclear scope as problematic. EIOPA and the vast majority of stakeholders were in favour of clarifying and amending the exemptions in Article 1(2) IMD in order to reduce the risk of confusion for consumers and the variation of levels of consumer protection between Member States. The lack of clarity concerning the scope of those persons covered by IMD requirements also raises a single market issue insofar as those persons that are outside the scope of the IMD will not be able to derive a passporting right from it, thus creating an unlevel playing field at a European level.

3.1.1.2. Which buyers of insurance fall outside the scope of IMD1?

Buyers of insurance products can be differentiated according to their profile (business clients or consumers) and according to the size of the risk to be insured. Most policies are issued to consumers. For example, in 2009, more than two thirds of all newly concluded life insurance contracts were with individuals (not group life insurance policies) [53].

Business clients have been excluded from the specific protection rules designed for consumers in all financial services legislation (including MiFID), except in insurance. In insurance, size criteria are used, and in the case of "large risks", i.e. risks above a certain threshold[54] (normally business risks), insurance intermediaries do not need to apply the information requirements.

Some respondents to the public consultation, notably the consumer organisations, state that the disclosure requirements for IMD2 should be aligned with the approach in other areas of financial services. Most stakeholders therefore argued that the scope of IMD1 should be any natural person plus SMEs, but professional clients should be excluded. The vast majority of stakeholders also believe that the current exemption for insurance intermediaries from requirements to provide information in the "large risks" area (e.g. a person who buys insurance cover for his private airplane) is useful and should be maintained.

3.1.2. Conflicts of interest

Insurance contracts are often complicated and difficult to understand for consumers.[55] Intermediaries therefore play an important role in processing information for the consumer and guiding consumers in choosing suitable insurance policies. Some studies actually suggest that intermediation is a necessity in some areas of insurance.[56]

But an intermediary may be confronted with a conflict of interest stemming from the way in which he is remunerated. Sometimes the intermediary is remunerated by the client (by way of a “fee”), but often the intermediary will be paid by the insurance undertakings whose policies he sells (by way of a “commission”). Often the customer is not aware of the way in which the intermediary is remunerated or what relationship he has with the insurance undertaking.

Conflicts of interest stemming from remuneration structures can lead to consumer harm in two slightly different ways: either through a lock-in of 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 biased advice (see next section) to the consumer.

In the 2007 Commission Business Insurance Sector Enquiry, the Commission Services found that the dual role of brokers may impact the objectivity of their advice[57]. This could lead to a situation where customers do not trust advice from intermediaries and other financial advisers. In a study led by AVIVA[58] in 2008, 49% of those interviewed trusted recommendations by friends, family and other informal sources more than those of professionals. Only 35% of those interviewed relied on professional advice. In Hungary this figure was only 17%. The lack of trust and of information about the links between the intermediary and the company could therefore have a negative impact on the market, by restricting choice and competition.

Since IMD1 does not contain information requirements relating to the remuneration of intermediaries or the disclosure of their relationship with the direct writer (other than in relation to certain shareholding thresholds), Member States are free to impose their own rules. The vast majority of Member States (21 out of 27) have left this area totally unregulated, whilst other Member States have introduced stricter rules; for example, the United Kingdom, the Netherlands, France, Sweden, Denmark and Finland have introduced additional information requirements. These variations in national rules mean that consumers in different Member States are not protected to the same extent. They also result in an unlevel playing field between sellers of insurance products which operate on a cross-border basis and, in some Member States, between sellers of insurance and investment products of a similar nature.

3.1.3. Advice and professional qualifications

The quality of the service provided by insurance intermediaries and sellers of insurance products depends on professional competence. As indicated above, the scope of IMD1 is limited and many market players are exempted and thus not subject to any professional qualification rules. In addition, the rules in IMD1 are too general and do not differentiate between complex and simpler products.

The majority of Member States divide intermediaries into different categories. The most common division is that between insurance agents, insurance brokers, sub-agents and insurance consultants, and some have chosen to use the definition of tied insurance intermediary in Article 2(7). In some Member States, a qualifying examination is necessary to become an agent or a broker, and in others it is necessary to attend a training course, which can range from 50 hours to a maximum of 500 hours. Some Member States require experience which can vary from 6 months to 4 years. In particular, complicated products, such as life insurance products with investment elements (insurance PRIPs), might require higher levels of knowledge and ability from the insurance intermediary.

Unsuitable or low quality advice leads to consumers buying products they do not need, or products not adapted to their needs. This creates higher costs and increases the risk of default under, or cancellation of, the insurance policy, resulting in extra costs.[59]

According to consumer groups responding to the public consultation (FSUG, the German association of consumers and BEUC) a definition of "advice" should be introduced, meaning an independent service to consumers. Consumer groups advocate that a definition is very important so that it gets possible to distinguish between information, advertising and personalised advice which can only be given and products proposed after the needs and demands of the consumers have been actively detected and analysed by the intermediary. In Germany, insurance intermediaries try to avoid giving “advice” to consumers. In a telephone survey, only 52 % of the consumers received “advice” from insurance intermediaries. According to consumer groups, if advice is inaccurate or of poor quality, consumers make wrong choices and buy (or, rather, are sold) the wrong products (including, for example, policies under which they are over- or under-insured).

Consumer dissatisfaction: the number of complaints in relation to insurance products is on the increase, according to information from dispute resolution bodies across Europe. There is about a 30% increase in the total number of complaints addressed to the insurance mediator in France in 2011, compared to 2010,[60] while in Poland the number of complaints about the sales of insurance policies in general has tripled between 2007 and 2010.[61] In 2010 the Belgian insurance ombudsman had received some 10% more complaints than during the previous year,[62] and in Hungary the number of complaints registered with the financial supervisory authority has doubled between 2007 and 2009.[63]

Without adequate level of professional qualifications, there is a risk of the quality of insurance advice being undermined, which could potentially lead to consumer detriment.

3.1.4. Cross-border business

The market for cross-border insurance services in general, irrespective of the means of marketing, is still very limited in the retail insurance sector. Evidence suggests that only global and multinational business insurance intermediaries, serving major multinational and domestic firms, and providing a wide range of services in addition to traditional brokerage, establish themselves in several Member States.

When an intermediary wants to sell insurance products cross-border under the freedom to provide services (FOS), he must notify his intention to the competent authority of his home Member State (which must notify the host Member State) and go through a notification procedure. Several respondents to the public consultation from the insurance industry and insurance intermediaries, as well as EIOPA, acknowledged that there is room for improvement as cross border business is hampered by current legislation. There are different approaches to the FOS problem in current EU legislation, all of which appear more favourable than that under IMD1.[64]

The total cross-border life insurance business was roughly 5% in 2007. In 2008, the business declined due to the financial crisis. In non-life segment, the cross border business accounts for 8% of total non-life business. The majority is industrial and P&C insurance. [65]

There is no single EU register for insurance intermediaries where a consumer can easily find information about registered sellers of different insurance products. As a consequence, sellers of insurance products lack easy access to information about how to go cross-border and this has a negative impact on competition in the EU insurance market.[66]

3.1.5. Sanctions in insurance distribution

At present, sanctions are not harmonised in any financial services legislation at EU level and the analysis of national sanctioning regimes has shown that they are divergent and not always sufficiently deterrent[67].

In the insurance sector, a preliminary mapping exercise of national sanctioning regimes was carried out in 2009 by EIOPA (then CEIOPS). EIOPA gathered additional information[68] from 13 Member States (these are enumerated in the Annex 15) by means of a questionnaire on the administrative sanctions in national legislation for violations of the obligations foreseen in the laws transposing IMD1.

The most common violations of IMD1 are: a failure of insurance intermediaries to register, or the use of unregistered intermediaries by insurance undertakings (Art. 8 (1)-(2)); a failure to comply with professional requirements (appropriate knowledge and ability, good repute "fit and proper" conditions, (Art. 4); a failure to comply with information requirements (Art. 12); and a failure to provide a fair analysis where an intermediary gives advice under Article 12 (2).

The most common problems in national sanction regimes related to breaches of the rules laid down by the IMD are (see Annex 15 for details):

(a) Lack of powers for competent authorities

(b) Low number of sanctions issued

(c) General lack of deterrence, lack of publication of sanctions issued

(d) A level of fines which is too low

The majority of respondents in the public consultation on the Communication on sanctions (governments, some industry representatives, consumers/investors associations) share the view that lack of important sanctioning powers and appropriate criteria for the application of sanctions may send the message that the consequences of illegal behaviours are not serious, which will not discourage such behaviours. [69]

The problems mentioned above give a very strong signal that the enforcement system is not working. Authorities often lack powers; other authorities do not enforce the rules. The fines vary for instance between a minimum of 25 EUR (Belgium) and a maximum of 100 million EUR (France). The low level of sanctions confirms the general feeling among many consumers that complaints to insurance companies or to the authorities do not lead anywhere. Input from EIOPA and national insurance ombudsmen gives similar indications[70]. Market actors can use the freedom to provide services or to establish themselves in countries with a lenient regime.[71]

Divergences and weaknesses in national sanctioning regimes may prevent the development of a level playing field within the Internal Market: unequal treatment of violations in different Member States, along with other regulatory divergences, risks creating competitive disadvantages for insurance intermediaries from certain Member States. Despite the current low level of cross-border activities in the insurance mediation sector, it cannot be excluded that market players subject to IMD rules (which will include cross-border insurance undertakings) may exploit differences between sanctioning regimes in different Member States.

The main conclusion from a recent Eurobarometer report is that consumers in Europe continue to feel powerless in relation to insurance providers: 65% of consumers believe they will never win in a dispute with an insurance company and 60% believe that "you never can be sure of your insurance cover". This impacts the number of complaints and the number of sanctioning cases.

3.2. Problems relating to Packaged Retail Investment Products (PRIPs)

The problems explained above are similar, but even more pronounced, in the case of investment based insurance products, because of their high complexity. This section presents evidence for the above-stated problems in the context of PRIPs insurance products.[72]

Consumer protection standards for the sales of insurance PRIPs[73] are not sufficient at EU level, as IMD 1 does not contain special rules for the sales of life insurance products with investment elements, which are generally more complicated than other insurance products. Currently, those products are sold under the general rules for the sales of insurance products, even though these products are very different in nature and generally represent higher risks for retail consumers.[74]

There is market evidence of a very high number of complaints regarding the sale of unit-linked insurance products in many Member States. For example, in France these complaints were about one third of all complaints in 2010[75]. In Hungary, about 15% of the registered complaints in 2011 related to sales of unit-linked insurance, and they had doubled in relation to the previous year[76].

Many responses from consumer organisations to the Call for Evidence on unit-linked life insurance policies highlighted deficiencies with regard to the sale of these products and of the costs associated with this type of investment. Regulators have reported that differences in regulation between life insurance products and mutual funds have caused significant problems.

A recent example of such a potential distortion in sales is the alleged mis-selling of equity-linked insurance products in the Netherlands, which resulted in a class action lawsuit. The complaint was that there was insufficient disclosure of the costs associated with those policies, leading to investment returns that were significantly lower than investors had been led to expect and to penalties on early withdrawal that were not expected. There are other examples; for instance, a Belgian consumer association has warned that rules on advertising unit-linked life insurance in Belgium do not specify how information on past returns should be presented so as to avoid misleading prospective investors. [77]

The substitutability of MiFID investment products and insurance-based investments was highlighted by a recent study of retail investment services for DG SANCO. The study, reporting on the results of mystery shopping[78] for investment products across the EU, indicated that in fact almost 20% of mystery shoppers received a recommendation to buy unit-linked life-insurance policies[79]. This shows that, when consumers are looking for investment products, they might be sold either pure investment products or insurance products with investment elements. This proves the substitutability of those products.

This is also apparent from the availability of ‘open-architecture’ insurance products that provide investment exposure to the performance of UCITS or other MiFID products. [80]

The aforementioned SANCO Study on Advice observed that countries with an especially high incidence of "unsuitable product recommendations" tend to be the ones with more developed financial industries, for example, Denmark (68%), Finland (56%), Netherlands (52%), Sweden (58%), the UK (55%). It was concluded that, out of all sales of investment products (regulated under MiFID 1), 57% were based on unsuitable advice.

Unsuitable financial advice has a significant impact on investor losses and investor confidence. It has been observed through anecdotal evidence that for one type of life insurance products, variable annuities, in about 25% of cases consumers withdraw from the contracts before they mature (see the impact section for the estimated benefits ). But a study in Germany indicates that consumers terminate 50% to 80% of all long-term investments prematurely because of unsuitable advice when buying financial products. This leads to estimated losses to consumers of 20-30 billion Euros every year[81]. The issue of unsuitable advice may be symptomatic of a wider problem within the EU. For example, recent data provided to the Commission by the FIN-NET network showed an increase in the number of complaints relating to financial advice on investment products, specifically in Italy, Ireland, France, and Belgium.

In the absence of EU rules regulators have responded differently by asking for increased transparency (for instance remuneration disclosure) or, where their action captures complex products in general, providing guidance on pre-contractual disclosure or calling for a moratorium:[82] (see the text in the following box for more information).

In Belgium: the supervisory authority has examined the trend towards increased complexity and has recently taken the initiative to launch a moratorium on the distribution of unnecessarily complex structured products to retail investors (life insurance contracts included).

In Finland, the supervisory authority is preparing regulations and guidelines on disclosure of costs and profits of life insurance policies. The new requirements are based on the inspections by the Finnish supervisory authorities and their finding that there is no adequate transparency in disclosure of costs of underlying investments. The insurer will have to disclose the costs related to the underlying investment products in a more detailed way than before[83].

In France, the supervisory authority (Autorité de Contrôle Prudentiel – ACP) has issued a recommendation concerning the use of structured financial instruments as units of account that carry a risk of mis-selling due to their complex nature. The recommendation sets out how insurers and insurance intermediaries can comply with their legal and regulatory obligations in terms of information and advice to consumers who wish to buy such products, including unit-linked life insurance products.

4. Subsidiarity

4.1. How would the problem evolve without EU action? The base line scenario

If IMD1 is not revised, it is very likely that the problems that have been identified will persist and could be aggravated by future market developments, as very few counterbalancing factors are likely to appear. On the major issue of consumer protection, a lack of action at EU level will likely result in an increase in the number of cases of mis-selling of insurance products and cases where consumers are led to take undue risks.[84]

An unlevel playing field develops between product issuers

A regulatory patchwork can lead to increased administrative costs and regulatory arbitrage. Different levels of regulatory requirements can create an incentive for products to be structured and marketed to take advantage of less onerous requirements. Product proliferation has been indicated by some stakeholders as providing prima facie evidence of regulatory arbitrage. In practice, however, it is difficult to assess the extent to which differences in transparency requirements, as such, are a sufficient motivation for driving market entry or exit. In relation to administrative costs, a number of consultation respondents commented that duplication, overlaps in requirements or differences in requirements both sectorally and between Member States (where they operate cross-border) could potentially raise their administrative costs. They noted that a lack of clarity as to the content of regulatory requirements and associated liabilities could also lead to greater compliance costs for firms (for instance, through the need to purchase legal advice).

Increased barriers to the further development of the single market

Most insurance products are currently not sold cross-border in great volumes; only about 5%, unlike UCITS products. The regulatory patchwork of sales requirements constitutes a barrier to further cross-border business across different product types. The impact of national differences in sales rules was strongly highlighted by UCITS stakeholders (prior to the development of the KIID[85]), who identified such differences as a key barrier to further development of cross-border efficiencies.

The failure to effectively mitigate asymmetries of information about different sales practices at EU level has encouraged action at the national level to address emerging problems, and the financial crisis has led to such action being more likely in the absence of further steps at EU level. Such action at national level is necessarily uncoordinated, leading to increased differences in approach across Member States.

In addition, given the ongoing PRIPs initiative, Member States will have to address disclosure requirements in the light of the new PRIPs standard, but without harmonized sales rules for these products the effect on consumers will be different in different Member States.

4.2. The EU's right to act

The legal basis for EU action in insurance is the Treaty provisions related to free provision of services. According to Article 3 of the EU Treaty, the EU pursues the objective of an Internal Market characterised by the free movement of goods, persons, services, and capital. Article 26 of the Treaty of the Functioning of the European Union (TFEU) further states that the Internal Market shall constitute an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the TFEU Treaty. Any follow-up action needs to be based on Article 53 (2) TFEU which is the legal basis to adopt EU measures aimed at promoting an internal market in financial services. Article 169 TFEU states that the EU measures taken in order to complete the Internal Market should have as part of the objective of protecting the interests of consumers. The Charter of Fundamental Rights of the EU also states in Article 38 that the Union shall ensure a high level of consumer protection.[86]

Although action at Member State level could in principle contribute to addressing some aspects of the problems that have been identified in the IMD, it would not be enough to complete the objectives.

General insurance

In their analysis of the 2007 CEIOPS survey, supervisors indicated that there was a need for clarification of some terminology used in IMD1 and in addition, that some of IMD1’s requirements are impractical from the point of view of day-to-day supervision; therefore an amendment of IMD1 is necessary.

Insurance PRIPs (unit-linked life insurance products)

Several supervisors (DE, FR, HU) reported in their annual report that the problems related to unit-linked insurance products deserved special attention. In particular, the German, the French and Hungarian supervisors identified as a practice adversely impacting consumers that certain insurers delay the fulfilment of customer orders regarding asset funds if the issuer suspends the sale of underlying assets. In the course of 2009, 2010 and 2011, those supervisors addressed an appeal to insurers distributing unit-linked life insurance products providing guidance on acceptable practices.[87] For instance, to address this issue, the Hungarian FSA (HFSA) established concept-level guidelines on further developing the total cost indicator (TCI) of unit-linked life insurance products. As a conclusion, it has been suggested that different regulatory approaches at EU level will lead to unlevel market regulation.

In particular, 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 (aligning IMD with MiFID rules on sales of insurance policies with investment elements). Only EU action can ensure that all policyholders and beneficiaries under insurance policies in the EU benefit from equal and comprehensive protection. This EU action also aims to ensure a level playing field and to promote further integration within the Internal Market.

It follows that, in accordance with the principles of subsidiarity and proportionality as set out in Article 5 TEU, the objectives of the proposed action cannot be sufficiently achieved by Member States and can therefore be better achieved at EU level.

Alternative legislative solutions and soft law approaches have been examined and dismissed

In its advice EIOPA examined other legislative solutions, such as the possibility of making the provisions in the Luxembourg Protocol legally binding instead of modifying IMD1. However, without prejudice to the possibility of incorporating some of the guidance in the Luxembourg Protocol into IMD2, some Members have expressed concern about the feasibility of the Luxembourg Protocol becoming a legally binding EU instrument. Moreover, consideration should be given to how its implementation would be enforced. A different approach to a classical directive is a “multi-level structure”; that is, the adoption of high-level rules, plus more detailed rules. The majority of Member States favoured this approach which retains the conventional structure of the IMD, but adopts more detailed requirements (possibly in the form of regulatory technical standards or implementing technical standards) in limited areas. Such an alternative could be complemented by amending or incorporating provisions of the Luxembourg Protocol.

5. Objectives

The revision of IMD1 has three sets of objectives: general, specific and operational. The general objectives are the overall goals of the project: consumer protection; undistorted competition; market integration. The specific objectives are the immediate goals of IMD2, the targets that first need to be reached in order for the general objectives to be met: create a level playing field; reduce conflicts of interest; improve advice for complex products; reduce the burden for cross-border entry. The operational objectives are the deliverables that the IMD2 project should produce: expand the scope of application of IMD to all distribution channels (e.g. direct writers, car rental firms, etc.); identify, manage and mitigate conflicts of interest; raise the level of harmonisation of administrative sanctions for infringements of sales rules; enhance the suitability and the objectiveness of advice; ensure sellers' professional qualifications match the complexity of products sold; simplify and approximate the procedure for cross-border entry to markets across the EU (See the objective tree below).

5.1. Consistency of the objectives with other EU policies

The identified objectives are coherent with the EU's fundamental goals of promoting the harmonious and sustainable development of economic activities, a high degree of competitiveness, and a high level of consumer protection, which includes the safety and economic interests of citizens (Article 169 TFEU). These objectives are also consistent with the reform programme proposed by the European Commission in its Communication Driving European Recovery,[88] the 'Europe 2020 strategy' for smart, sustainable and inclusive growth,[89] the ongoing MiFID review and the PRIPs initiative.

5.2. Consistency of the objectives with fundamental rights

The legislative measures setting out conduct of business rules for all sellers of insurance products, including sanctions, will be in compliance with relevant fundamental rights and particular attention will be given to the necessity and proportionality of the legislative measures. The following fundamental rights of the Charter of Fundamental Rights of the European Union are of particular relevance: freedom to conduct a business (Art. 16) and consumer protection (Art. 38). Limitations on these rights and freedoms are allowed under the Charter. The objectives as defined above are consistent with the EU's obligations to respect fundamental rights. However, any limitation on the exercise of these rights and freedoms must be provided for by the law and respect the essence of these rights and freedoms[90]. Subject to the principle of proportionality, limitations may be made only if they are necessary and genuinely meet the objectives of general interest recognised by the Union or the need to protect the rights and freedoms of others.

6. Policy Options

6.1. Proposed legislative structure of IMD2 and involvement of EIOPA

Any new measures to be proposed within the current revision would follow the 'classical directive' approach, as is already the case with IMD1. Therefore, policyholders and beneficiaries would benefit from a higher level of protection for general insurance and for insurance PRIPs products. The so-called 'multilevel' approach (see annex 6 and annex 11) would be applied to the chapter dealing with distribution of insurance PRIPs, in order to be in line with the structure of the relevant provisions in MiFID[91]. Alternative legislative solutions and soft law approaches have been examined and dismissed (see section 4.2.).

6.2. Identification of options

The problems described above require different levels of regulatory solutions, as indicated in the table below.

The options highlighted in bold are the Commission Services' preferred options.

The options chosen for general insurance products apply also to insurance PRIPs. The options chosen only for PRIPs are additional because of the specific investment features of the products (see the further explanation in 2.4).

Problems || Objectives addressed || Policy options

1 Scope of IMD2 || Consumer protection Undistorted competition Market integration || 0 – Take no action (apply IMD1 to agents, brokers) 1 – Combine current IMD scope with a 'Soft law' approach (issuing guidelines, self-regulation, ethical codes, etc.) - recommend to apply some provisions of IMD1 to all sellers of insurance products 2 – Extend the scope only to direct writers (so that it would cover agents, brokers, direct writers) 3 – Extend the scope to all sellers of insurance products (so that it would cover direct writers, agents, brokers, travel agents, car rental firms, suppliers of goods (B2B + B2C)). 4 – Extend the scope to all sellers of insurance products except for: · sales of insurance complementary to the supply of goods (seller's side); and · large risks/professionals (buyer's side) (so that it would cover direct writers, agents, brokers, travel agents, car rental companies, suppliers of goods not meeting conditions for exemption from the scope (B2C only).) 5 – Extend the scope to: - all sellers of insurance products except for: · sales of insurance complementary to the supply of goods (seller's side); and · large risks/professionals (buyer's side) - and to after-sales activities (so that it would cover direct writers, agents, brokers, travel agents, car rentals, suppliers of goods not meeting conditions for the exemption, loss adjusters, claim handlers ( B2C only)) but with a lighter "ancillary"/after-sales regime in the interests of proportionality, as described in the table below. [Options are mutually exclusive]

2 Conflicts of interests at the point of sale: remuneration structure and links between direct writer and intermediary || Consumer protection Undistorted competition Market integration || General insurance 0 – Take no action 1 – Introduction of (a) a European Standard for status information ("business card solution") and (b) disclosure of nature, structure and amount of remuneration (mandatory or on request) for all products (and transitional period) 2 – Ban on commissions (complete , not only for "independent advice") 3 – Soft law (issuing guidelines, self-regulation, ethical codes, etc.) [Options 1 and 3 are not mutually exclusive] || Insurance PRIPs – (life insurances with investment elements ) 0 – Take no action (apply the same rules as for general insurance) 1 - Apply revised MiFID entirely, conduct of business rules and organisational requirements (risk management, internal audit, etc.) (MiFID Level 1 and 2) 2 – Introduction of a revised MiFID-like regime based only on the conduct of business rules (identify, manage and mitigate all conflicts of interest through ban on commissions (complete or only for "independent advice"), (Article 23-of MiFID II) Level 2 guidelines by ESMA/EIOPA 3. Soft law (issuing guidelines, self-regulation, ethical codes, etc.) 4. Prohibition of products difficult to understand even for professional market participants [Options are not mutually exclusive]

3 Advice by sellers of insurance policies is biased due to conflicts of interest, or of an insufficient quality A/inappropriate/biased advice B/low quality advice -professional requirements || Consumer protection Undistorted competition Market integration || A 0 – Take no action 1 – Introduce a suitability test as part of the advice process for all insurance products 2 – Clarify the scope of “insurance advice” by use of a definition - the intermediary or employee of an insurance undertaking, on the basis of the information provided by the customer, provides a recommendation on whether an insurance product(s) fits the demands and the needs of that customer. 3 – Ban on commission fro independent advice (Art 24. MiFID) [Options are not mutually exclusive] || A 0 – Take no action (,apply the same rules as for general insurance 1 – Introduce a suitability test as part of the advice process for life insurances with investment elements (incl. PRIPs) detailed suitability test (Level 2) (based on article 25 MiFID II ) 2– Ban on commission fro independent advice (Art 24. MiFID) [Options are not mutually exclusive]

B 0 – Take no action 1 – Ensure that professional qualifications are proportionate to the complexity of the products sold (guidelines to be drafted at Level 2) 2 – Full harmonisation of requirements for professional qualifications 3 - Soft law (issuing guidelines, self-regulation, ethical codes, etc.) [Options 1 and 3 are not mutually exclusive] || B 0 – Take no action (apply the same rules as for general insurance) which means that professional qualifications are proportionate to the complexity of the products sold (guidelines to be drafted at Level 2). 1 – Full harmonisation of requirements for professional qualifications [Options are mutually exclusive]

4 Burdensome for insurance intermediaries and direct writers to enter markets on cross-border basis || Undistorted competition Market integration Consumer protection || 0 – Take no action 1 – Revise "general good" rules 2 – Introduce provisions relating to freedom to provide services (FOS) and freedom of establishment (FOE) definitions and a mutual recognition system as well as a simpler notification process (to provide greater detail and clarity). 3 – Introduce a centralised registration system by EIOPA 4 – Soft law (issuing guidelines, self-regulation, ethical codes, etc.) [Options are not mutually exclusive]

5 Lack of effective sanctions || Consumer protection Undistorted competition Market integration || 0 – Take no action 1 – Introduce a general framework for sanctions and enhanced harmonisation of sanctioning powers (guidelines to be drafted at Level 2) 2 – Introduce fully harmonised sanctions regime by unifying sanctioning powers and enforcement rules 3– Soft law (issuing guidelines, self-regulation, ethical codes, etc.) [Options are mutually exclusive]

Description of policy options

1.Scope of initiative

Option (0) means that only agents and brokers remain to be covered by IMD2. Option (1) would combine the scope of IMD1 with a 'soft law' approach (issuing guidelines, self-regulation, ethical codes, etc.). This means that the Commission would recommend applying non-binding high level, minimalist conduct of business rules (such as professional requirements and information requirements) to other market players (such as direct writers, travel agents and car rental companies). Option (2) would extend the scope only to direct writers, but this would leave other sellers of insurance products out of the scope. This option would ensure that insurance companies selling directly to consumers would be brought within the scope of the new Directive on similar grounds as insurance agents and brokers. Option (3) would extend the scope to all sellers of insurance products. This would include direct writers but also other market participants who sell insurance products on an ancillary basis (travel agents and car rental companies, suppliers of goods not meeting conditions for the exemption – declaration requirements should apply to them). Option (4) would extend the scope as in solution (3) but, at the same time, allow exemptions as follows: a) full exemption: the activity is a sale complementary to the supply of goods (such as glasses or mobile phones):[92] as in IMD1 but €500 would be indexed to €600 (reflecting an increase which has already been implemented by Member States in compliance with provisions contained in IMD1) or b) exemption from the disclosure rules only: the buyer concludes contracts of large risks insurances (such as insurance for a private jet) or the buyer is a professional client (rather than a retail client). Large risks are defined by Article 13 (27) of the Solvency II Directive. This means that the IMD would be applicable only in B2C relationships. Option (5) would extend the scope as in solution (4) and would also require after-sales players to notify the competent authorities (through a simplified declaration procedure) and to disclose their business status (European business card solution) to the consumers.

A declaration procedure means

a lighter regime which would be introduced for market players which sell insurance products on an ancillary basis (e.g. car rental companies, travel agents, suppliers of goods not meeting conditions for the exemption)

They should apply similar conduct of business rules and comply with some basic professional qualifications.

The same lighter regime would apply for loss adjusters and claims handlers.

The lighter regime would consist of a simplified procedure based on a declaration submitted by the relevant market participant to the competent authorities instead of a standard registration. If Member States deem it necessary for consumer protection purposes they may decide to use the standard registration regime instead of the light regime (declaration procedure).

2. Conflicts of interest

General insurance and insurance PRIPs

Option (0) means that only low level conflicts of interest rules would be applied (Article 12 of IMD1). Article 12 of IMD1 already addresses the issue of “conflict of interest”, though not using the term. It requires intermediaries, on a contract-by-contract basis, to inform the customer whether they are giving advice based upon a fair analysis, or whether they have contractual obligations with one or more insurers. In addition, the intermediary has to state in writing the reasons for any advice on a given insurance product and all this is supervised and controlled by the national supervisory authorities.

Option (1) introduces a mandatory standardised business card (European Business Card).

European Business Card solution means

Providing information on an A4 page, so-called "business card" to the consumer at the pre-contractual stage. It would show:

the relationship between the insurance company and the seller,

the nature of the remuneration (a fee, commission or salary),

its structure (whether financed directly by the client or an undertaking),

the amount of the remuneration,

and what it includes in terms of services: claims handling, advice, administration, etc.

This option introduces a remuneration disclosure. The insurance intermediaries would disclose in advance their remuneration to the customer (fee or commission). The insurance undertakings engaged in a direct sale should disclose the variable remunerations of their employees linked to the sale. Mandatory disclosure of remuneration means that the intermediary should disclose his remuneration towards the customer. On request regime means that the intermediary need only disclose his remuneration if a customer specifically requests the disclosure. The transitional period means that a mandatory 'full disclosure' regime is envisaged for the sale of life insurance products and an 'on–request' regime (i.e. on customer's demand) for the sale of non-life products with transitional period of 3 years. After the expiry of 3 years transitional period, the full disclosure regime will automatically apply for the sale of non-life products as well. Option (2) would completely ban commissions and introduce a fee-based system (i.e. clients pay for advice). Option (3) would combine the current IMD scope with a 'soft law' approach. This means that the Commission would only recommend applying non-binding conflict of interests rules. Actions should be taken by insurance companies and sellers voluntarily to refrain from business conduct that is misleading (such as setting up ethical codes, etc.).

Additional rules for insurance PRIPs

Option (0) would mean that the same rules set for the sales of general insurance would apply to insurance PRIPs (European business card system and disclosure for remuneration). Option (1) would apply MiFID entirely – organisational requirements (risk management, internal audit, etc.) as well as conduct of business rules (obligation to identify, manage and mitigate all conflicts of interest ). The customer would be given information both about the product's insurance cover and the investment risks related to it. Detailed requirements on conduct of business rules would be set by EIOPA at Level 2. Option (2) would only apply MiFID-based conduct of business rules (see above) and not apply its rules for organisational requirements. In view of that, EIOPA in collaboration with ESMA[93] could be asked to develop guidelines for the application of IMD2 rules on the sale of insurance PRIPs in order to ensure consistency with MiFID Level 2 work.

Level 2 guidelines mean that EIOPA will have to draft five regulatory technical standards regarding

1) the content of adequate professional knowledge and ability of the intermediary;

2) mutual recognition of the intermediary's professional qualifications;

3) conflicts of interests linked to the sale of insurance investment products,

In relation to the conflicts of interests linked to the sale of insurance investment products, EIOPA will have to draft regulatory standards on defining steps that may be required to identify, prevent, manage and disclose such conflicts; and establishing criteria for specifying types of conflicts which may damage the interests of customers.

4) general principles and information to customers in relation to the sale of insurance investment products;

As regards general principles and information to customers in relation to the sale of insurance investment products, the regulatory standards are to ensure that insurance intermediaries comply with the following principles:1) they act honestly fairly and professionally in accordance with the best interests of customers; 2) they ensure that information given to customers is fair, clear and not misleading;

This means that EIOPA will have to draft regulatory standards how insurance intermediaries should provide information about their identity, the insurance undertaking and their services, in particular whether advice is provided on an independent basis, about the scope of any market analysis, about proposed products and investment strategies, and about costs

5) detailed suitability and appropriateness test for the sale of insurance investment products.

EIOPA also will have to draft regulatory standards how suitability and appropriateness is to be assessed and required information to be obtained from the customer.

More detail on Level 2 measures and specific task given to EIOPA can be found in Annex 19.

Under Option (3), market players would be encouraged to set up ethical codes when selling such products. Option (4) would prohibit products that are difficult to understand even for professional market participants. Option (4) would completely ban all PRIPs insurances and require them to be withdrawn from the market.

3. Biased and low-quality insurance advice

Section A: Inappropriate or biased advice stemming from conflicts of interest or improper assessment of buyer's needs

General insurance and PRIPs insurance

Option (0) covers all advice given for the purpose of assisting the customer in concluding an insurance contract or with a view to the management or implementation of an insurance contract. There is no definition of advice under IMD1. The “advice” is part of the sales discussion for an insurance product, where the seller analyses the consumer´s needs and tests the appropriateness of the recommended insurance product to the customer's needs. Option (1) would introduce a detailed suitability test for sales of all insurance products when there is a sale with advice. Selling without advice would require an appropriateness test for those products where the underlying investment funds are composed of complex products (as in MiFID). This suggested regime would apply MiFID rules, and detailed suitability rules would be drafted at Level 2.

An appropriateness test means that the seller must request information from the client regarding his knowledge and experience to enable the firm to assess whether the insurance investment product is appropriate for the client. When advice is provided, the seller has to apply a suitability test, which is broader than the appropriateness test, in that the seller must also obtain information regarding the financial situation and investment objectives of the client.

Option (2) would introduce a definition of insurance advice along the lines of the provision of personal recommendations to a customer, either upon his request or at the initiative of the insurance undertaking or the insurance intermediary. Option (3) would mean that the seller of insurance products would not be able to accept any payment provided by any third party if he wanted to provide the client with independent advice. Independent advice in this case would mean that the seller covers a sufficiently large number of products and cannot receive any benefit from an insurance company (therefore the consumer should pay a fee for the advice). This option would thus introduce a form of advice aiming at a higher guarantee of independence and market participants could choose whether they want to buy a product with "independent advice" or with "advice" which is not claimed to be fully independent. The obligations under this option would apply only to those sellers who claim to provide "independent advice".

Additional rules for insurance PRIPs only

Option (0) would mean that the rules for the sales of general insurance would apply to insurance PRIPs as well (i.e. insurance advice is defined). Option (1) would introduce suitability and appropriateness tests for the sales of insurance PRIPs only (see Option (2) above for general insurance). This suggested regime proposes introducing a requirement to provide the consumer with an advice based on a suitability test assessing his needs, demands and his financial situation and is based on the example of MiFID. Providing such advice would depend on the consumer duly informing the seller about his profile. Option (2) introduces a ban on commission for independent advice (as under Option (3) for general insurance).

Section B: Low quality advice stemming from the seller's insufficient level of knowledge and professional qualifications

General insurance and insurance PRIPs

Option (0) would mean that high level professional requirements would remain (Article 4 of IMD1).

Option (1) would mean the introduction of high-level principles which give Member States the possibility to graduate the knowledge and ability requirements according to the activity pursued or type of intermediary. At the same time, this would ensure that professional qualifications are proportionate to the complexity of the products sold. This means a three-level system would be introduced: a) lower level requirements for ancillary sellers of simpler products (e.g. travel insurances); b) regular level requirements for sellers of general insurance products (non-life and pure life products); c) higher level requirements for sellers of complex products (insurance PRIPs such as unit linked life insurance policies). There would also be a mutual recognition of intermediaries' knowledge and abilities and recognition of foreign proof of professional qualifications. Option (2) would mean that a common knowledge and skills requirement system would need to be set up at EU level and all sellers would have to follow the same training irrespective of the method of distribution or the complexity of product they offer. Option (3) would encourage insurance companies and intermediaries to cooperate in the application of professional requirements (organising training, exams, etc.) and set up ethical codes.

Additional rules for insurance PRIPs

Option (0) would mean that the same rules set for the sales of general insurance would apply to insurance PRIPs (see above). Option (1) would mean a common system of knowledge and skills requirements at EU level (see Option (2) above for general insurance).

4. Cross-border business

Option (0) would mean that the current, high level principles regulating cross-border business (Article 6) and non-binding EIOPA Luxembourg Protocol would continue. Option (1) would mean that the Commission would revise its Interpretative Communication (2000/C 43/03) on ‘Freedom to provide services and the general good in the insurance sector’ to list exhaustively the exceptions under 'general good' that can be invoked by Member States. The concept of "general good" means that if a registered insurance intermediary intends to carry on business in another Member State, he must comply with the conditions under which, for reasons of the general good, such business must be conducted in the host Member State. Option (2) would incorporate definitions already existing in the Luxembourg Protocol in the IMD and introduce a simpler notification process for intermediaries going cross-border. This option would clarify the application of the Treaty principles regarding the FOE and the FOS and introduce some enforcement rules linked to those freedoms, based on the MiFID II. Option (3) would introduce a centralised registration system that would work as follows: each Home State website would be required to publish a list of intermediaries passporting into other Member States containing the following data: (i) name, address and registration number of intermediary; (ii) type of intermediary (e.g. tied, independent); (iii) classes of business (life/non-life) to be undertaken; (iv) Member States in which the intermediary intends to operate; and (v) whether activities would be on a FOS or FOE basis. These lists would be required to be accessible in the language of the home Member State and in a common language (e.g. English). A hyperlink to the relevant web address for each list would be required to be forwarded to EIOPA and similarly published on its website (in the public area). Option (4) means that the Luxembourg Protocol would be incorporated in the text as a non-binding legislative tool.

5. Sanctions

Option (0) means that only high level principles on sanctions would remain (Article 8 of IMD1). Option (1) would introduce minimum common rules on sanctions, leaving Member States with the possibility of establishing stricter rules. Those common rules would include the requirement that the maximum level of administrative fines in national legislation is not lower than a common EU level. Option (2) envisages common rules on the sanctions to be established, including the setting of minimum and maximum levels of fines. Under this option, Member States would be prevented from setting minimum or maximum levels lower that those established at EU level and the sanctioning powers of supervisory authorities would be harmonised fully (see more details in Annex 4).

7. Analysis of Impacts and Comparing the Options

The options are assessed against the general objectives of the project (in the following order):

Objective 1: Consumer protection and clear conduct of business rules (Obj. 1)

Objective 2: Undistorted competition (Obj. 2)

Objective 3: Market integration (Obj. 3)

7.1. Extension of the scope

Issue 1: Scope || Effectiveness (benefits) || Cost effectiveness

Consumer protection and clear conduct of business rules (Obj.1.) || Undistorted competition (Obj.2.) || Market integration (Obj.3.)

0 – Take no action (Baseline scenario) || 0 || 0 || 0 || N/A

1 – Combine current IMD scope with a 'Soft law' approach (issuing guidelines, self-regulation, ethical codes, etc.) - recommend to apply some provisions of IMD1 to all sellers of insurance products || 0 || 0 || 0 || 0

2 – Extend the scope only to direct writers so that it would cover agents, brokers direct writers || + || + || + || ~/-

3 – Extend the scope to all sellers of insurance products (so that it would cover direct writers, agents, brokers, travel agents, car rental firms, suppliers of goods (B2B + B2C)). || ++ || ++ || + || --

4 – Extend the scope to all sellers of insurance products except for: · sales of insurance complementary to the supply of goods (seller's side); and · large risks/professionals (buyer's side) (so that it would cover direct writers, agents, brokers, travel agents, car rental companies, suppliers of goods not meeting conditions for the exemption (B2C only)). || ++ || ++ || + || ~/-

5 – Extend the scope to: - all sellers of insurance products except for: · sales of insurance complementary to the supply of goods (seller's side); and · large risks/professionals (buyer's side) - and to after-sales providers (so that it would cover direct writers, agents, brokers, travel agents, car rentals, suppliers of goods not meeting conditions for the exemption, loss adjusters, claim handlers ( B2C only)) but with a lighter "ancillary"/after-sales regime in the interests of proportionality. || +++ || +++ || +++ || ~/-

Stakeholders' view: The vast majority of stakeholders (intermediaries, industry, consumers) supported Option (5) in order to level the playing field. Travel agents and car rental companies agreed provided a lighter regime (declaration procedure) was applied to them. Moreover, a majority of stakeholders (consumer organisations, regulators, supervisors, investment firms and the insurance industry) supported the approach of raising standards for the sale of investment based insurance products (insurance PRIPs). It was suggested that two sets of rules could be applied: one for the sales of general insurance products and the other for the sale of life insurance products with investment elements (because those products are substitutable with investment products).

Under the baseline scenario, the current scope would remain. As regards consumer protection and clear conduct of business rules (obj. 1), Option (1) would not provide an effective solution. In the area of financial services, soft law has been proven ineffective as studies show that recommendations addressed to Member States who would like to coordinate their national regulations would not work in practice due to the non-binding character of the measures[94]. Regarding the objective of undistorted competition and market integration (obj. 2&3), this option has proven ineffective as the unlevel playing field remains because non-binding rules cannot be enforced.

As regards consumer protection (obj.1), Option (2) would provide consumers with more consistent information regardless of the channel used. As for market players, a slight increase in costs can be expected as insurance undertakings already fulfil similar requirements in terms of professionalism, good repute and disclosure. This option is more beneficial in reaching the objective of undistorted competition than Option (1) (obj. 2), as consumers can expect benefits related to increased market competition. A level playing field would be achieved between intermediaries and direct writers. As for market integration (obj.3.), this option would mitigate regulatory arbitrage between different markets in the EU (see the opinion of insurance intermediaries at the public consultation), but no significant structural changes to any markets would be expected to result from the extension of articles 12 and 13 of IMD1 to direct writers.

As regards consumer protection (obj.1.), Option (3) could be effective as it would ensure that consumers would receive the same information regardless of the distribution channel used and the wider scope could allow for better regulatory coherence for market players. As for undistorted competition (obj. 2.), this would be more effective than Option (2) and would achieve a complete level playing field between all sellers of insurance products. This option is also beneficial to achieve market integration (obj.3.), as uniform requirements in all Member States would provide legal certainty for all market participants and also facilitate the procedures of competent authorities. This would mitigate regulatory arbitrage between different markets in the EU.

Option (4) would be less effective in achieving better consumer protection and clearer conduct of business rules (obj. 1.), than Option (3) as the only products that are not covered by this option are simple, very cheap products that cannot create consumer detriment. It has been proven (see the results of the public consultation) that some market players do not need protection: purchasers of large risks and professional purchasers are in general large firms with their own insurance and legal staff who manage their insurance needs and interact with insurance intermediaries at a professional level. The key benefits for the achievement of undistorted competition (obj. 2.), relate to the fact that most of the sales channels and products are covered, so it is only marginally less effective than option (3) for consumers. As for market integration, this option would mitigate regulatory arbitrage and enhance cross-border business (see the opinion of intermediaries in the public consultation).

In line with the principle of proportionality, Option (5) would bring, in general, key benefits. These benefits relate to the fact that the impact of most provisions would be targeted on those sales of products and services that are most relevant so it would only be marginally less effective than option (3) and more proportionate than Option (4) in achieving enhanced consumer protection (obj.1.). To achieve undistorted competition (obj.2.), this would mean that most of the sales channels, after-sales services and products are covered, so it would only be marginally less effective than Option (3), and more proportionate than Option (4). This would create a level playing field for all players in the insurance value chain. Proportionality would be ensured for after-sales players and ancillary providers: only a simple declaration of their existence, status information disclosure, basic professional standards and good repute would be required. To achieve market integration (obj.3.), this would be at least as effective as Option (4) but more consumer confidence in registered after-sales players can be expected. This would also enhance cross-border business for after-sales players (claim handlers, loss adjusters).

Proportionate approach to preferred policy options in problem 1 (explanatory table)

Organisational rules Registration requirements

FULL || Intermediaries (agents, brokers) Direct writers (under Solvency II)

PARTIAL (declaration) || Ancillary service provider (car rental firms, travel agents, suppliers of goods not meeting conditions for the exemption ) After sales (loss adjusters, claim handlers)

NONE || Sales of insurance complementary to the supply of goods (ancillary+ below €600)

Compliance cost implications

Option (1) would involve slight costs. As for Option (2), total compliance costs should be low, as insurance undertakings already fulfil similar requirements in terms of professionalism, good repute and disclosure. Direct writers would have to bear the cost of additional regulation. Option (2) would entail an average cost of €40,000 (one off costs)/ €10,000 (recurring costs) per direct writer (4618 companies, out of which SMEs: none; total costs around €185,000,000 one-off, €46,180,000 ongoing). This total compliance cost estimate covers training costs, costs related to information requirements, IT, administration costs, etc. (all figures are based on Eurobarometer data, revised PwC study figures and Commission Services' analysis).

As far as the total compliance costs of Option (3) are concerned, the following costs estimates have been established (all figures are based on Eurobarometer data, revised PwC study figures and Commission Services' own analysis):

Direct writers (per company): €40,000 (one off costs)/ €10,000 (recurring costs) (4618 undertakings in the EU, out of which SMEs: none) (same cost estimates as for Option (2)).

Travel agents (per company): average costs estimates: €500 (one off costs)/ €50 (recurring costs). (68 000 undertakings in the EU, out of which SMEs: 80%), (total costs around €34,000,000 one-off, €3,400,000 ongoing).

Car rental companies (per company): average costs estimates: €600 (one off costs)/ €50 (recurring costs) (30 976 undertakings in the EU, out of which SMEs: 80%),( total costs around €18,585,600 one-off, €1,548,800 ongoing).

These total compliance cost estimates cover training costs, costs related to information requirements, IT, administration costs, etc. Direct writers bear relatively higher cost compared to other market players because they are the product manufacturers and their IT system needs to be substantially adjusted to comply with new requirements.

Option (4) would lessen the costs of Option (3) to €25,000,000 (Commission services' estimates) as it excludes sellers of insurances which are complementary (ancillary) to the supply of some goods. A good example is an optician who sells complementary insurance on glasses. It is estimated that 200,000 market players (such as opticians) sell insurance complementary to the supply of goods (in this case insurance on glasses). It is also estimated that the total compliance costs will be a maximum of €125 per entity (one-off cost). This will cover training costs, costs related to information requirements, IT, administration costs, etc. Those ancillary sellers (whose main business is not selling insurance products) bear low cost compared to other market players because they sell inexpensive, simple product and their IT system do not need to be substantially adjusted to comply with new requirements. Option (5): Total compliance costs for direct writers, agents, brokers, travel agents, car rentals would be the same as in Options (3) or (4). For loss adjusters, this would mean €400 (one off costs)/ €50 (recurring costs)/company and for claims handlers €400 (one off costs)/ €50 (recurring costs)/company (all figures are based on Commission Services' best estimates). Total number of loss adjusters is 6000 in the EU. Total costs are around €2,400,000 one-off, €300,000 ongoing costs.

Overall assessment: The preferred option is Option (5) because it addresses consumer protection concerns with a proportional approach in respect of after-sales services and ancillary insurance providers.

7.2. Conflicts of interests

Issue 2. Conflicts of interests General insurance and insurance PRIPs || Effectiveness (benefits) || Cost effectiveness

Consumer protection and clear conduct of business rules (Obj.1.) || Undistorted competition (Obj.2.) || Market integration (Obj.3.)

0 – Take no action (Baseline scenario) || 0 || 0 || 0 |