COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document PROPOSAL FOR A DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Insurance Mediation
Date: 2012-07-03
Institutions: European Commission
Subjects: access to a profession, consumer information, freedom to provide services, insurance claim, insurance company, insurance occupation, market access, reinsurance, right of establishment, single market

EUROPEAN COMMISSION 

Strasbourg, 3.7.2012  
SWD(2012) 192 final 

COMMISSION STAFF WORKING DOCUMENT 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying the document 

PROPOSAL FOR A DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF 
THE COUNCIL 

on Insurance Mediation 

{COM(2012) 360 final} 
{SWD(2012) 191 final} 

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COMMISSION STAFF WORKING DOCUMENT 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying the document 

PROPOSAL FOR A DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF 
THE COUNCIL 

on Insurance Mediation 

1. 

OVERVIEW OF RELEVANT EU LEGISLATION AND CURRENT POLICY INITIATIVES 

Insurance 

Investment 

Relevant 
products 

Capital 
requirements 

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. 

SOLVENCY II 

CRD (Capital Requirements Directive) IV 

taking up and pursuit of business, supervision, 
reorganisation and winding-up procedures for 
insurance and reinsurance companies 

taking up and pursuit of business, 
supervision, reorganisation and winding-up 
procedures for credit institutions and 
investment firms 

Distribution 

IMD 

MiFID II 

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. 

and 

authorisation 

requirements 

rules, 
Registration 
organisational 
(including 
qualification  of  staff),  selling  practices  of  all 
investment  products,  cross-border,  conduct 
of  business,  supervision,  etc.  MiFID  has  an 
exemption  for  investment  products  with  an 
insurance  wrapper,  such  as  unit-linked  life 
insurance. 

Product 
disclosure 

SOLVENCY II 

PRIPS 

UCITS  

Insurance products 

Insurance products with investment elements 

Investment products 

In order to ensure cross-sectoral consistency, the revision of the IMD will take into 
account the on-going revision of MiFID as well as the upcoming PRIPs initiative. It 
means  whenever  the  regulation  of  selling  practices  of  life  insurance  products  with 
investment element (PRIPs insurance) is concerned, IMD should meet at least similar 
consumer  protection  standards  as  the  revised  MiFID.  PRIPs  insurances  are  retail 
investment products packaged as life insurance, such as unit-linked life insurance for 
example. 

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2. 

PROBLEM DEFINITION  

The outstanding issues with the current IMD legal framework, which will be detailed 
further in this section, can be grouped into two problem categories: problems related 
to  the  sale  of  all  insurance  products  (life  and  non-life  insurances)  and  problems 
related to the sale of PRIPs insurances.  

2.1. 

Problems related to the sale of all insurance products 

The  scope  of  the  Directive  does  not  include  direct  writers  and  some  other  sales 
channels  of  insurance  products  (such  as  travel  agencies  and  car  rental  companies). 
This leads to a widespread problem that consumer protection is different depending 
on  where  (through  which  sales  channel)  the  consumer  purchases  an  insurance 
product.  Besides  undermining  consumer  protection,  this  situation  also  creates 
unequal  regulatory  compliance  costs  across  sales  channels.  Some  after-sale  market 
players (claims handlers and loss adjusters) are also excluded from the scope of IMD 
at present. These professions make part of the sales process of the insurance products 
and could be exposed to conflicts of interest.  

The second substantial problem relates to conflicts of interest between the seller of 
insurance  products  and  the  consumer  due  to  the  remuneration  structures  of  sellers. 
Conflicts  of  interests  stemming  from  remuneration  structures  can  lead  to  consumer 
harm  in  two  slightly  different  ways:  either  through  a  lock-in  of  the  intermediaries 
into quasi exclusive dealing arrangements with a single upstream insurance company 
(whereby  consumers  turning  to  the  intermediary  will  not  have  sufficient  choice  to 
best satisfy their needs); or through advising products to the consumer which are the 
best remunerated for the seller, rather than best suited to consumers' needs (this latter 
case is dealt with below, together with other problems concerning advice).  

The  third  group  of  important  issues  relate  to  advice,  where  we  can  distinguish  two 
different problems.  

• 

• 

Biased advice could be given to consumers due to the above described conflicts 
of interest stemming from remuneration of sellers.  

Low  quality  advice  occurs  in  areas  where  the  professional  qualification 
requirements  for  sales  personnel  are  insufficient.  Currently  the  rules  of 
professional qualifications vary widely across Member States and across sales 
channels, leaving many consumers with low quality of advice. 

Access to cross-border markets is burdensome for sellers of insurance products and 
currently  there  is  very  little  entry  across  European  markets.  Mutual  recognition  of 
professional  qualifications, 
freedom  of 
establishment are not specified in the text of IMD1. There is no single register where 
consumers  could  find  information  about  the  sellers  of  insurance  products  in  every 
EU Member State.  

to  provide  services  and 

freedom 

With  regards  to  the  problem  with  lack  of  harmonisation  of  sanctions,  it  has  been 
detected  as  an  issue  in  almost  all  current  revisions  of  financial  services  legislation. 
The reason for that is lack of deterrent effect of sanctions in some Member States and 
large differences between the sanctioning powers of the competent authorities. 

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2.2. 

Problems related to the sale of PRIPs insurances 

Consumer protection  standards  for  the sale of insurance PRIPs are not sufficient at 
EU  level  as  IMD  1  does  not  contain  special  rules  for  the  sale  of  complex  life 
insurance  products  with  investment  elements.  Currently,  those  products  are  sold 
under the general rules for the sale of insurance products although these products are 
very different in nature and represent higher risks for unprofessional buyers. There is 
market  evidence  of  a  very  high  number  of  complaints  regarding  the  sale  of  unit-
linked  insurance  products  in  many  Member  States.  There  is  evidence  about 
regulatory arbitrage existing due to differences in the regulation of the sale of PRIPs 
through  different  sales  channels.  The  potential  consumer  detriment  stemming  from 
the sale of unsuitable unit-linked life insurance products could be estimated to be a 
maximum  of  €1.1  trillion  for  EU  27.  Importantly,  in  the  insurance  market,  due  to 
costs  of  exit  and  higher  costs  of  products  -  unsuitable  advice  can  lead  to  investors 
paying  more  in  fees  and  being  locked  into  products  with  penalties  for  leaving  that 
were  not  understood  well  enough  by  the  investor  when  making  the  investment.  Of 
course, many factors impact on actual detriment for consumers, and sales advice is 
only one factor. However evidence suggest that advice is crucial in retail markets of 
financial products. Therefore, it appears that advice is a key element. Given the size 
of  this  market  the  mis-selling  cases  could  equate  to  a  large  potential  impact  on 
consumer welfare. In the absence of EU rules, regulators have responded by asking 
for increased cost transparency or, where their action captures complex products in 
general, providing guidance on pre-contractual disclosure or calling for a moratorium 
on the sale of such products. 

3. 

ANALYSIS OF SUBSIDIARITY AND PROPORTIONALITY 

Member States acting on their own would not be able to address at national level the 
problems  of  ineffectiveness  due  to  different  regimes  for  direct  writers  and 
intermediaries  across  the  EU,  non-harmonised  standards  of  advice  and  consumer 
protection  and  differences  in  qualification  requirements.  Moreover,  the  revision  of 
the existing Directive aims to improve consumer mobility, to facilitate cross-border 
trade  and  to  ensure  a  level  playing  field  for  all  market  players  by  aligning  the 
regulatory  standards  in  different  financial  services  sectors  (i.e.  aligning  IMD  with 
MiFID rules on sales of insurance policies with investment elements). 

About  95%  of  registered  insurance  intermediaries  in  the  EU  are  micro  enterprises 
and SMEs (as defined by other EU Directives). Therefore, a proportionality approach 
needs to be ensured when introducing aligning IMD with MiFID. 

1.  The  sellers  of  simple  insurance  products  who  sell  insurance  products  on  an 
ancillary basis (such as car rentals, travel agents) and the after-sales services (such as 
loss  adjusters  and  claims  managers)  will  go  through  a  simplified  notification 
procedure instead of registration with the competent authorities. 

2.  There  will  be  a  general  proportionality  rule  applicable  to  all  provisions  which 
states  that,  since  the  Directive  is  a  minimum  harmonisation  instrument,  Member 
States should impose requirements in a proportionate manner taking into account the 

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complexity  of  the  products  sold.  This  would  equally  apply  to  EIOPA  when  it 
develops Level 2 measures on professional qualification requirements. 

3. MiFID rules pertaining to investor protection (such as the ban on commissions for 
independent advice, mitigation of conflicts of interest, suitability and appropriateness 
test)  will  be  taken  over  in  IMD2  to  ensure  a  level  playing  field  between  the  sales 
practices  of  all  PRIPs  products  in  the  investment  and  insurance  fields.  IMD2  and 
Solvency  II  will  contain  organisational  rules  (registration,  notification,  rules  on 
internal  audit,  risk  management,  etc.,  –  similar  to  those  contained  in  MiFID)  for 
insurance intermediaries and direct writers which will ensure equally high standards - 
sometimes  higher  -  in  this  regard  as  MiFID.  As  these  rules  take  organisational 
features  of  insurance  intermediation  and  insurance  into  account,  the  administrative 
burden  is  significantly  less  than  using  full  MiFID  rules  written  for  the  investment 
sector.  The  countries  using  MiFID  rules  in  full  (NL,  IT,  UK)  in  fact  apply  a 
proportionality  approach  to  make  the  rules  useful  and  suitable  for  insurance 
intermediaries. 

4. 

COMPARISON OF POLICY OPTIONS 

Scope: The preferred policy option is to define more precisely the activities that are 
within  the  scope  of  the  IMD.  This  means  maintaining  the  flexibility  for  Member 
States  to  set  the  widest  possible  scope  but  allowing  some  exceptions  to  ensure 
proportional treatment (to exempt sales of insurance complementary to the supply of 
goods; and to exempt large risks insurance and professional buyers from conduct of 
business  rules).  This  includes  also  an  introduction  of  simplified  declaration 
requirements for actors in the insurance value chain (sellers of insurance products on 
ancillary basis such as travel agents, car rentals and after sales players such as loss 
adjusters,  claim  handlers).  This  already  has  beneficial  impact  on  consumers,  while 
the  impact  on  market  players  selling  on  an  ancillary  basis  would  only  be  small  in 
terms of costs. This option substantially reduces the negative impact on direct sellers 
and  intermediaries  in  terms  of  competition,  while  still  remaining  effective  in 
achieving the pursued objectives. 

Conflict  of  interest:  There  are  two  preferred  options:  to  introduce  a  European 
Business Card standard disclosure format for all the sellers of insurance products and 
to  introduce  at  the  same  time  a  MiFID  style  regime  (conduct  of  business  rules  as 
contained in articles 23-25 of MiFID II) for the sellers of life insurance products with 
investment  elements.  These  options  trigger  improved  consumer  protection  by 
prevention  (European  Business  Card  and  disclosure  of  remuneration)  and  possible 
management and mitigation of conflicts of interests (MiFID-style solutions). At the 
same time these options are cost efficient as they allow for a proportionate approach 
depending on the complexity and the costs of the products sold. 

Advice: There are two preferred options related to advice: it would be not costly to 
introduce  a  definition  for  advice  in  the  Directive.  This  option  will  enable  the 
consumer  to  know  as  to  whether  he  receives  a  personalised  advice  or  not  when 
purchasing  a  product.  The  other  preferred  option  is  to  introduce  a  MiFID-style 
suitability test and a ban on commission for independent advice for the sales of the 

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most  complex  products.  This  will  prevent  consumer  detriment  that  might  arise  in 
cases of inappropriate selling of those products.  

As for the problem of low quality advice, the preferred option is to ensure that the 
professional qualification of the seller of the insurance product is proportionate to the 
complexity  of  the  products  that  he  offers,  for  instance  sellers  of  complex  life 
insurance products should receive special training about the features of the products 
that they are offering. Due to the market structures and Member States competencies 
related  to  professional  qualification  requirements,  this  should  be  combined  with  a 
'soft law' approach. 

Cross-border trade: The preferred option is to introduce FOS and FOE definitions 
and a mutual recognition system, as well as a simpler notification process for those 
insurance intermediaries who want to sell products on a cross-border basis, as well as 
to  create  a  centralised  registration  system  where  consumers  can  find  information 
about  all  sellers  of  insurance  products  which  exist  in  the  Member  States.  These 
options  are  relatively  cost  efficient  and  would  lead  to  important  consumer  benefits 
linked  to  having  more  information  and  a  wider  range  of  choice  (improved 
competition). 

Sanctions:  The  preferred  option  is  to  introduce  a  general  sanction  framework  by 
establishing harmonised minimum rules which are dissuasive enough to significantly 
reduce  the  number  of  infringements.  This  option  has  been  identified  as  being  the 
most  cost-effective  by  several  impact  assessments  of  similar  legislative  initiatives, 
such as MiFID and PRIPs. EIOPA is also largely in favour of this approach. It should 
also  be  noted  that  a  large  number  of  potential  offenders  might  be  cross-border 
operators with very considerable turnovers, for whom a sanction of a 6 000 EUR for 
being an unregistered insurance intermediary (e.g. Spain) will not have a dissuasive 
effect. 

5. 

OBJECTIVES OF EU INITIATIVE  

The revision of IMD1 seeks to improve regulation in the retail insurance market in 
an efficient manner. It aims at ensuring a level-playing field between all participants 
involved  in  the  selling  of  insurance  products  and  at  strengthening  policyholder 
protection. 

6. 

ASSESSMENT OF IMPACTS AND COSTS 

All analysed policy options will result in Member States incurring compliance costs 
in terms of developing and/or incorporating rules into national law. According to a 
recent study, the costs of developing and/or incorporating rules into national law are 
low to moderate. As for administrative costs, since this initiative would by definition 
seek to require the application of new selling rules and in some Member States the 
provision of new information to retail customers, this would impose one-off costs on 
all distributors and manufacturers. On-going costs are also likely to occur. As for the 
extension  of  scope,  this  would  have  a  marginal  or  no  impact  on  direct  writers  and 
other  market  players.  As  far  as  distribution  of  PRIPs  insurances  is  concerned,  it 
should be noted that an estimation of the impacts at level 1 for an initiative such as 

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this  is  necessarily  going  to  be  rather  approximate;  more  accurate  estimations  will 
only be possible once analysis of possible level 2 measures has been undertaken. The 
estimate  of  administrative  burden  on  the  basis  of  the  PWC  study  and  industry 
statistics,  adjusted  by  Commission  services,  are  around  617.000.000  EUR  for  the 
first year of application of IMD2, which represents 0,06% of the total GWP for 2009 
and  will  result,  in  view  of  the  large  number  of  undertakings  affected  (about  1 
million),  in  a  relatively  moderate  cost  on  an  average  of  about  730  euro  per 
undertaking.  Those  costs  will  not  be  distributed  between  all  undertakings  in  an 
equal  manner  –  those  undertakings  selling  PRIPs  insurances  will  be  affected  more 
than those who only sell general insurance products. 

7. 

ESTIMATION OF BENEFITS 

7.1. 

For consumers and society 

By  introducing  improved  and  harmonised  advice  standards,  consumers  will  gain 
benefits  through  an  improved  comparability  of  offers,  including  across  different 
distribution  channels.  This  is  likely  to  lead  to  an  improved  understanding  by 
consumers  of  the  services  and  products  on  offer.  As  a  result,  consumers  will  be 
inclined  to  compare  offers  and  shop  around  for  products  and  deals  better  suited  to 
their needs. This reduces the cost/price paid by the consumer.  

The  consumer  needs  to  buy  insurance  policies  which  fit  his  needs  and  financial 
situation.  Otherwise,  there  is  a  high  risk  of  an  early  withdrawal  on  the  unsuitable 
policy  and  consumer  dissatisfaction.  This  means  that  if  a  consumer  cancels  his/her 
insurance  contract  earlier,  he  or  she  will  lose  all  accumulated  benefits  and  pay 
around  8%  cancellation  fees.  There  may  also  be  some  unfavourable  taxation 
consequences  for  the  consumer  following  a  cancellation  of  a  life  insurance  policy 
(for example if taxation has to be levied on any surrender value of the policy). For 
instance,  for  the  market  of  one  type  of  life  insurance  products,  variable  annuities 
statistics suggests that in about 25% of cases consumers withdraw from the contracts 
before they mature (level of 'defaults'). This could be linked to various factors, inter 
alia inappropriate advice on the choice of the product. The benefits to consumers and 
society  as  a  whole  from  the  introduction  of  high  and  harmonised  advice  standards 
come through a reduction in early withdrawals (reduction in defaults).  

7.2. 

For sellers of insurance products 

The  main  benefits  for  insurance  intermediaries  and  insurance  companies  will  be  in 
the  form  of  greater  business  opportunities.  These  would  stem  from  lower  costs  of 
operating cross-border and higher consumer confidence and therefore demand. This 
should increase competition between sellers. Similar impacts could be expected from 
policy options that encourage insurance intermediaries’ cross-border activity.  

With regards to the effect of improved advice standards, market players will save on 
some additional costs linked to defaults. These include costs linked to re-calculations 
and  calibrations  of  risk  management  measures  by  insurers,  which  must  manage  a 
wide range of risks under a long-time investment perspective. Finally, market actors 
should also benefit from enhanced financial market stability. 

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7.3. 

For Member States 

Insurance  plays  an  important  social  role  since  it  covers  risks  which  are  difficult  or 
impossible to be faced by citizens under normal circumstances. Member States might 
face  lower  costs  and  thus  benefits  because  reduced  sales  of  unsuitable  insurance 
products leading to earlier cancelation of the policy would mean lower costs in terms 
of providing assistance for consumers who are unable to absorb losses of their assets 
and  increased  expenses  incurred  through  mis-sales  in  insurance  policies  (e.g.  life 
insurance, unemployment insurance, home insurance, medical insurance).  

8. 

MONITORING AND EVALUATION 

In  order  to  evaluate  whether  the  preferred  policy  options  have  achieved  their 
objectives,  the  Commission  services  envisage  to  work  closely  with  EIOPA, 
consumer  groups  (e.g.  FSUG),  main  stakeholders  and  Member  States.  An  ex-post 
evaluation  is  to  be  performed  five  years  after  the  adoption  of  the  revision  of  the 
Directive. 

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