The European Insurance & Occupational Pensions Authority (EIOPA) Preparatory Guidelines on Product Oversight and Governance arrangements by insurance undertakings and insurance distributors (the “Preparatory Guidelines”) were published on 13 April 2016. They provide clarification on EIOPA’s expectations regarding the arrangements which manufacturers and distributors should establish and maintain in order to be compliant with the formal requirements of the Insurance Distribution Directive (IDD). The IDD must be transposed into Irish law by 23 February 2018.

Implications

The Central Bank of Ireland (the “Central Bank”) has confirmed that the Preparatory Guidelines apply from 3 January 2017. The Preparatory Guidelines provide that it is not intended that national supervisors would take enforcement action on becoming aware of practices that are not fully in line with the Preparatory Guidelines but that national supervisors should discuss with market participants possible ways for appropriate remedial action. In such circumstances, insurers and insurance intermediaries can expect engagement from the Central Bank. Therefore, (re)insurers should be reviewing their products and distribution strategies having regard to the requirements of the Preparatory Guidelines and the IDD. 

Overview

Chapter 1 of the Preparatory Guidelines is aimed at insurance undertakings and insurance intermediaries who manufacture life and/or non-life products for sale to customers (the “Manufacturers”). The primary obligation of Manufacturers is to establish and implement product oversight and governance arrangements (the “POG Arrangements”) that set out appropriate measures and procedures aimed at designing, monitoring, reviewing and distributing products for customers. The board of directors of Manufacturers are required to endorse and be ultimately responsible for the establishment, implementation, subsequent reviews and continued internal compliance with POG Arrangements. 

In addition, Chapter 1 sets out a number of obligations on the Manufacturers including: 

• identify the target market for which each insurance product is designed;
• align each product with the interests, objectives and characteristics of the identified target market;
• select appropriate distribution channels appropriate to the identified target market;
• ensure that relevant personnel involved in designing products possess the necessary skills; and
• regularly review the POG Arrangements to ensure that they are still valid and up-to-date.

The Preparatory Guidelines provide that Manufacturers must test products before bringing them to market or changes to an existing product are introduced, including if relevant, scenario analyses. A Manufacturer should not bring a product to the market if the results of the product testing are not aligned with the interests of the identified target market.

The Manufacturer is required to monitor on an ongoing basis that the product continues to be aligned with the interests of the target market. Should the Manufacturer identify circumstances which relate to the product or give rise to customer detriment, the Manufacturer is required to take appropriate action to mitigate the situation and prevent the re-occurrence of the detriment.

The Manufacturer is also required to provide information, including the details of the products to distributors, of an adequate standard, which is clear, precise and up-to-date and which should be sufficient to enable distributors to:

• understand and place the product properly on the target market, and
• identify the target market for which the product is designed and also to identify the group of customers for whom the product is considered likely not to meet their interests, objectives and characteristics. 

Chapter 2 of the Preparatory Guidelines addresses insurance distributors which distribute products they do not manufacture (the “Distributors”). Distributors are required to establish and implement product distribution arrangements which consider the products the Distributor intends to offer, review the product distribution arrangements and obtain all necessary information on the products from Manufacturers. The board of directors of the Distributor should endorse and be ultimately responsible for the establishment, implementation, reviews and continued internal compliance with the product distribution arrangements.

In addition, Chapter 2 sets out a number of obligations for Distributors which include the following:  

• obtain all necessary information from the Manufacturer on the insurance product, the product approval process and the target market to allow the Distributor understand the customers the product is designed for, as well as those groups of customers for which the product is not designed;
• ensure they do not act in a manner inconsistent with the Manufacturer’s specified distribution strategy and identified target market;
• regularly review the product distribution arrangements  to ensure that they are still valid and up to date; and
• inform the Manufacturer without undue delay if it becomes aware that a product is not aligned with the interests of a target market or other circumstances which increase the risk of customer detriment.

Conclusion

While EIOPA proposes to revisit the Preparatory Guidelines once the IDD transposition deadline has passed to assess whether a revision may be needed, it is likely that the content will remain broadly the same. Accordingly, insurers and insurance distributors should take the opportunity now to ensure that the Preparatory Guidelines are fully embedded in their business and compliance strategy. 

Contributed by: Naoise Harnett