With a view to a revision of the Insurance Distribution Directive (IDD), which is expected to be undertaken by 2023 (the European Insurance and Occupational Pensions Authority (EIOPA) is due to submit its report by the end of 2021, and the European Commission in 2022), discussions and work have already begun at a European level to assess the implementation of rules resulting from the IDD and to clarify some aspects of these laws, where needed. Among the aspects of the IDD under review, the remuneration schemes of insurance distributors will play a significant part in the discussions.
Several countries (including Denmark, Finland and Norway), as well as consumer organisations are campaigning for a general ban on commission arrangements which are deemed to be contrary to the client’s interests, in favour of remuneration schemes based exclusively on fees.
French remuneration schemes, which are mainly based on commission could be under threat. With the aim of preserving the French system, the French Ministry of Economy and Finance as well as the French Insurance Supervisory Authority (the Autorité de Contrôle Prudentiel et de Résolution – the ACPR) intend to enhance the transparency of remuneration structures. This is considered to be one of the main areas of scrutiny in 2021 for the French insurance sector.
As commission is included in insurance premium paid by the client without any obligation to disclose its amount, the ACPR has reminded the industry that such remuneration must correspond to the price of the service and that customers must be clearly informed in this respect.
According to the ACPR, concerns about remuneration and price relate to the whole value chain – from the insurer through the different distributors and intermediaries involved. Insurers can also act as distributors and therefore can also receive commissions. Asset managers will also be subject to the increased scrutiny since they receive remuneration through the various costs charged with respect to each underlying security and/or asset in unit-linked policies, and they pay “kick-back” commissions to the insurers (having selected the underlying securities and/or assets as units in the policies) and to the distributors (having marketed the underlying securities and/or assets).
Certain remuneration arrangements used in the French market are particularly under scrutiny by the ACPR since they can conflict with the duty to act in accordance with the best interests of customers. These are:
- Advance commission (précompte). Particularly used in individual health insurance, advance is paid by the insurer to the distributor upon the conclusion of the policy (e.g. a 40% commission paid the first year instead of a 10% commission paid each year). This incentive, historically used by insurers to launch a new product with distributors, may create conflicts of interest insofar as the distributor may be enticed to recommend a policy that is more profitable for the distributor itself without necessarily meeting the customer’s needs. During its inspections, the ACPR has often identified such commission arrangements as part of poor commercial practices.
- Sales challenges (challenges commerciaux). Such incentive schemes are intended to boost sales by setting up competitions and rewarding sales teams when targets are achieved (with bonuses, gift vouchers or other benefits).
- Significant and unjustified differences between remuneration schemes provided for Euro fund policies and those for unit-linked policies. In the current context of low/ negative rates, life insurers can seek to direct savings toward unit-linked policies rather than Euro fund policies.
Insurers and intermediaries must accordingly review their remuneration schemes (which may vary depending on the products they offer and the distribution chain involved) as well as their conflict of interest policies, to identify those raising potential risks (e.g. in terms of compliance, transparency or conflicts of interest) and change or enhance their schemes (e.g. adding qualitative criteria such as customer satisfaction, duty to inform and advise, level of complaints, level of termination).