How EIOPA Guidelines Regarding the EU’s Product Oversight and Governance Affect Insurers
The European Parliament, the Council of the European Union and the European Commission agreed on a proposal for revising the Insurance Mediation Directive on 30 June 2015. The revised directive will be called Insurance Distribution Directive (IDD) and will cover the sales activities of the insurance industry. Article 21a of the draft of the directive contains rules for controlling and monitoring insurance products, the so-called Product Oversight and Governance (POG) requirements. On 30 October 2015 the European Insurance and Occupational Pensions Authority (EIOPA) published a revised version of its proposed guidelines for the monitoring processes to help safeguard the interests of consumers.1 Each EU member state is now required to address the issue.
But how exactly do the POG requirements and the EIOPA guidelines affect product development? Will all the processes for every product being developed have to be changed entirely, or will it suffice to adjust current processes accordingly? Do the rules only apply to new contracts, or do they also affect ongoing ones?
Discussions on the legality of the guidelines, and the necessity of having them, are underway. The goal of the guidelines is to force companies to focus more on consumer protection issues. However, some see a problem that POG has its origins in capital market law, and the principles that seem reasonable and necessary in that legal area cannot easily be transferred to insurance products. For example, a consumer’s need for protection when purchasing a highly speculative investment product cannot be compared to the need for protection when buying homeowners insurance. POG treats both products in the same way - and therefore there is a risk of over-regulating this aspect of insurance. In addition, a possible consequence is that increased regulatory complexity for the insurer could result in higher premiums for consumers.
In practice, it will probably suffice to examine and adjust only aspects of insurance product development that are relevant for consumer protection.
Those in the industry should critically examine which of their insurance undertakings, as defined by EIOPA, will have to undergo the POG processes. It can be assumed that the rules will only be applied to new products because POG is supposed to be preventative.
The EIOPA has already announced that it will publish its final POG guidelines after the IDD Directive has been adopted.2
The POG guidelines contain recommendations across all different types of insurance products for establishing procedures to monitor and control the internal product development processes of companies. All types of insurance undertakings, and intermediaries that develop insurance products to be sold to consumers, are affected. The guidelines are divided into two chapters.
The first chapter of the guidelines is aimed at insurance undertakings, and the second chapter on intermediaries. I only focus on the first chapter, where the guidelines cover internal processes, structures and strategies aimed at creating products, bringing them to market, monitoring them and evaluating them. The rules establish internal product development procedures, thereby ensuring that the company’s responsibility for its products goes beyond the development process so that the entire distribution channel is covered. These guidelines are not meant to be a step towards an official product approval process but rather shift consumer protection to the beginning of the development process to prevent legal uncertainties and disputes, especially after market launch.3 As a result, the POG guidelines should not only guarantee the economic viability of a product, but also take consumer interests into account.
In particular insurance companies are required to initiate written product development rules that are approved by the management board and that ensure product control and product monitoring. The management board is also responsible for setting up and implementing these rules.
In conclusion the POG requirements only define process rules for product development, which should already go without saying for most companies. Even though the guidelines do not define anything new, they could lead to increased administrative burden for insurers. On the other hand, they increase the level of consumer protection by providing clarity regarding the scope and liability for the product during the development process.
- Consultation Paper on the proposal for Guidelines on product oversight & governance arrangements by insurance undertakings and insurance distributors, European Insurance and Occupational Pensions Authority.
- EIOPA consults on revised preparatory Guidelines on product oversight and governance, EIOPA newsletter 30 October 2015.
- Emanuel Lampert, EIOPA arbeitet an Leitlinien für Produktentwicklung, VersicherungsJournal.de, 31 March 2015.