Since last October 1, the IDD, the Insurance Distribution Directive, has been in force in Italy, representing for the insurance investment market what Mifid II stood for in terms of asset management, thereby representing a key step in the evolution of policy purchases with a view to transparency and investor protection. And more, it’s also a step forward in the process of creating new opportunities for those already operating in the insurance market and for the development of insurtech sectors thanks to the provisions regarding online benchmarking and advisory platforms.
Let’s have a look at what it foresees, what advantages it brings to customers and companies.
The IDD provisions
The Directive regulates the design and sale of insurance products both by insurance intermediaries and directly by insurance companies.
It sets forth the information to be provided to consumers prior to the conclusion of an insurance contract; it imposes specific rules of conduct and transparency on distributors; it clarifies the procedures and rules for cross-border activities and contains rules for the supervision and penalties for insurance distributors in the event of non-compliance with the provisions of the Directive.
The rules apply to the sale of all insurance products. However, tighter rules apply to distributors selling insurance products having an investment focus, such as unit-linked life insurance policies.
The new legislation also deals with the training of distributors, monitoring of compliance with the rules of conduct, the advisory model for placing insurance investment products, the incentive policy and conflicts of interest.
Who does it apply to? The Directive applies to those who distribute insurance and reinsurance products: agents, brokers and “bankinsurance” professionals, insurance companies, entities operating comparison websites when these allow the direct or indirect execution of an insurance policy, travel agencies and car rentals.
“One of the hallmarks of the Idd directive is to move the insurance distribution sector from a product-centered logic to a customer centered approach – explains Stella Aiello, head of Ania’s distribution service, in this interview with WSJ Italia – insurance intermediaries will face a radical change of approach: from the product to an understanding of the need.”
The transition from product-centric strategies (based on the product life cycle) to customer-centric strategies (based on the needs and life cycle of the person) is now the focus for many Companies, as well as insurtech startups, although the virtue of the Idd is to have boosted this approach through a new legal framework. An example is the Product Oversight Governance (Pog), which requires the construction of the product on the basis of a previously identified target market. As a result, products tailored to the needs and requirements of customers will be created avoiding a sort of “customer placement” within already existing slots.
This concept has been the focus of the Italian Insurance Supervisory Authority (Ivass) for some time now, both by issuing a series of regulations and raising awareness among professionals as to the need to comply with a series of new requirements and procedures, particularly in the area of POG. According to Ivass in a letter to professionals: “The aim is to ensure insurance products remain in line with the needs of the customers these were designed for. Companies are asked to define the target customers the products are intended for, since the design and market launch, and to consistently monitor such products to ensure their ongoing responsiveness to the interests of policyholders. Intermediaries are asked to verify whether the current processes are adequate for the exchange, with companies, of the necessary information on the products and reference markets for which they have been designed, planning any necessary adjustment” writes.
Benefits for customers
Insurance customer profile has changed a lot in recent years; there is a more widespread level of knowledge and substantial use of digital technologies, not only among Millennials, but in all age groups. Nowadays, a Company (as well as any other financial or non-financial service) is expected to provide its customers with attention, customization, simplicity, speed and efficiency. Many companies are already moving in this direction by leveraging mainly on the digital transformation. The IDD also embraces this approach and brings clear benefits for customers. In addition to an increased effort (also with the implementation of new digital tools) that insurance providers will have to make in terms of communication and intelligibility of information, the new concept of POG is a great achievement for the customer, let’s say a sort of protection.
In order to adapt to the new customer-centric model, the Companies will have to modify some key processes of their business model, perhaps reclassifying the product range according to different customer targets. The approach of the insurance intermediary will have to change.
PWC says: “Product Oversight Governance (POG) sets out new requirements on procedures, functions and strategies to be developed by companies to design and distribute products that:
- meet the requirements of joining one or more Target Markets;
- offer suitable services according to the customer’s needs.
Specifically, an obligation to adopt a design, management and monitoring process for each insurance product to be distributed through the appropriate distribution channels, is envisaged. According to PWC, the following diagram summarizes the new process.
Opportunities for Insurtech
Idd could represent a sound boost towards digital transformation and a new way of doing insurance and reinsurance.
Over the years, many Insurtech startups or B2B technological applications aimed at companies have been leveraging big data to customize their offer. After a first bewilderment, Companies have understood how better is the collaboration with startups to accelerate their digital transformation.
Traditional companies seem to need even more technological partners (which can be tech startups) first of all to comply with the new regulations: on the basis of what the IDD sets on POG, for example, the protection of the end customer starts from the moment of the design of an insurance solution, which must be in line and meet the interests of a given customer category, and lasts for the entire term of the agreement. In short, the tools must be digital and automated, to support the data gathering, analysis, assessment of customer needs and risk profile, drafting of proposals, signing of the contract, monitoring of the same, the exchange of information between company and dealers. These are solutions that can be developed by startups and other technology providers.
This is also an opportunity to make a virtue out of need, and to drive change and investment towards a pivot of business models and value propositions.
New technologies, from artificial intelligence to machine learning, from Big Data to Blockchain, are now able, in the different ways these can be developed, to lead insurance companies towards a new insurance paradigm, and embrace the path outlined by the IDD.
Technological startups have a great opportunity today to enter insurance market through the mainstream B2B gateway, developing solutions that can help insurance providers to get in order, improve service, regain consumer confidence and be even more efficient in offering new policies, such as micro-insurance; or to support the growth of insurance investment (unit-linked, multi-branch policies) that still captures subscribers.All rights reserved