#LuLex – IDD: State of play of compliance with conduct of business rules by life insurance companies (Information note 23/5 of the Commissariat aux Assurances)

In November 2022, the Commissariat aux Assurances (CAA) sent a qualitative questionnaire to life insurance companies to assess compliance with the IDD conduct of business rules and to make companies aware of the CAA’s expectations in this regard. The results of this assessment were presented by the CAA in its information note 23/5 of 21 March 2023.

This note contains useful reminders of the IDD rules, but also introduces some clarifications or positions that were not yet, as such, included in the IDD implementation texts and in particular:

– the CAA’s recommendation, in the context of product design (or revision), to use negative target markets (a formal obligation exists only for positive target markets);

– the need, in the context of product testing, to also take into account the customer’s point of view and in particular EIOPA’s recommendations with regard to “value for money”;

– in the area of remuneration of the distribution :

business introducers can only obtain a one-off (and not recurrent) remuneration for their act of introduction (as also provided for by the regulators in e.g. Belgium or France);
retrocessions by funds are possible, if there are sufficient safe-guards and governance rules.

1. Insurance product validation process (POG)

The CAA notes that most life insurance companies report having a policy or group policy on the insurance product validation process. However, the content of these policies is not always adequate, particularly with regard to the target market, product testing, product monitoring and review, distribution channels and conflicts of interest.

2. Target market

The CAA notes that while the majority of life insurance companies determine a positive target market for their insurance products, the criteria used are not sufficiently granular. The customer’s residence and needs are often the only criteria used, while the customer’s loss-bearing capacity, professional situation or income are only taken into account by half of the life insurance companies. The CAA recalls that the positive target market is mandatory for each product marketed and must be defined at a sufficient level of granularity, taking into account the characteristics, risk profile, complexity and nature of the insurance product.

A limited number of life insurance companies determine a negative target market. While this is (unlike the positive target market) not a requirement, the CAA strongly recommends its use to avoid marketing to unsuitable market segments.

3. Product testing

The CAA notes that few tests of insurance products are carried out before they are introduced to the market or significantly adapted, or in the event of a significant change in the target market. Insurance product testing is often carried out in the interest of the life insurance undertaking rather than in the interest of the policyholder.

The CAA calls on companies to strengthen their testing process by taking into account value for money criteria:
– by conducting scenario analyses;
– by monitoring the changing needs of the target market during the product life cycle;
– by testing products in panels;
– by comparing the historical/expected average performance of the contract with the fees and costs incurred by the policyholder.

4. Monitoring and review of products

The CAA also recalls the need for the company to put in place processes for regular monitoring and review of its products.

In this context, elements such as customer complaints or comments, feedback from distributors, or monitoring of the redemption rate (average holding period of a product) should be taken into account.

5. Conflits d’intérêts et rémunérations

En ce qui concerne les politiques en matière de conflits d’intérêts, le CAA attire l’attention sur les points suivants :

With regard to conflict of interest policies, the CAA draws attention to the following:

– policies that exist at group level, must be adapted at the local level, taking into account the specific conflicts of interest in the design and distribution of Luxembourg IBIPs;

– the obligation to have a register of potential and/or actual conflicts of interest;

– the need to take into account the risks of conflicts of interest specific to companies that only offer underlying investments from its parent company or group.

With regard to remuneration of the distribution, the CAA is critical of:

– remuneration systems for employees or distributors taking into account an increasing percentage according to the volume of sales, the type of contracts sold, the type of underlying chosen by the policyholder or the investment strategy;

– the remuneration of business introducers by variable and multiannual payments, whereas the mission of the introducer is limited to putting people in touch with each other (one-off act);

– retrocessions by third parties (bank, financial manager, etc.) on investment funds, if they are not accompanied by an adequate and formalised analysis of the management of conflicts of interest and the obligation to always act in the best interest of the client.