[INSURANCE LAW] New ACPR recommendation provides a framework for insurance distribution
The new recommendation issued by the ACPR on July 17, 2023(1) concerns the governance and supervision of insurance products, as well as remuneration policy and the management of conflicts of interest, and will be applicable from January 1, 2024.
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The Autorité de Contrôle Prudentiel et de Résolution (ACPR), the French supervisory authority, has issued a reminder of the main requirements for distributors of insurance contracts and designers of insurance products, along with a list of best practices.
The Supervisor specifies his requirements in terms of analysis and monitoring methods, using analysis grids and objective indicators, as well as the implementation of tests and a review mechanism for product governance.
The ACPR also sets out its expectations in terms of the management of direct distributors by designers and wholesale brokers, prescribing a system for selecting distributors and the obligation to provide sufficient information on the product to their distribution networks.
Lastly, the new recommendation describes the obligations applicable to remuneration policies and the management of conflicts of interest, and specifies the practices to be proscribed in this area.
1) A necessary reminder in the wake of observed abuses
This new recommendation from the ACPR is in line with the findings of the Supervisor’s conference on insurance distribution held on December 5, 2022(2) and its publication last April(3). 7 years after the entry into force of the Insurance Distribution Directive (IDD)(4), which provided a framework for this activity, specifying expectations in terms of product governance and supervision, information and advice, remuneration policy and conflicts of interest, the ACPR is still finding numerous shortcomings in its inspections of distributors, to the detriment of customer protection.
2) A broad scope of application
The distributors concerned are insurance companies governed by the French Insurance Code (Code des assurances), mutual insurance companies or unions governed by Book II of the French Mutual Code (Code de la mutualité), provident institutions or unions governed by the French Social Security Code (Code de la Sécurité sociale), supplementary professional retirement organizations (organismes de retraite professionnelle supplémentaire), and insurance intermediaries, including when these insurance companies or insurance intermediaries operate in France under the freedom to provide services or the freedom of establishment.
This recommendation now sets out the Supervisor’s precise expectations in this area, which will serve, from a practical point of view, as checkpoints to be adopted by distributors as part of their internal control system.
3) Requirements adapted to each type of insurance product
In its list of recommended best practices, the ACPR has drawn a distinction between the requirements for capitalization and life insurance products with a surrender or transfer value and invested wholly or partly in units of account, which are dealt with in the first section, and those for other insurance products, which are dealt with in the second section. This difference in treatment is explained by a desire to adapt and reinforce distributors’ obligations in view of the higher stakes for customers represented by capitalization and life insurance products.
4) Practical application procedures
Requirements for capitalization and life insurance products
Product governance via an analysis grid and objective indicators
The recommendation sets out in detail the ACPR’s requirements in terms of monitoring and tools.
Accordingly, distributors must set up an analysis grid and determine objective product monitoring criteria. According to the ACPR, the purpose of these tools is to ensure that the product is adapted to the target market, right from the design stage and then throughout its life cycle, by measuring product complexity and verifying consistency between the granularity of the target market and the level of complexity of the product thus determined.
The ACPR lists the criteria to be used to define the target market:
- The target customer’s knowledge and experience,
- Personal and financial situation,
- Risk tolerance and capacity for loss,
- Objectives and needs.
These criteria must be clearly defined.
The ACPR admits the possibility of segmenting the market into sub-groups of customers with distinct profiles, provided this does not exceed a reasonable number, i.e. 3 to 6 sub-groups depending on the complexity and management methods proposed.
Product designers will have to set up tests to ensure that product costs are proportionate to the expected benefits for the identified target market, and that these costs are identified and justified in coherence with the expenses actually incurred for the design, management and distribution of the product.
Product monitoring throughout its life cycle
Designers are subject to a wide range of obligations, since they must:
- Monitor products, identifying events that may affect the product’s main characteristics, risk coverage or guarantees,
- Assess the product’s consistency with the needs, objectives and characteristics of each segment of the identified target market,
- Examine the performance of investment vehicles by comparing them with the net performance of similar vehicles on the market,
- Take appropriate action in the event of circumstances that could have a negative impact on the target market.
In the event of product evolution, the analysis grid and objective indicators will enable distributors to justify the planned adaptations and determine whether or not the modification is significant.
An effective distribution strategy
In terms of distribution policy, the ACPR directly targets designers and wholesale brokers, who are expressly referred to as such (via a footnote) to define professionals in the insurance sector who run a distribution network.
They are subject to several obligations:
a) Implementing a distribution strategy that is consistent with the target market and each of its possible segments, while also respecting the interests of members and policyholders.
b) Periodic verification of the distribution strategy, to ensure that product distribution is in line with the defined target market. The recommendation suggests that distributors be audited.
The ACPR provides no further details, apart from the notion of “proportionate measures” to carry out this verification. It is therefore necessary to refer to the ACPR publication of April 2023(2) to get an idea of the Supervisor’s expectations in this area, which cover the analysis of underwriting files, the analysis of tapped sales calls, the verification of the reasons for complaints, the implementation of a follow-up of indicators on the lapse rate, the rate of complaints… concerning underwriting carried out by direct brokers, the gathering of alerts from broker-distributors if the latter observe “unfavorable repercussions for customers”.
Note: it is unfortunate that the recommendation does not expressly state what is expected of direct distributors in terms of periodic controls, since as independent professionals, they would be entitled to refuse requests for controls or audits from wholesale brokers, as they may consider them disproportionate to the aim pursued, or even intrusive.
To avoid this pitfall, it is important for all parties to include in the distribution contract an exhaustive clause on the terms and conditions of the controls (permanent and periodic) that designers and wholesale brokers will carry out as part of the management of their distribution networks, in particular by defining the terms and conditions of the control actions, their frequency, their scope, and so on.
c) Setting up a system for selecting distributors, including the collection of information and objective criteria, to ensure that they are capable of distributing the product in line with the distribution strategy.
d) Providing distributors with a list of information enabling them to check that their customers fall within the defined target market.
The ACPR is careful to specify that “the transmission of this information does not exempt the distributor from its legal and regulatory obligations, in particular the duty to provide advice“.
e) The integration into the internal control system of the best practices resulting from the recommendation, particularly with regard to the distribution selection system.
f) The implementation of remedial action in the event of an unsuitable distribution strategy, leading to a situation where distribution is contrary to customers’ interests.
The ACPR cites several possibilities for remedial action, such as eliminating distribution channels, terminating agreements with distributors at the root of such situations, modifying distributor remuneration structures or even ceasing product marketing.
Conflict of interest and remuneration policy
The ACPR clearly states that no remuneration policy, whatever its form, is likely to have a negative effect on the quality of service provided, by encouraging distributors to offer a product, operation or allocation because of its more advantageous remuneration, to the detriment of the policyholder or member.
Thus, for example, variable remuneration based solely on quantitative commercial data (sales volumes) is likely to have a negative effect on the quality of service provided. Similarly, a policy of appraisal and evaluation of sales staff which could affect their obligation to act in the best interests of the policyholder or member should be avoided.
It should be noted that the Supervisor requires designers to include these recommendations in all distribution agreements, and by January 1, 2025 at the latest for distribution agreements already concluded.
The ACPR is reinforcing the controls to be carried out as part of internal control, since the Supervisor is requiring the inclusion of control points on compliance with remuneration policy, in particular by checking the conformity of distribution operations with regard to customer interests.
Note on group life insurance products with surrender or transfer values:
The situation in which the distributor markets a product that it has underwritten for the benefit of its customers presents a risk of conflict of interest, requiring the distributor to take concrete action, for example:
- Justifying that the interests of members are taken into account when contractual changes are made,
- Proposing the transformation of the contract into a strictly identical contract underwritten by another structure with the same insurer,
- Setting up a governance system that includes representation of the customer’s interests, independent of those of the insurer and distributor.
If it is not possible to implement these actions, then the distributor must clearly and exhaustively inform members of the risk of conflict of interest and its implications.
Similar requirements for other insurance products
The Supervisor’s best practices are based on those listed for capitalization and life insurance products in terms of product governance, distribution strategy, remuneration policy and management of conflicts of interest, and internal control procedures, but they have been adapted to this type of insurance product by providing concrete examples.
Product governance: monitoring insurance products throughout their life cycle
In terms of product governance, the introduction of an analysis grid with objective criteria is required only for product adaptations, and not from the design stage onwards.
Designers must be able to justify whether the modifications implemented are significant. This applies to the following modifications:
- The addition, modification or deletion of a warranty, a warranty condition or a warranty exclusion;
- Changes to product pricing, loyalty guarantees and contractual terms and conditions for calculating and allocating profit-sharing;
- Changes relating to the scope of compensation (including deductibles and ceilings);
- The addition, modification or removal of a lapse in coverage;
- Rate changes that do not result from an indexation clause.
Tests and monitoring must also be carried out throughout the product cycle, to ensure that the product continues to be of interest to the customer.
Distribution strategy and selection of direct distributors based on compliance criteria
With regard to distribution strategy, it should be noted that the mechanism used by designers and wholesale brokers to select distributors must include a mechanism for verifying that the distributor has the means to offer insurance products in full compliance. This means, for example, that the distributor must be able to record and store calls in the event of telephone canvassing, if the distribution strategy provides for the use of this method of canvassing; it must also have a process for monitoring and handling complaints.
The specificity of loan insurance
Lastly, in terms of creditor insurance, the requirements of the new recommendation particularly concern insurance products offered when a loan is set up, and which are often a prerequisite for obtaining credit. The Supervisor is therefore particularly concerned by the sometimes anti-competitive practices of certain financial establishments in this sector.
The ACPR therefore expressly recommends that financial or commercial incentives should no longer be offered as a condition of access to preferential credit rates, to encourage the purchase of loan insurance produced by an insurance entity of the group to which the distributor belongs.
Furthermore, distributors must be careful not to make a lower loan rate conditional on the purchase of other group insurance products, without first ensuring that the latter are consistent with the requirements and needs of the potential subscriber.
As anticipated when the Supervisor’s article was published last April(3), distribution network designers and operators will now be at the forefront of this compliance process, and thus of the regulation of the insurance distribution market.
Once the list of requirements has been drawn up and the roles distributed, distribution players will have to bring their distribution policies into line by January 1, 2024.
(1) Recommendation 2023-R-01 of July 17, 2023 on the implementation of certain provisions stemming from Directive (EU) 2016/97 on insurance distribution.
(2) https://acpr.banque-france.fr/sites/default/files/media/2022/12/06/2022_presentations_apres-midi_session_3.pdf ; ACPR Conference of December 5, 2022
(3) “Les obligations de vigilance des professionnels du secteur assurantiel animant un réseau de distribution dans le suivi de la commercialisation des contrats” publication of April 2023, Revue de l’ACPR
(4) DIRECTIVE (EU) 2016/97 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of January 20, 2016 on insurance distribution