Significant decisions remain regarding the Insurance Distribution Directive (IDD), which is due to be transposed into Luxembourg law in February 2018. (Read my last article on the IDD's new requirements for training). In this article I will address the regulatory framework for product oversight and governance (POG) requirements that this new directive brings, which is relevant to both manufacturers and distributors.
What are the POG requirements for insurance manufacturers?
The European Commission has issued a delegated regulation on POG requirements for insurance undertakings and distributors. It states that, to be considered a manufacturer, the entity must take on a decision-making role in the design and development of an insurance product. The regulation also provides criteria to determine if this decision-making role is met and specifies which activities are not related to the manufacturing of an insurance product.
The POG requirements for manufacturers also address the product approval process: the manufacturer must have a written policy describing the process for designing, monitoring, reviewing, and distributing insurance products, which also includes corrective actions for insurance products that are detrimental to customers. These measures have to be proportionate to the product's complexity, risks, nature, and scale.
The product approval process also involves identifying a target market. This must be done to a sufficiently granular level, taking into account the characteristics, risk profile, complexity, and nature of the product. Only products compatible with the needs, characteristics, and objectives of the customers in the target market are to be designed and brought to the market.
Product testing must also be carried out. The purpose of this is to assess if the product matches the identified target market's needs, objectives, and characteristics. (In contrast to product monitoring and product review, which aim to identify events that could materially affect the product's main features, risk, and guarantee).
Finally, manufacturers must select distribution channels. To this end, they must provide distributors with all relevant information on the product including its target market, a suggested distribution strategy, the product characteristics as well as its risks, costs, and potential conflicts of interest that would lead to the detriment of the customer.
What are the POG requirements for insurance distributors?
For distributors, who are regulated less than manufacturers, the EC's regulation uses the term POG arrangements.
The main obligation consists in having product distribution arrangements in place, arrangements with the appropriate measures and procedures for obtaining information from the manufacturer on the products to be distributed. The complexity level and risks, as well as the nature, scale, and complexity of the distributor's business thus have to be taken into account.
Product distribution has to be in line with the manufacturer's distribution strategy and target market. Thus the distributor must exchange the relevant product information with the manufacturer and, upon request, be able to provide the relevant information on sales and product reviews.
Since the POG requirements/arrangements are important part of the IDD, their implementation is crucial for manufacturers and distributors. Other regulations in the insurance sector seem to overshadow the IDD, but it ought not to be neglected.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.