23 March 2017

Commercial Risk Europe: Europe’s new regime on insurance distribution: Germany adopts controversial approach to implementation

Directive (EU) 2016/97 of the European Parliament and of the Council on insurance distribution sets a new European legal framework for insurance distribution. The IDD has to be implemented in the member states by 23 February 2018, and first steps are being taken in this direction.

On 21 November 2016, the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) published a first draft of an IDD Implementation Act which was subject to much discussion. Nevertheless, on 18 January 2017, the German Cabinet adapted the draft with basically only one significant change.

The implementation mainly affects the German Commercial Code (Gewerbeordnung) which is the law governing insurance intermediation but also the German Insurance Supervisory Act (Versicherungsaufsichtsgesetz) and the Insurance Contract Act (Versicherungsvertragsgesetz) to the extent there is insurance distribution by insurers.

In Germany there will continue to be a differentiation between two types of insurance intermediaries: insurance agents (Versicherungsvertreter), acting on the side of the insurer, and insurance brokers (Versicherungsmakler), acting on the side of the insured. In addition to that, a new concept of honorary insurance consultants (Honorar-Versicherungsberater) is implemented. Authorisation may only be granted as either insurance agent, insurance broker or honorary insurance consultant.

The issue of remuneration is subject to major discussion: pursuant to the draft IDD Implementation Act, insurance intermediaries may obtain remuneration for their intermediation services only from the insurers. Only for consultation services (i.e. not intermediation services) provided to business customers, insurance brokers may obtain a fee from such business customers themselves.

On the other hand, honorary insurance consultants may only receive remuneration from their customers and must not obtain an economic advantage/contribution from insurers. In case the honorary insurance consultant mediates insurance coverage that includes contributions, he must immediately ensure that the contributions are paid to the insured.

Criticisms expressed are, for example, based on the argument that the draft goes beyond the scope of the Directive, which allows services for a fee as long as this is agreed upon with the customer in advance.

Insurance brokers see themselves at a considerable disadvantage, arguing that this would create the impression that an assignment to the insured’s or insurer’s side depends on the nature of payment (fee or commission) and that only honorary insurance consultants which are paid by the insureds act on their side – an assumption entirely in contrast with the concept of insurance brokers under German law so far.

Further, an exemption to this principle was demanded at least for the commercial/industrial sector. Here, it is quite common that insurance brokers are paid by the customer and net premiums offered.

Comments to the Draft Implementation Act were invited until 12 December 2016. In total, three federal ministries were involved in reviewing the statements before submitting the draft to the federal government. The German Cabinet adopted the draft with some changes on 18 January 2017 and afterwards submitted it to the federal council. The first reading with the federal council is scheduled for end of March 2017. The final decision will come from the German parliament, which is expected to decide on the Implementation Act at the beginning of July 2017.

Considering the major discussions and comprehensive statements, it is still possible that there will be certain amendments to the draft in the further legislative process. However, it is hard to predict what the final outcome will be. Taking into account that no expert expected there to be a ban on special compensations and this now being provided for, it is hard to imagine that this will be withdrawn completely again.

Also, an updated draft will most likely still not allow for complete flexibility in relation to services against fee. However, the exemption for the industry sector is an expected adjustment following major criticism. Further, it remains to be seen which adaptions will be made to the Insurance Mediation Regulation (Versicherungsvermittlerverordnung), which further specifies the legal framework for insurance intermediaries (e.g. details on registration and mandatory insurance coverage).

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