The German legislator finally approved the legislation implementing the European Directive on Insurance Distribution (IDD) on July 7, 2017. The law will enter into force on February 23, 2018. The following article will give you a brief outline of how the IDD will apply in Germany in light of particular German regulations.
(i) Germany holds on to its “prohibition to pass on insurance provisions” (the so-called Provisionsabgabeverbot, established in 1934). It remains the only country in the EU which applies such a regulation. In essence, the rule states that insurance intermediaries are not allowed to transfer to policyholders any part of their commission – which they receive from the insurance companies for concluding a contract – to the policyholders. Although German courts have questioned the validity of the prohibition several times during the last six years, the legislator has maintained the principle in adopting a new article in its Insurance Supervision Act (cf. Art. 48b VAG) and changing the current article for insurance intermediaries in its Trade and Industry Code (cf. Art. 34d GewO) as part of the implementation of the IDD. The legislator’s principal motive for perpetuating and rewriting the prohibition seems to be the protection of a whole field of brokers’ and agents’ work. Without the protection of this law, insurance intermediaries would face the prospect both of decreasing margins due to a more competitive market and of having to compensate for the loss of part of their commission by closing even more deals. As a consequence, the quality of the service offered by brokers and agents could be affected. On the other hand, critics of the prohibition suspect that the latest changes will not be in line with European law on competition as well as national German fundamental constitutional rights.
(ii) For the sake of better consumer protection and a more transparent market, the draft law implementing the IDD in Germany initially distinguished between a strictly commission-based distribution for the approximately 47,000 registered intermediaries and a pure fee-based advice for the 321 insurance advisers. Adopting this proposed regulation would have been the end of so called “mixed-model” in private client business. It allows intermediaries, mainly brokers, to agree on a fixed fee instead of a commission based remuneration. Publication of the draft law, however, produced a reaction to this approach with intermediaries and their stakeholders lobbying politicians immediately to prevent the “worst”. This led to the last minute rejection of the proposal by Parliament. One important reason for this rejection was the need to guarantee a comprehensive insurance advisory service for people with a lower income. The view was that consumers should not be discouraged from buying insurance by having to pay a fee for the service.
(iii) The new law will regulate the distribution of payment protection insurance (PPI). In the past, borrowers were often under the impression that they were obliged to take out such insurance in order to receive a loan from the bank. The new regulations will make clear that PPI is independent from and not compulsory for the loan. The right to withdraw from the insurance contract will be extended and consumers must be provided with comprehensive advice. In future, banks will have to provide their debtors with an additional information document one week after they enter into the contract. This second document must inform the consumer about all the costs and should raise awareness of the consumer’s right to withdraw from the PPI within a period of two weeks.
It remains to be seen, however, how the implementation of the IDD will improve consumer protection and transparency in the market.
Anna Darinka Pruß