ESG Insurance Regulatory Guide: Product Governance and Suitability under the IDD

European texts: IDD / CDR 2021/1257

In Austria, the IDD was transposed into national law by way of several legal acts, amongst others:

• Austrian Trade Act (Gewerbeordnung, GewO), the general trade act which sets forth requirements pertaining to provision of different activities in Austria, including insurance distribution.
• Austrian Regulation of the Federal Minister for Digitalization and Economic Affairs on professional and procedural rules for traders engaging in the activity of insurance distribution (Professional Rules for Insurance Distribution) (Verordnung der Bundesministerin für Digitalisierung und Wirtschaftsstandort über Standes- und Ausübungsregeln für Gewerbetreibende, die die Tätigkeit der Versicherungsvermittlung ausüben (Standesregeln für Versicherungsvermittlung)) which addresses specific obligations of insurance distributors with regards to the retail sector.
• Austrian the Insurance Supervision Act 2016 (Versicherungsaufsichtsgesetz 2016, VAG 2016), a general legal act that governs operation and supervision of the insurance activities in Austria.
• Austrian Insurance Contract Act (Versicherungsvertragsgesetz, VersVG) which sets out the legal framework applicable to insurance contracts under Austrian law.

  In this context, the Austrian Financial Market Supervision Authority (Finanzmarktaufsicht, FMA) issued a document outlining their supervision strategy. Amongst others, the FMA emphasized that they will focus on the sustainability of insurers' business models. Moreover, adequate product design including close monitoring of supervisory and steering requirements were established as strategic supervisory priorities and declared by the FMA as focal points for the supervision. The FMA also reposted and emphasized the applicability of EIOPA Guidelines relating to products regulated by IDD on their website.

  Furthermore, on its website, the FMA outlined the following priorities in terms of the sustainable finance aspects within the context of the insurance sector supervision in Austria:

• asset screenings, including (i) analyses of the transitional risks in investment to identify those assets in the portfolios that would be exposed to potentially higher fluctuations in price during a transition to a more CO2-neutral economy and (ii) valuation and analysis of share and corporate bond portfolios under different transition scenarios with regard to the decarbonisation of the economy;
• product design in terms of placing the focus on the integration of ESG topics in underwriting, a forward-looking price structure, promotion of risk mitigating behaviour, and risk advice for preventative purposes;
• analysis of the protection gap in light of the insurability against risks arising from natural catastrophes and the affordability of the corresponding insurance cover becoming increasingly significant with regard to climate change;
• climate stress tests to analyse the risks and vulnerabilities in the insurance sector especially regarding the current economic climate as well as for assessing the risk capacity of the individual insurance undertakings; and
• establishing an ESG dialogue with the industry. To this end, the FMA also held an event in 2021 with the purpose of educating management and supervisory bodies in companies.

Contacts: Jasna Zwitter-Tehovnik | DLA Piper Anže Molan | DLA Piper

European texts: IDD / CDR 2021/1257

• Act of 4 April 2014 on Insurances (Insurance Act)
• Royal decree implementing Articles 5, 19° /1, 264, 266, 268 and 273 of the Act of 4 April 2014 on Insurances

Furthermore, the national competent authority that is responsible for supervision on product oversight and insurance distribution, the Financial Services and Markets Authority (FSMA), issues regulatory guidance interpreting and supplementing Belgian rules implementing the IDD.

Article 288 of the Insurance Act governs product governance rules and Article 296 of the Insurance Act the suitability assessment for insurance-based investment products (IBIPs).

In two communications of 29 April 2022 and 4 July 2023, the FSMA has published its expectations regarding the applicable rules on sustainable finance in the insurance sector. These expectations summarise EU rules and do not impose additional local requirements.

Contacts: Pierre Berger / Alexander Hamels 

European texts: IDD / CDR 2021/1257

In Croatia, the implementation of the Insurance Distribution Directive (IDD) involved the introduction of several legal acts, particularly the amendment of the Croatian Insurance Act (Zakon o osiguranju, "Insurance Act") (16 December 2022). This amendment pertains to product governance and suitability of insurance products.  

More specifically, regarding Environmental, Social, and Governance (ESG) criteria in the insurance sector, the Croatian Agency for Control of Financial Services (HANFA) issued several non-binding guidelines:

In November 2020, HANFA published Guidelines for performing insurance activities (Smjernice za obavljanje poslova osiguranja). This recommendation provides guidelines how to conduct business for insurance companies and insurance distributors. Particularly, it provides guidelines how to tackle the climate risk and provide sustainable products through a number of steps, including:

• developing insurance products that are both financially viable and environmentally sustainable, encouraging practices that reduce carbon emissions and increase resilience to climate change;
• evaluating how products may be affected by climate change, environmental regulations, and sustainability trends to ensure they remain beneficial and relevant;
• following product approval, continuously monitoring its alignment with the target market's sustainability needs, making corrective actions as necessary to address changing environmental contexts; and
• adapting products or change distributors/distribution channels as needed to keep insurance offerings in line with sustainability goals.

In February 2016, HANFA released Guidelines for the content and delivery of the document with key information for life insurances where the policyholder bears the investment risk. The purpose of this document is to prepare the market and insurers for the implementation of the Regulation 1286/2014 EU. 

Contacts: Jasna Zwitter-Tehovnik |Ivan S. Males | DLA Piper

European texts: IDD / CDR 2021/1257

The EU Insurance Distribution Directive 2016/97 (IDD) was transposed into Danish law through mainly two acts with accompanying executive orders:

• The Insurance Distribution Act (“Lov om forsikringsformidling”) with regard to insurance intermediaries.
• Amendments to the Financial Business Act (“Lov om finansiel virksomhed”), which from 1 January 2024 was replaced by the Insurance Business Act (“Lov om forsikringsvirksomhed”) with regard to insurance and reinsurance companies.

Under the Insurance Business Act, an insurance company is defined as (1) a non-life insurance company, (2) a mutual insurance company, (3) a life insurance company, (4) a multi-employer occupational pension fund, or (5) a reinsurance company. The Insurance Business Act applies to such companies and funds. The Insurance Distribution Act applies to other persons and entities which perform insurance distribution activities.

Product governance and suitability are governed by the Insurance Distribution Act and the Insurance Business Act and by the Danish executive order on good business practices in insurance distribution (“Bekendtgørelse om god skik for forsikringsdistributører”) which applies to both insurance intermediaries and insurance and reinsurance companies.

Sustainability is not expressly mentioned in the Danish legislation (other than as regards sustainability reporting and related sustainability due diligence), but the Danish Financial Supervisory Authority (FSA), who is responsible for the supervision of insurance companies and insurance intermediaries, provides Guidance with regard to the Commission Delegated Regulations and the guidances of the European Insurance and Occupational Pensions Authority (EIOPA), including the EU Commission Delegated Regulation 2921/1257 (on the integration of sustainability factors, risks and preferences into the product requirements for insurance undertakings and insurance distributors) and EIOPA’s Guidance on the integration of sustainability preferences in the suitability assessment under the Insurance Distribution Directive (IDD).

It also follows from the Danish FSA’s Guidance on product development and surveillance (“Opfølgning på julebrev fra 2021 om produktudvikling og -overvågning”) that requirements regarding product oversight and governance also include integration of sustainability factors.

Under EU law and Danish law, the EU Commission Delegated Regulation 2021/1257 (on the integration of sustainability factors, risks and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors) applies directly in Denmark and under Danish law. It is not necessary to formally incorporate the Regulation into national law by any legal act under national law.

Contacts: 

Per Vestergaard Pedersen, Partner | DLA Piper / Pernille Sølling, Partner | DLA Piper / Stine Gellert, Senior Associate | DLA Piper

European texts: IDD / CDR 2021/1257

In France, the implementation of the Insurance Distribution Directive (IDD) involved the introduction of several legal texts. The main ones are:

• Order no. 2018-361 (16 May 2018) - This order pertains to insurance distribution.
• Decree no. 2018-431 (1 June 2018) - Concerning insurance distribution.
• Ministerial Order (29 June 2018) - This order was issued to support the IDD.
• Ministerial Order (26 September 2018) - Relating to the list of eligible competencies for continuous training and professional development actions.

More specifically regarding Environmental, Social, and Governance (ESG) criteria in the insurance sector, the French Prudential Supervision and Resolution Authority ("ACPR") have issued significant guidelines:

ACPR Recommendation 2022-R-02 - On 14 December 2022, ACPR released Recommendation 2022-R-02, effective from 1 April 2023. This recommendation complements the earlier Recommendation 2019-R-01 (6 December 2019) concerning advertising in life insurance contracts. Recommendation 2022-R-02 addresses three types of advertising communications:

• Promotion of non-financial characteristics of life insurance or capitalization contracts and offered investment options.
• Highlighting non-financial characteristics of life insurance or capitalization without specific contract or investment references.
• Emphasizing commitment or actions related to sustainability.

The regulator emphasizes that advertising must avoid misleading claims about sustainability criteria, clients' sustainability-related investments, and the extent of commitments (article 3.5.1).

Therefore, advertising should be based on accurate and objective information. Additionally, ACPR requires the incorporation of measures against "greenwashing" in advertising monitoring methods and procedures (article 3.6.1).

Contacts: Luc Bigel / Hamza Akli

European texts: IDD / CDR 2021/1257

In Germany, the Insurance Distribution Directive (IDD) has been implemented in various regulations and at various levels. The main ones are: 

• Industrial Code (Gewerbeordnung) – Covering the licensing, registering and expertise/training requirements.
• Insurance Intermediaries Regulation (Versicherungsvermittlerverodnung) – Detailing the requirements mentioned above. 
• Insurance Supervisory Act (Versicherungsaufsichtsgesetz) – Relating to the distribution requirements applicable to insurance companies (also when cooperating with insurance intermediaries, including but not limited to the Product Oversight and Governance requirements).
• Insurance Contract Act (Versicherungsvertragsgesetz) - Relating to the good conduct requirements to be complied with in relation to the customers/policyholders.

Within the product oversight and governance process according to Sect. 23 para. 1a et seq. Versicherungsaufsichtsgesetz, “insurance undertakings and insurance intermediaries manufacturing insurance products should consider sustainability factors in the product approval process of each insurance product and in the other product governance and oversight arrangements for each insurance product that is intended to be distributed to customers seeking insurance products with a sustainability-related profile.” (cf. recital 5 of the CDR 2021/1257). 

Furthermore , when conducting the distribution activities in relation to the customers/policyholders honestly, fairly and professionally in their best interests (cf. Sect. 1a para. 1 Versicherungsvertragsgesetz), “the sustainability factors of an insurance product should be presented in a transparent manner to enable insurance distributors to provide the relevant information to their customers or potential customers.” (cf. recital 8 of the CDR 2021/1257.

Gunne Bähr / Volker Lemmer

European texts: IDD / CDR (EU) 2021/1256 / CDR (EU) 2021/1257

In Ireland, the Insurance Distribution Directive (IDD) has been transposed by the European Union (Insurance Distribution) Regulations 2018 (S.I. 229 of 2018) and the Commission Delegated Regulations (EU) 2021/1256 and (EU) 2021/1257 apply in Ireland and other Member States automatically without the need for further action.

More specifically regarding Environmental, Social, and Governance (ESG) criteria in the insurance sector, the Central Bank of Ireland (CBI) have issued draft Guidance:

Overarching Principles of Draft Guidance

A recognition that (re)insurers’ approach to assessing and managing climate change risks is one which is iterative and becomes more sophisticated over time.

• The CBI expects that climate risk needs to be managed as a key risk.
• The CBI expects that firms will consider the impact of “double materiality”
  • the impact which climate change has on the firm itself, and
  • the impact that the firm’s activities have on the climate.

• The ORSA is central to adopting an integrated approach to managing climate change risk, emphasising that where firms seek to rely upon group policies and activities regarding climate change risk, they must be adapted for the local entity.
• The draft Guidance leaves open the possibility that firms may choose to adopt other approaches which result in outcomes similar to those expected to be achieved by CBI.
• Consider the draft Guidance as a holistic framework, also visually captured in a flowchart.

CBI Expectations Regarding Governance

• The board is ultimately responsible for setting the risk appetite and ensuring that risks are identified, managed and controlled.
• It is the responsibility of the board to ensure that the management of climate change risks are integrated into the risk management processes of firms.
• Decisions, discussions and actions of boards and committees are to be documented and that ‘where appropriate’ climate change risk becomes a standing agenda item at board/sub-committee meetings.
• Responsibility for risks related to climate change are allocated to senior managers, duties and responsibilities documented and these requirements will be enhanced by SEAR and the Individual Accountability Framework.
• All key functions, but especially the Risk Management function and Actuarial function are expected to contribute to the board’s decision making in respect of climate change risks.
• A remuneration framework caters for climate change related performance and risk management factors as an incentive.

Five Key Focus Areas of CBI Guidance

Within the draft Guidance there are five key focus areas concerning the assessment and management of climate change risks, those being:

1. Materiality assessment
   Firms are expected to establish a baseline climate change scenario and then consider the firm’s current strategy and business model to fully understand the potential for exposure to climate change risk.
2. Scenario analysis and the ORSA
   The CBI regards ORSA as an appropriate process for the consideration of climate change risk, but leaves open the possibility that firms may choose to adopt other appropriate levels of scenario analysis which result in outcomes similar to those expected to be achieved by CBI. 
3. Strategy and business model
   Firms should fully assess the potential impacts of climate change risks on their business models and to integrate climate change risk in its overall strategy, considering climate change risks over the longer term, particularly with regard to prolonged, clustered, or repeated events, and reflect these in the overall strategy and business model.
4. Risk appetite statement
   Understand the climate change risks to which the firm is exposed, and where material, incorporate climate change risk into their Risk Appetite Statement. The CBI expects firms to establish appropriate risk exposure limits and thresholds relating to climate change risks over the short, medium and long term and to define appropriate Key Risk Indicators to support them.
5. Embedding climate change risk considerations across the business
   The strategy and business model set out actions relating to climate change risk and make these part of the business-as-usual activities of the firm with a focus on risk management, underwriting and pricing, reserving and capital, and investment decisions. 

For more information, please see our article: CBI spells out its expectations of (re)insurers on climate change risk

Contacts: Naoise Harnett / Lindi Raath | DLA Piper

European texts: IDD / CDR 2021/1257

The Insurance Distribution Directive (IDD) has been implemented in Italy through legislative decree no. 68 of 21 May 2018 which amended the Italian Insurance Code (i.e., legislative decree no. 209/2005).

Additionally, some specific Regulations have been adopted by the Italian Insurance Authority:

1. IVASS Regulation no. 40/2018, laying down provisions on insurance and reinsurance distribution;
2. IVASS Regulation no. 41/2018, laying down provisions on informative duties and design of insurance products;
3. IVASS Regulation no. 45/2020, which implemented Delegated Regulation (EU) 2017/2358, in the matter of Product Oversight and Governance (POG).

With specific reference to ESG criteria, on 12 May 2023, IVASS issued Order no. 131/2018 introducing amendments, among others, to Regulations nos. 40/2018 and 45/2020 to implement the guidelines provided by EIOPA in its “Guidance on the integration of the customer’s sustainability preferences in the suitability assessment under IDD”.

As to IVASS Regulation no. 40/2018, the key amendments are the following: 

• Conflicts of interests: the sustainability preferences of clients must be taken into account to achieve the best possible outcome for them. These preferences, notably, should influence the distribution of IBIPs.
• Pre-contractual information: the description of risks associated with IBIPs must encompass sustainability risks, aligning with SFDR and the Taxonomy Regulation. 
• Suitability assessment for IBIPs: the distribution of IBIPs, especially in advisory scenarios, must consider the sustainability preferences of the client. If no IBIP aligns with the sustainability preferences expressed by the client, and the client voluntarily adjusts these preferences, the suitability declaration should acknowledge this circumstance and provide relevant reasons. Conversely, if the policyholder opts not to adapt his/her sustainability preferences, insurance distributors offering advice should elucidate the reasons for the unavailability of the suitability declaration and maintain pertinent documentation.

As to IVASS Regulation no. 45/2020, the key amendments are the following:

• Definition of target market: The identification of the target market must consider the sustainability objectives specified by clients. Specifically, sustainability factors should align with the identified target market, and the definition of a negative target market should not be exclusively based on sustainability factors.
• Periodical assessment of product suitability: the periodic assessment of product suitability concerning the demands and needs of clients should also incorporate sustainability factors.
• Distributors operating for EU companies in Italy: intermediaries operating on behalf of EU companies in Italy must implement measures to ensure that products are distributed in accordance with any sustainability targets indicated by clients.
• Information from manufacturers: Information obtained by distributors from manufacturers must encompass sustainability factors related to the target market;
• Competence of personnel and collaborators: Insurance intermediaries must ensure that their personnel and collaborators have the necessary competences to comprehend the sustainability factors, if applicable, associated with the products they intend to distribute.

In addition to the above, it is worth to mention article 31 of IVASS Regulation no. 41/2018 in the matter of insurance advertising, which states that the qualification of “etic” or “sustainable” product can be used only for certain specific insurance financial products which are subject to specific provisions set out by article 36 of the same Regulation.

Contacts: David Marino / Valentina Grande

In the Netherlands, the Insurance Distribution Directive (IDD) has been implemented by the Dutch Financial Supervision Act (Wet op het financieel toezicht) and regulations pursuant thereto, as well as the Dutch Civil Code, General Administrative Law Act (Algemene wet bestuursrecht), Pension Act and Mandatory Occupational Pension Schemes Act (Wet verplichte beroepspensioenregeling). The most relevant acts and regulations in relation to this Guide are:

• Dutch Financial Supervision Act (Wet op het financieel toezicht) – This Act covers general market access, conduct and prudential requirements applicable to financial undertakings in the Dutch market.
• Decree on Conduct of Business Supervision of Financial Undertakings under the Wft (Besluit Gedragstoezicht financiele ondernemingen Wft) – This Decree covers the rules relating to conduct of business of financial undertakings in the Dutch market.

In relation to supervision on financial institutions, the Dutch Authority for the Financial Markets (Autoriteit Financiele Markten, the “AFM”) is responsible for conduct supervision, and the Dutch Central Bank (De Nederlandsche Bank, “DNB”) for prudential supervision. AFM’s most important tasks relate to transparent product development, fair and understandable information provision, adequate choice guidance and quality of advice, also in relation to insurance products. DNB's prudential supervision focuses on the financial soundness and stability of (amongst others) insurers and protecting the rights of insureds.

In addition to the European framework, the AFM has issued multiple publications on sustainability claims. With its Guidelines on sustainability claims, the AFM aims to enhance the transparency on sustainability aspects required as part of the (pre-)contractual information requirements. The Guidelines set out three main principles and these are supplemented by further explanation, and practical examples. The AFM also published a  Position Paper on sustainability. The AFM recognizes the importance of the transition to a sustainable society and encourages financial institutions to play their part. The availability and quality of information throughout the entire chain continues to be one of the key focus areas of the AFM. 

Contact: Paul Hopman | DLA Piper Aline Kiers | DLA Piper

European texts: IDD / CDR 2021/1257

Norway has implemented the IDD in mainly two legal acts with accompanying regulations:

• A new Insurance Distribution Act (Nor; “Lov om forsikringsformidling”), with regards to the provisions concerning regulation of insurance distributors and
• Through amendments to the Insurance Contracts Act (“Forsikringsavtaleloven”), with regards to the provisions concerning product governance and suitability. These provisions apply to insurance undertakings and insurance distributors alike 

Sustainability as part of product governance:

• Requirements regarding product governance also include integration of sustainability factors as set out in Commission Delegated Regulation (EU) 2021/1257 so that sustainability factors, risks and preferences of the customer are integrated into the product approval process for insurance undertakings and distributors. It also has to be considered in relation to business conduct and in any investment advice provided for insurance based investment products.

Contacts: Hugo-A. B. Munthe-Kaas, Head of Compliance | DLA Piper Marthe Oldernes, Associate | DLA Piper

European texts: IDD / CDR 2021/1257

In Sweden, the implementation of the Insurance Distribution Directive (IDD) involved the introduction of the following legal texts:

• Insurance Distribution Act (2018:1219) - This Act contains regulations on insurance distribution applicable to insurers and insurance brokers.
• Ordinance on Insurance Distribution (2018:1231) - Detailed regulations regarding insurance distribution

In Sweden, Swedish insurance brokers are under the supervision of the Financial Supervisory Authority ("FSA"). The FSA has issued the following regulation related to the Insurance Distribution Act and the IDD:

Financial Supervisory Authority's regulations on Insurance Distribution (FFFS 2018:10) - The FFFS 2018:10 regulates, among other things:

• requirements of certain knowledge of employees, associated ancillary insurance intermediaries and associated insurance intermediaries,
• employee compensation schemes,
• advice based on an impartial and personal analysis, and
• specific regulations for the distribution of insurance-based investment products and certain pension products.

CDR 2021/1257 requires insurance intermediaries and undertakings to consider sustainability factors in the product approval process for each insurance product and for insurance products intended to be distributed to customers seeking insurance products with a sustainability profile. In combination with the IDD, insurance intermediaries are therefore required to make an independent and individual assessment of both financial objectives and sustainability preferences in their advice.

Insurance intermediaries must assess the suitability of a product for the customer when providing insurance advice. The assessment now includes suitability as regards the customer's ESG preferences (Chapter 6 Section 10 of the Swedish Act on Insurance Distribution, in combination with CDR (EU) 2021/1257 of 21 April 2021 amending CDRs (EU) 2017/2358 and (EU) 2017/2359).

Contacts: David Johansson, Managing Associate | DLA Piper Frida Nordström, Senior Associate | DLA Piper 

The IDD was transposed into UK law through legislation, regulations and FCA rules, including by way of amendments to the FCA Handbook.

Sustainability factors were introduced into the IDD after Brexit. This means that UK regulations do not reflect the changes introduced at EU level with CDR 2021/1257. Thus there are no specific provisions integrating sustainability factors, risks and preferences into the general insurance distribution regulations in the FCA Handbook. 

However, UK-based insurance businesses may nevertheless feel the impact of these provisions, as there are likely to be demands for sustainability categorisation, and related data requirements, from EEA manufacturers, distributors or advisers in the distribution chain that will be subject to the IDD as implemented in the jurisdiction concerned. 

For UK insurers providing insurance-based investment products, or operating a personal pension scheme, stakeholder scheme, or a SIPP containing insurance-based investment products, compliance with the FCA’s ESG Sourcebook (Sourcebook) is required.

Under the Sourcebook, UK insurers providing insurance-based investment products are required to make climate related financial disclosures that are consistent with the Recommendations and Recommended Disclosures of the Taskforce on Climate related Financial Disclosures. (TCFD), which has developed a framework to help public companies and other organizations disclose climate-related risks and opportunities.

Under the Sourcebook, firms in scope must provide a TCFD entity report, and a TCFD product report, which describe any targets for managing climate-related risks and opportunities, including the Key Performance Indicators they use to measure progress against these targets. The Sourcebook does not include any provisions on the ‘sustainability preferences’ of customers and related suitability assessments, as provided for under CDR (EU) 2021/1257; however, to a certain extent, these requirements can be found in COBS, specifically COBS 9.2.

Contacts: George Mortimer / Matthew Hunter | DLA Piper

European texts: IDD / CDR 2021/1257

In Slovenia, the Insurance Distribution Directive (IDD) was implemented into the Slovenian legislation through several acts, among others:

• The Insurance Act (Zakon o zavarovalništvu),
• The Decree on the Conditions Required for Conducting Insurance Agency and Brokerage Activities (Sklep o pogojih, potrebnih za opravljanje poslov zavarovalnega zastopanja in posredovanja), and
• the Decision on Detailed Conditions for Continuing Professional Training of Insurance Agents and Insurance Intermediaries (Sklep o podrobnejših pogojih za stalno poklicno usposabljanje zavarovalnih zastopnikov in zavarovalnih posrednikov).

The CDR 2021/1257, which mandates that insurance intermediaries and undertakings consider sustainability factors for each insurance product, is directly applicable and need not be transposed into national legislation.

The national competent authority responsible for overseeing  insurance distribution and product governance is the Insurance Supervision Agency (Agencija za zavarovalni nadzor).

Contacts: Jasna Zwitter-Tehovnik | DLA Piper Domen Brus | DLA Piper