A silent revolution: the changing face of EU insurance distribution

in Regulatory/Compliance, 15.09.2022

The terms ‘insurance distribution’ and ‘insurance distributor’ shall include the activity of a policyholder selling insurance cover to customers.

Yes, you heard that right!

This is the opinion of Advocate General Szpunar of the Court of Justice of the European Union (ECJ) delivered on 24 March 2022 in a case involving a collective insurance scheme (ECJ Case C-633/20).

The defendant in the main proceedings – a commercial company –  commissions advertising companies to offer door-to-door membership to the ‘TC Medical Air Ambulance Agency GmbH Mitgliedergemeinschaft’. This membership entitles its members to claim various benefits in the event of illness or accident abroad. The defendant provides these benefits either by using its assets directly or through a group insurance which the defendant took out as policyholder with an insurance undertaking. The defendant (the policyholder) is in charge of paying the insurance premium to the insurer while the group members (the consumers who become insured persons) remunerate the defendant in exchange for insurance cover.

So far, this has been a commercial practice adopted in some Member States by operators and insurers to distribute insurance products without entering the regulated scope of insurance distribution.

In effect, so far there are two main options for commercial companies to sell insurance products without being impacted by the insurance regulation:

Option 1: An economic operator sells an individual insurance product linked to a principal object or service sold by the same operator. In this case, the operator may benefit from the connected contract exemption.

For example, when we buy smartphones, and the sellers suggest an extended guarantee or other specific insurance cover to protect the device. This actually happened to me recently, and the reseller in the store wasn’t even aware it was an insurance product!

Option 2: The operator subscribes to a group insurance or collective insurance scheme and sells group insurance cover membership to its customers. Here, the operator escapes the application of the insurance distribution regulation because it is selling the product as a policyholder, and not as an insurance intermediary!

Let’s take the example of the travel insurance cover provided by your credit card. The bank selling you the insurance cover is often the policyholder of the group insurance scheme providing the insurance protection to the credit card subscribers.

So, what might change now? Well, if the ECJ follows the Advocate General’s opinion, the commercial practice of selling a group insurance scheme as a policyholder to end customers will enter the scope of regulated insurance distribution activity.

As a result, the policyholder of a collective contract will be considered  an insurance distributor. What does that mean? It means that commercial companies selling these products will have to assess whether or not they can claim regulatory exemptions or if they must obtain an insurance distribution license. If so, they will have to comply with all terms of insurance regulation including anti-money laundering and combating terrorism financing, product oversight governance, obligation of recommendation to customers, know your customer, conflict of interests or even annual training.

With this in mind, and in the ECJ Case C-633/20, the Advocate General Szpunar has recommended the ECJ to rule that:

“Article 2(3) and (5) of Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation and Article 2(1)(1), (3) and (8) of Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution should be interpreted as meaning that a natural or legal person who maintains foreign travel medical insurance and insurance covering foreign and domestic repatriation costs as a group insurance policy for its customers with an insurance undertaking, distributes to those persons memberships entitling them to claim insurance benefits in the event of illness or accident abroad and receives from recruited members (who indirectly fund the insurance premium) a fee for the insurance cover purchased, is an ‘insurance intermediary’ within the meaning of those directives.”

On life insurance distribution, the Advocate General has also reminded the ECJ that:

“In a judgment delivered almost a month ago, the Court ruled that an ‘undertaking which is the policyholder’ that concluded a unit-linked group life insurance contract is an ‘insurance intermediary’ within the meaning of Directive 2002/92 where it performs, for remuneration, the activity of offering that insurance to consumers, who thereby conclude a life insurance contract with the insurance undertaking, and of providing financial advice on the investment of the capital resulting from the insurance premiums.[1]”

So, if the ECJ follows the Advocate General’s opinion (as it usually does), this ruling will have a significant impact on distribution models within the EU. In that eventuality, whoever participates in such collective selling schemes without a due license may more than likely commit administrative offences. In some countries, they may be subject to criminal charges.

Consequently, it is farsighted for operators involved in such schemes to start reviewing their business models today and have a plan B in place.

It will all come down to whether the operator can apply for connected contracts exemption or should prepare for filing a full or ancillary insurance distribution license.

Want to know more? Get in touch with KPMG’s Regulatory Risks experts today!

[1] ECJ, decision of 24 February 2022 – case reference: C-143/20 and C-213/20.