The draft for the IDD Implementation Act is causing a great stir in the insurance industry due to the still existing ban on commissions. Lawyer Johannes Fiala and actuary Peter Schramm have examined the draft and show that the ban is not dead.
The legislator would like to strengthen fee-based advice as part of the implementation of the EU Insurance Sales Directive IDD. As a result, the prohibition of commission fees, which was already believed by experts on the waste disposal site Alt-Verordnungen, is to remain in place. In the future, the passing on of commissions to clients is to be expressly permitted only for the newly created consultant type of the fee-based insurance consultant (FONDS professional ONLINE reported). However, a close reading of the speaker’s text shows that discounts are by no means prohibited. In an exclusive article for FONDS professionell ONLINE, Munich lawyer Johannes Fiala and actuary Peter A. Schramm explain the details of the proposed law – and explain possible consequences for brokers. (jb)
Contrary to expectations, the draft law allows intermediaries to let customers participate in their commissions. This is because distributors, fintechs, insurtechs, broker pools or individual intermediaries can agree with insurers that they will give the policyholder a permanent increase in benefits or a premium discount on a permanent basis.
For the first time, insurers will be allowed this form of special remuneration on a broad scale, which was previously only permitted under narrowly defined conditions in collective agreements. The insurer can therefore also make the discounts subject to certain conditions, for example that the agent waives part of his commission or brokerage fee, brings in a minimum turnover or complies with certain other requirements. This gives the insurer a powerful new instrument for sales management – for example, it can also allow discounts only for its agents.
Sales networks, insurtechs or pools with strong negotiating power can thus also secure a competitive advantage by advertising with the possibility of premium discounts and special additional benefits. Depending on the price sensitivity of the customer, new sales opportunities arise. And it creates an incentive for rationalisation in the intermediary business, which ultimately saves distribution costs – in favour of better additional services and/or lower, discounted premiums.
Sales control through special remuneration
The intermediary is only permitted to pass on commissions directly to the customer in any form – once or continuously – is prohibited. The benefits from such intended special compensation must instead be designed as a permanent premium discount or increase in benefits by the insurer. Then the special compensation is also allowed. Fintechs that have streamlined their business model using IT and apps, or discount brokers with lower consulting requirements can no longer decide independently of the insurer how much of an acquisition and/or support commission they pass on to the customer.
This is intended to permanently eliminate false incentives in insurance sales – it will then be the task of the insurance company to deal responsibly with such sales management. The draft law hardly sees the danger of false incentives in the case of ongoing discounts – in contrast to one-off payments to the customer, Berlin would like to make society rather than the intermediary responsible for this as well.
So once again: A Fintech can give the ten percent discount that exists under his passing of the current commission, under the new law, by waiving the commission on a discount from the insurer. It will be able to do this with most companies and will enforce it on the basis of its market power. However, it is questionable whether small brokers will succeed in this and whether they can afford to forgo commission parts in favour of premium discounts. The fact that they may die out in favour of fee-based insurance consultants, or that only large, rationally working ones remain, seems to be accepted or even encouraged by the legislator.
No commission fee through intermediaries of any kind
As soon as the insurance company is then allowed to give the customer special compensation in the form of discounts or as an increase in benefits without any special conditions, according to the Insurance Supervision Act (ISA), there are hardly any limits to the way in which the conditions for this are designed. Sales incentives based on the motto “Take 3, pay 2” in the form of free additional services by the insurer on top of the normal tariff are permitted.
People are now thinking differently than they did back then when commissions were prohibited. The mediator is still not trusted, so he himself is forbidden to do so. The insurer, however, is believed to be allowed to do so, but also to be obliged to use its now permitted instruments in such a way that no false incentives are created in distribution. Instead of a ban for the insurer, therefore, it is an imperative to deal with it responsibly. So for the benefit of the customer – this must be the goal of the insurance company. According to section 15 para. 3 ISA, broker sales will continue to be part of the insurer’s business operations. The insurer should also be made more responsible for this.
Sales concentration through price competition
Insurers could use it to promote individual sales organisations, such as their own. Or bind brokers – by requiring them to generate a certain amount of revenue. Pools and concept providers could also excel here. The insurer can also use them to strengthen the agents or even the distribution via the Internet, according to the motto “Has your insurance been calculated with too high a brokerage fee so far? For the first time, the broker can then no longer claim that the customer does not have to pay anything extra for his brokerage fee.
Job description of the fee-based insurance consultant
The fee-based insurance consultant can limit himself to insurance mediation if he wants to, or he can only give advice like the previous insurance consultant. Legal advice on “agreeing, amending or reviewing insurance contracts for a separate fee” remains prohibited for brokers vis-à-vis consumers: see Section 34d of the Gewerbeordnung. The insurance broker is thus discriminated against.
The draft promotes the ruinous competition for discounts with partial waiver of commission. Because instead of negotiating this on a case-by-case basis, rather in secret, between intermediary and customer, it requires the cooperation of the insurer. The latter cannot escape the discounts offered to attract powerful but low-cost distributors – models such as “Friendsurance” demonstrate this. This makes the discount possibilities obvious, it is advertised by corresponding distributors.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
(published on 29.11.2016)
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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