How To Assess Suitability And Appropriateness Under The IDD

The Insurance Distribution Directive (IDD), which applies from 1 October 2018, introduces a regime for the selling of insurance-based investment products (IBIPs). Under the IDD, customers' profiles, including their demands and needs, must be determined, and suitability or appropriateness must be assessed for every IBIP sale (much like what MiFID II requires in the investment sector).

Suitability

The "suitability" of an IBIP must be assessed in cases where the distributor provides advice to the customers. (If the insurer does not provide advice, then it must assess "appropriateness" instead). Depending on the nature of the advice provided, the distributor has to determine the extent of the information to be collected from the customer. The suitability assessment is then built on three points:

the financial situation of the customer, including his/her ability to bear losses the customer's investment objectives, including his/her risk tolerance the customer's knowledge and experience in the product's investment field For all three of these points, the IDD offers guidance on what must be included:

the source and extent of the customer's regular income and assets, including liquid assets, investments, real property, and regular financial commitments the period that the customer wants to hold the investment for, his/her preferences on risk-taking, his/her risk profile, and his/her reasons for investing the customer's familiarity with the type of service, transaction, IBIP, or financial instrument; the nature, number, value, frequency, and transaction period of the IBIP or financial instrument; his/her education level and profession (including former professions, if relevant) If any of this information is missing, then the distributor may not provide any advice to the customer. Similarly, if all the required information is provided but none of the products are suitable for the customer, then no advice can be given.

Only if the data is gathered and a product deemed suitable can the distributor provide advice. The outcome of the assessment is to be a suitability statement given on a "durable medium" that outlines the advice and describes how the product suits the customer's profile.

Should a periodic assessment of the suitability be performed by the distributor, the suitable character of the recommended product has to be reviewed at least annually. However, it may be necessary to increase review frequency depending on the characteristics of the...