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Advisory duties: Can I offer you an environmentally friendly insurance-based investment product?

by Michaela Duhr / 21. October 2022

In its efforts to direct capital towards green investments, the EU has already instituted multiple sets of rules as parts of its Action Plan on Sustainable Finance, namely through the Taxonomy and Sustainable Finance Disclosure Regulations that were implemented under its Action Plan on Sustainable Finance. Since early August, there has been an additional, new requirement for the insurance and finance sector: advisory duties about sustainability. This is not a simple undertaking as there have previously not been any binding, minimum standards for sustainable investments.

Starting August 2022 Insurers and brokers who offer insurance-based investment products (IBIPs) are obligated to consider and document their clients’ sustainability preferences since August 2022. For example, when offering fund policies or endowment life insurance policies, they must explicitly ask clients if and to what extent they are interested in sustainable products. With the amended Commission delegation regulations that took effect on 21 April 2021, the European Commission adjusted the Insurance Distribution Directive (IDD) and Markets in Financial Instruments Directive (MiFID) II accordingly.

Clients must now be asked about their interest in a specific ecologically sustainable investment (as per the taxonomy regulation) or rather in a generally sustainable investment (as per ESG criteria), and, if applicable, how large this part should be. They must also be asked if they want to take into account the most significant detrimental impacts on sustainability and if they want to exclude certain investments or limit the amounts put into them. For example, clients can say that they wish to purchase a product that is 70 per cent ESG-compliant and does not invest in any nuclear energy or weapons manufacturing whatsoever.

Advising about sustainability without reliable information

The obligation to advise about sustainability is causing confusion in the industry. While the regulation defines the questions that need to be asked precisely, it is still unclear where insurance brokers are to find the information that they need. To date, there have not been commonminimum standards for sustainable investing or doing eco-friendly business management. The reason for this is that the EU has not yet finalised its regulatory initiatives (Taxonomy and Sustainable Finance Disclosure Regulations) that are intended to identify investments in sustainable economic activities and obligate businesses to disclose corresponding information. The Regulatory Technical Standards (RTS), which provide the precise specifications for implementing the Sustainable Finance Disclosure Regulation (SFDR), have not yet been finalized.. The EU has therefore postponed the adoption date for the RTS by a year, to 1 January 2023. Until this time, sales employees and brokers must rely on the sometimes vague information from the businesses, funds and investment firms about the investments underpinning the given insurance product.

To make it easier to fulfil the advisory duties in insurance sales, the European Insurance and Occupational Pensions Authority (EIOPA) published non-binding guidance in late July 2022. The comprehensive document is entitled ‘Guidance on the Integration of Sustainability Preferences in the Suitability Assessment under the Insurance Distribution Directive (IDD)’. EIOPA had initially intended to publish binding guidelines, however the authority found it was too premature in the light of the incomplete regulatory framework.

Criticism of timing

Experts criticise the EU’s timing and in particular th introduction of advisory duties before defining any binding minimum standards. This timetable puts insurers and brokers in a tricky legal situation, as they cannot deliver binding product recommendations if the data required for them is lacking. EIOPA has recognised this as well and, for this reason, recommends that insurers and brokers provide details about sustainability conscientiously based on the currently available data and strive to the best of their abilities to ensure good quality. In addition, the authority will revise the guidelines once insurers, brokers and national authorities have gained experience with the new legal framework.

Help from professional associations

In light of the major uncertainty in the industry, a number of professional associations have developed checklists and tools for insurance brokers. The Bundesverband Finanzdienstleistung AfW and VOTUM Verband Unabhängiger Finanzdienstleister have updated their wording suggestions for insurance and investment brokers regarding clients’ sustainability preferences. The Bundesverband Deutscher Versicherungskaufleute e.V. (BVK) has also published a checklist on its website and, on top of that, offers special courses on sustainability in insurance sales.

There is a growing interest in sustainable insurance solutions and the market offers lots of potential. Even though the EU’s initiatives are not yet complete and there is a large amount of uncertainty, life insurers are not shying away from incorporating aspects of sustainability into their product development right now. If you wish to know more, we recommend reading our next post.


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