Exploring the impact of financial regulation on the insurance industry
13 May 2024
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3 min read
Intro
The comparison between finance and insurance is an age-old debate. While banking often takes the spotlight for its sophistication, the insurance sector has historically lagged behind in development. There are multiple theories as to the reasons why - but one of the main ones must be that the insurance industry has resisted standardisation of its products, unlike the finance sector. In this blog post we explore how progressive regulations, such as MiFID II, are instrumental in driving change and standardisation to financial markets and how this is translated into the world of insurance.
Main
What is MiFID 2?
MiFID II is a comprehensive set of financial reforms introduced by the EU in 2018 that aims to regulate off-exchange and over-the-counter trading. Its key objectives include enhancing transparency in trading costs and improving transaction record-keeping. The regulations cover all aspects of financial investment and trading and apply to all financial professionals operating in the EU. Even post-Brexit, the UK has largely adopted MiFID II into its local laws.
One of the significant changes brought about by MiFID II is the separation of charges for research and transactions, providing investors with greater clarity on the services they pay for. Additionally, investment firms must now report transaction details to regulators promptly, enabling better oversight and detection of market abuses. What this means is that investors can now see exactly what they are paying for each service, giving them better information when deciding which services they want to pay for. Additionally, the seperation of charges and control is set to deliver a fairer competition and higher quality of services.
How does MiFID 2 translate into insurance?
The Insurance Distribution Directive (IDD) introduced in the same year as MiFID II, in 2018, aims to provide consumers with greater protection when purchasing insurance and to promote competition. While not directly linked to MiFID II, the IDD is generally seen as its adapted version for the insurance industry.
Key IDD regulations include the introduction of product oversight and governance (POG) requirements which assigns clear manufacturer and distributor roles to each party. While these regulations echo earlier financial directives, they are not as comprehensive and have been delayed in comparison. Similarly when it comes to fee structures IDD falls short of requiring modular splitting and real time reporting requirements. Transparency around fees and commission goes as far as requiring that remuneration for insurance distribution does not conflict with firms’ duty to act in the best interests of customers and that firms must disclose the nature of remuneration.
Conclusion
What are the future trends?
MiFID II and IDD represent significant shifts in their respective industries, with a common theme of increased customer protection and transparency.
However, it’s important to note that in this comparison, financial legislation extends far beyond insurance and has significantly influenced subsequent regulations in the insurance sector. Hence, as financial regulations continue to influence insurance, it’s worth exploring how core principles of MiFID II, such as fee splitting and transaction reporting, could shape the future of the insurance landscape.
In conclusion, while the insurance industry may not experience regulatory changes as sweeping as those seen in finance, the learning from its sister industry aids the progress of transparency and consumer protection across all sectors. As financial regulations continue to evolve faster than their insurance equivalents, it seems likely that the traditional lead-lag relationship between finance and insurance will persist. However, this dynamic could shift with the accelerated adoption of technological advancements in the relatively undersaturated insurance market.
