Informed sales and advised sales in the draft of the Private Insurance and Reinsurance Distribution Act

The future Private Insurance and Reinsurance Distribution Act seeks to increase the protection of insured persons by increasing transparency (similar to the MIFID regulation), intending that our insured clients know what they are signing and that they have been provided with all their insurance information. One of the nerve points of the new regulation of insurance distribution is the transparency that will take shape in the reporting obligations that insurance distributors must comply with. This information - including advertising communications directed by insurance distributors to customers or potential customers, which will be clearly identified as such- must be precise, clear and not misleading (art.46.2), adapting it to the type of insurance distributed and to the forms of distribution. In this last sense, the Insurance Distribution Directive (DDS) differentiates between informed and advised insurance sales (art.20). In particular, one of the most important changes that the future Act will introduce will be the obligation of insurance distributors to know and evaluate their customers. For this purpose, two types of sales can be differentiated:First, reported sales where the dealer does not provide advice to the customer. Section V of the explanatory memorandum of the future Act will identify this type of sales by saying that the reported sale must be identified, “such as one that is carried out in accordance with the customer's requirements and needs, based on information obtained from the customer, and which seeks to provide him with objective and understandable information about the insurance product so that the customer can make an informed decision”.Second, advised sales in which the dealer provides advice to the customer. Understanding “Counseling”, “the personalized recommendation made to a customer, at the customer's request or at the initiative of the insurance distributor, regarding one or more insurance contracts” (art.2.15). Therefore, section V of the explanatory memorandum of the future LEDISPRI will identify this type of sales by saying that the advised sale is”one that takes as its essence the existence of a personalized recommendation made to the customer, at the customer's request or at the initiative of the insurance distributor, regarding one or more insurance contracts”.In these cases, the dealer must carry out a suitability analysis with a different scope in the following two scenarios:

• When the insurance broker or insurance entity carries out insurance distribution activities in which they offer advice on an insurance-based investment product, they will also in any case obtain minimum information about the client or potential client (knowledge and experience in the investment field specific to the product class; financial situation, including their capacity to bear losses; and investment objectives, including their risk tolerance). This is so that the insurance broker or insurance entity recommends to the client the insurance-based investment products that are ideal for him and that, in particular, are best suited to his level of risk tolerance and his ability to withstand losses.
• When investment advice consists of the recommendation of a set of combined products, the suitability should refer to the set of products considered as a whole.

In both cases, “before the conclusion of an insurance contract, the insurance distributor shall determine, on the basis of information obtained from the customer, the requirements and needs of that customer and shall provide him with objective information about the insurance product in an understandable way, so that the customer can make an informed decision” (Article 49.1).

Raúl Martínez (T&L Attorney)