Well advised

How to keep the law on your side

Insurance distribution comes with a number of challenges. You have to advise your clients in line with their needs and risks, tailor their insurance cover precisely to their personal situation and document every note and recommendation properly.

The comprehensive catalogue of duties that intermediaries are bound by shows how much responsibility this involves. Without claiming to be complete, we use selected examples to show you what to look out for to minimise liability risks.

✔ Risk disclosure

Why does it matter?

Insurance products involve risks, because their benefits depend on several uncertain factors. For clients to make well-founded decisions, they first have to understand the existing risks in full. A lack of information can lead to wrong decisions with legal consequences.

What does a typical conflict look like?

The ongoing costs of fund-linked insurance sometimes lead to misunderstandings. If the client is not aware that the acquisition costs of his gross policy depress performance, he may be surprised by the modest contract balance in the first years.

How can you do better?

Call things by their name and make clear how high the total costs are. Show how the costs affect the development of the contract, and explain which services they cover. Openness is the basis for a lasting relationship of trust with the client.

✔ Individual needs assessment

Why does it matter?

Good advice starts with good listening. If you do not fully capture what the client wants, a rather general recommendation will often miss the mark. Protection needs are only part of it. Values, sustainability and flexibility count, too. A systematic needs assessment is at the core of a broker's duties.

What does a typical conflict look like?

A client wants to make private provision for retirement and stresses that sustainability is very important to her. The intermediary takes note but recommends a standard product with a mixed fund portfolio. It later turns out that it includes companies from the fossil fuel industry. The client is disappointed because she had assumed that the investment product she chose was fully ESG-compliant.

How can you do better?

Ask specifically about personal preferences and use IDD-compliant questionnaires for documentation. When it comes to sustainability, this is particularly easy in Partner Life, our digital platform: when you create a new quote, one click limits the choice of investment products to ESG-compliant funds.

✔ Investment advice

(for insurance-based investment products or fund-linked insurance)

Why does it matter?

When clients are mainly looking for an investment, fund-linked insurance comes close to regulated financial products. Stricter requirements then apply, including in relation to risk profile, diversification and investment horizon.

What does a typical conflict look like?

A client is interested in fund-linked insurance with as little death cover as possible. His focus is therefore on future performance and the tax advantages in the accumulation phase. The intermediary talks at length about the tax aspects but hardly mentions the fund composition. After a fall in prices, the client is disappointed and later speaks of misinformation.

How can you do better?

Treat the distribution of fund-linked insurance much like investment advice: clarify the client's target return, risk appetite and knowledge. Document the process carefully and explain the composition of the portfolio transparently.

✔ Ongoing duties of care

Why does it matter?

Insurance contracts are not static products. They have to be adapted over years and decades to the client's changing life situation. When contracts are left unattended for a long time, the potential for optimisation fizzles out. This negligence damages the client relationship on both an economic and a personal level, and it increases the liability risk.

What does a typical conflict look like?

Several years ago, a client took out fund-linked pension insurance to close her pension gap. Since signing the contract, there has been no further contact with the intermediary. Only when she looks at the annual statement does she notice that her contract balance has performed considerably worse than expected. The fund strategy was never adjusted, even though market conditions and her circumstances have changed. The client feels that she and her interests are not being taken seriously.

How can you do better?

Stay in active contact with your clients after the contract is signed. Support them through changes, explain the consequences and document your advice in full. That way, you avoid misunderstandings later.

✔ Regulatory compliance

Why does it matter?

The regulatory requirements for data and consumer protection (GDPR, IDD) are not formalities. They are meant to ensure the quality of advice and ultimately also serve your own protection. The IDD (Insurance Distribution Directive) requires regular further training of at least 15 hours per calendar year. Breaches of this training obligation (§ 34d (9) GewO, the German Trade Regulation Act) can lead to fines of up to €5,000 (§ 144 (2) no. 7d, (4) GewO). This also includes the appropriateness test, which ensures that clients have sufficient knowledge and experience to sign a contract.

What does a typical conflict look like?

After a short conversation, the broker is sure that his client is "competent" enough to sign a contract. He therefore skips the mandatory appropriateness test. Later, the client complains that he never understood the product at all.

How can you do better?

Carry out all the required questions fully and conscientiously. Do not take shortcuts with existing clients either. Have important points confirmed in writing, for the security of both sides.

✔ Suitability test for new contracts

Why does it matter?

Switching contracts carries a particularly high liability risk. Here, you have to show clearly that the new contract is better suited to the client overall, despite any disadvantages such as costs or the loss of guarantees.

What does a typical conflict look like?

A client wants to replace her traditional life insurance with a fund-linked policy with a choice of ETFs. In principle, the new contract considerably increases the chances of an attractive return. But in the first year, the fund balance performs negatively. The client had not expected these initial losses.

How can you do better?

Compare the advantages and disadvantages of both options in detail. Show why the new solution pays off in the long term, and explain possible short-term disadvantages openly. A complete suitability test with written reasons is indispensable when signing a new contract.

✔ Documentation and records

Why does it matter?

If it comes to a dispute, what counts is not what was said but what was documented. Without reliable evidence, the burden of proof lies with the intermediary, who quickly ends up in a vulnerable position.

What does a typical conflict look like?

A client claims he was never informed about fund costs. The broker remembers the conversation but can only prove it with a general record of advice. The case goes to court, with an uncertain outcome.

How can you do better?

Record every relevant detail: wishes, risks, costs, recommendations, rejected options and so on. Use concrete wording and clear language, and have the client countersign the record.

Conclusion:

Intermediaries who take their advisory duties seriously benefit twice: they reduce the risk of liability cases and cancellations, and they build trust with their clients. Good, legally sound advice pays off for both sides.

Note: this article does not claim to be complete. You can find out about other advisory and information duties under the Insurance Distribution Directive (IDD), such as the duty to undertake further training, on the website of the Deutscher Maklerverbund (in German), for example.

Article published by Prosperity Solutions AG