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The legal side of embedded insurance: navigating regulation and compliance

The complex web of insurance regulation is not for the faint of heart. And with the proliferation of embedded insurance and cross-border digital experiences, we’re seeing a significant shift in the world of compliance.
Words by
Alex Vickery
Time to read
13 minutes
Last updated
July 31, 2023
In a nutshell
  • As insurance becomes more and more embedded in consumers’ daily lives, it’s a challenge for legislators and regulators to keep pace in order to adequately protect them.
  • This shift in insurance regulation also makes it difficult for businesses looking to add value to their product or service through insurance – as they can quickly become entangled in a web of ever-evolving, ever-local regulations.
  • Whether companies decide to get their own licence or go through an insurance intermediary, there are solid paths forward for embedding insurance experiences.

Embedded insurance is creating a more transparent experience for end users: offering the right product at the right time is driving more relevant and meaningful insurance cover. 

This, in turn, is impacting insurance regulation and compliance, as it evolves in order to better protect consumers – supporting the mission of a global safety net through insurance.

What are the challenges and grey zones the industry still faces from a regulatory and compliance point of view? And how can insurers and distributors navigate this world in order to create insurance products that comply and truly matter to consumers? 

In our recent webinar, we asked two legal and compliance experts – Caroline Hanotiau, General Counsel at Qover, and Benoit Vandervelde, Banking and Financial Services Partner at CMS – to give us their take on all of this and more.

Read on for their insights into the current regulatory landscape when it comes to embedded insurance and what both insurers and businesses need to know.

Watch the full replay here → 

Changing insurance landscape, changing insurance regulation

Embedded insurance is on the rise – statistics indicate that within five years, more than 30% of all insurance transactions will likely occur within embedded channels. And this is true across industries: travel, gig, motor and new mobility, e-commerce, financial services, etc.

While the concept of offering insurance at the point of sale has been around for some time, today it’s much more integrated into our online lives. With the digitalisation of purchase flows, insurance can be easily and smartly sold alongside any product or service, or even fully included in the price. 

This transformation brings both new opportunities and challenges, particularly when it comes to regulation and compliance.

The insurance industry is heavily regulated, with multiple layers of legislative requirements creating added complexity.

For example, in Europe, insurance is subject to sectorial regulations such as the Insurance Distribution Directive (IDD) and Solvency II, but as a customer-facing industry, it must also comply with consumer protection laws such as data privacy and fair commercial practices.

As the sector continues to advance technologically, we also have to grapple with new regulations around cybersecurity and AI.

So if you’re a non-insurance company looking to add embedded insurance to your offering, navigating this web of evolving insurance regulations can seem fairly daunting.  

layered chart of insurance distribution in Europe starting with the Insurance Distribution Directive
The Insurance Distribution Directive harmonises insurance distribution across Europe, but businesses also have to navigate a web of local regulations and rules.

How insurance regulation and distribution intersect

Insurance distribution is highly regulated in order to protect consumers. 

In Europe, the IDD makes sure that certain rules are followed whenever performing an act of insurance distribution, no matter the means; and one of these rules is needing a licence to distribute insurance. 

Which leads to the question that many companies ask: if I want to embed insurance into my core product or service, do I need an insurance distribution licence?

If you’re distributing insurance, then yes – which is why we need to start by defining insurance distribution. 

Benoit, who advises financial institutions on their relationship with regulatory authorities and the compliance of their insurance distribution process, explains that insurance distribution, regulatory-wise, is any activity around advising, proposing or preparing an insurance policy. It also involves assisting in administration, monitoring daily performance and handling claims.

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When a business decides to add insurance to its product or service, they need to assess whether their activity falls within that definition, and whether or not they’ll need permission to do it – which can be a challenge.

Key regulatory and compliance challenges when looking to offer insurance

Balancing insurance regulation with your business strategy

Trying to interpret insurance regulation and how it impacts your business is not only a challenge, it can also be risky.

Let’s consider adding insurance to your core product. In this case, the insurance product is ancillary to the good or service you provide.

When you choose to distribute insurance in this way, you are considered an ancillary insurance distributor. That means – that unless you’re one of the regulatory exemptions – you’ll need an insurance distribution licence.

Whether you’re exempt or not, when you offer a financial product ancillary to your core product, you have to consider the rules regarding cross-selling.

‘The IDD – which is harmonised within the EU – has a specific provision which says that [ancillary insurance] is totally permitted, no problem’, Benoit says. ‘But you need to give the customer the ability to purchase the goods or service without the insurance component.’

For example, you might purchase a car, bike or trip online and have the option to buy a policy at the end: third party liability for a car, theft insurance for a bike or trip assistance.

Where there might be additional assessment needed, Benoit argues, is when the insurance is included as part of the good or service.

One example is when you sign up for a specific plan or payment card with a bank or fintech that includes insurance.

Insurance cross-selling rules stipulate that, when offering an insurance product as an add on to your main good or service, that good or service needs to be available both with and without the ancillary insurance.  

If this optionality doesn’t fit your ideal business model, then you need to consider whether or not you can benefit from one of the few exemptions in the IDD’s cross-selling provision.

Interpreting these specificities might be too much of a burden for some companies, who might opt to go through a more experienced insurance intermediary instead

Offering harmonised insurance across Europe

The IDD allows licensed entities to conduct business across borders within the European Economic Area (EEA).

This creates a level playing field, as licensed distributors can distribute all over Europe without the need to be licensed in every single market. For example, getting a licence in Italy allows you to do business in any EEA country.

But unfortunately, there’s no such harmonisation when it comes to insurance contracts specifically (i.e. there’s no European insurance law or regulation that applies to the insurance contract itself). 

This means that deploying embedded insurance across borders involves complying with local regulations in each region.

‘Maybe the master policy you have in place has its own governing law. The question is then whether you can use that governing law in every other country’, Benoit explains. ‘If you could use your master policy’s English law for a customer in Spain, for example. Legally speaking, usually the applicable law is based on the policyholder’s residence, and in the case of a master policy there is only one policyholder.’

’But from a compliance perspective, it’s not doable to sell an English law policy to someone in Spain. In that case you’ll need to deal with local consumer protection rules. So the exercise of localisation is important from a compliance perspective as well. Generally speaking, you can’t avoid a certain number of mandatory provisions and localisations.’

There are certain jurisdictions with more demanding local laws, and ‘unfortunately’, he says, ‘I’m not seeing any sort of harmonisation there any time soon.’

So how can you address these local specificities?

Intermediaries can help you deploy a cross-border insurance program with a unified user experience that still addresses these local nuances.  

What’s really key, Caroline says, is working with an intermediary that understands your needs, i.e. your strategy, brand identity and key requirements for the insurance product.

‘From there, you build the product and customer flows, checking where and how it needs to be adapted to meet local specificities,’ Caroline explains. ’Do we need to add a notice or a check box? Then let’s discuss how to best implement those local flavours while maintaining the same global customer experience. A good understanding of the client’s needs and a good mapping of the regulatory requirements makes this process fairly quick and easy.’

To make the localisation process even smoother, she adds, look for an intermediary with an agile platform. That way, you can customise specific elements without additional development work.

Insurance activity in the UK impacted by Brexit

Cross-border regulations are further complicated by Brexit, which has impacted both sides of the channel. 

European players in the UK began switching to a local English licensing process, while English players scrambled to incorporate new entities in Europe.

‘What we’ve seen for both insurers and insurance intermediaries is the branching back principle’, Benoit explains, ‘where that new European company has incorporated a branch in the UK to enable people to work under the umbrella of the company – a model that is likely to disappear in the short to medium term.’

‘We have various signs and announcements from the European Insurance and Occupational Pensions Authority (EIOPA) – the body that oversees the European insurance sector – that all the structures on the continent should deal with European business and people. It can’t be just an empty shell with a big branch in London for instance. They’ll need to progressively switch to more resources in Europe.’ 

‘From a governance point of view, reporting also needs to be tailored to the UK now’, Caroline adds. ‘We need to update all of the framework because we need to document specific governance for all UK activities.’

‘So there’s a bit of work to be done on that side, and of course keeping up with new Financial Conduct Authority (FCA) regulations and new expectations from the regulator.

Getting a licence to distribute insurance in Europe

For companies looking to offer insurance, then, the question of licensing becomes key. 

While there are paths available for companies to integrate insurance into their main purchase flow without a licence, there are also potential limitations and conditions that might not be aligned with your business strategy.

If your business has the time and resources, getting a licence to distribute insurance could be a viable path to creating a compliant insurance program.

Here are a few things to keep in mind.

Obtaining an insurance distribution licence might not be as hard as you think

How difficult is it really to get an insurance licence? 

‘I think it’s probably overestimated,’ Benoit argues. ‘The process is relatively easy if you have the right people.’

While you might not encounter legal difficulties, you need to have people that understand insurance to a certain extent. 

Cost isn’t much of a barrier either, Benoit says. In Belgium, for example, it costs less than €1,000 to get a licence and then a similar yearly fee. 

The biggest hurdle is recurring governance: ensuring that your customer-facing people are properly trained on a regular basis.

‘If you happen to lose one of your key stakeholders doing insurance’, Benoit says, ‘then you need to replace them with someone who has the right qualifications and professional knowledge. I don't think that's too big of a hurdle.’

Licence shopping in Europe could be an option

Companies outside of Europe could even choose an ‘easier’ country to start with and transfer their activity to another European country later on. 

But companies should consider whether that’s worth the additional effort. The difference between countries in terms of obtaining a licence here is minimal, not to mention you would need to be strategic about how you transfer your business to another country so that the licence follows.

‘Shopping around, getting a licence in one place and then transferring the business will take more time and be more costly to obtain the same result,’ Benoit says.

One type of insurance licence doesn’t necessarily take longer than another

The type of licence you go for – whether you’re aiming to be classified as a broker, an agent, etc. – doesn’t make much of a difference in terms of the process.

There are two main categories that exist in most European countries, he explains: an agent tied to an insurance provider on an exclusive basis, who is mandated to find clients for the insurance products; and a broker, who is non-exclusive and mandated by the client to find the best offer on the market.

In Belgium, for example, both have similar requirements for getting a licence.

With Brexit and the arrival of English players on the European market, we also have managing general agents (MGA) and mandated managing agents, or underwriters.

‘And you also have the subagent concept or appointed representative, which is more and more regulated in Belgium and offers basically no sensible advantage in terms of regulatory requirements,’ Benoit says.

So all in all, if you do decide to go for a licence, there aren’t many sensible ways to skirt or shorten the process. 

Immoweb is a Belgian real estate platform that acts as a business introducer for home insurance.

How businesses can create added value with insurance, without becoming regulated

For companies that decide not to go the regulated route, there are a few ways to add value to your product with insurance without the need for actual distribution (and therefore, a licence). 

‘One benefit of being an unregulated entity,’ Caroline explains, ‘is being able to work under the umbrella of a regulated entity that already has the expertise, experience and governance framework in place. This regulated insurance entity could even educate or coach the company through getting their own licence later on.’

As an unregulated entity, you have three solid options to be able to provide added value through insurance without the need for a licence to distribute: as a business introducer, an exempted ancillary or through a master policy.

Option 1: Business introducer 

As a business introducer, a company redirects – or introduces – its users to an insurer or intermediary, where they can then sign up for an insurance contract.

One example is Immoweb, a Belgian real estate platform that introduces its users to Qover for home insurance – via a website banner or landing page for example – and then receives a commission on the insurance contracts sold. 

In this lead-gen insurance distribution model, the business introducer can provide limited, generic information on an insurance product or the insurer/insurance intermediary without further facilitating the completion of an insurance contract.

Benoit does caution businesses to check whether additional regulations apply to introducers on a local level: ‘In Belgium for instance, the Belgian regulator has issued guidelines around this concept’.

Option 2: Exempted ancillary intermediary

One way to actually distribute insurance without the need for a licence is as an exempted ancillary insurance intermediate.

In this case, the activity will fall under the concept of insurance distribution, but because certain conditions are fulfilled, you will be exempt from the licensing rules. 

This applies to companies where insurance is an add-on; related to their main good or service; covers the risk of breakdown or loss related to that good or service; and with an annual premium below a pre-defined threshold.

The IDD defines a maximum yearly premium of €600, but member states are allowed to go lower.

A word of caution from Benoit: some jurisdictions, like Belgium, have a more restrictive cap. In Belgium, companies are no longer exempt if the yearly premium is above €200 – so it’s best to check if the IDD is implemented more strictly in certain countries.

One example of an exempted ancillary intermediary is bike manufacturer Canyon, which offers bike insurance at checkout. If customers decide to purchase insurance, they can choose between a package with or without damage coverage on top of theft and assistance.

Option 3: Master policy

Companies can use master policies to include embedded insurance as a native component of their offering.

In this case, the policyholder is the company itself – which takes on the cost and the relationship with an insurer or intermediary – while its customers or employees are the ones who benefit.

One example is the fintech Revolut, which has embedded trip and event cancellation insurance into its Ultra plan. Another example is Deliveroo automatically insuring its couriers while they’re on the job.

However, the master, or group, policy model should be approached with a certain amount of caution and investigated on a case-by-case basis. Regulators across Europe don’t necessarily align on the concept of insurance distribution in the scope of a group policy. 

In some jurisdictions, insurance distribution is interpreted more strictly than in others, which could mean that unlicensed group policyholders need to apply for a distribution licence anyway.

Two key elements that seem to lead regulators to perceive the group policy as an act of insurance distribution are the optionality of the coverage and the cost for the beneficiary.

‘There’s a distinction to be made between optional coverage versus compulsory or automatic coverage,’ Benoit says. ‘When the coverage is automatically embedded without customers opting to pay for it, the likelihood of doing insurance distribution is much, much lower. It doesn’t exclude the fact that a licence might be needed at some point, but there is no case law on that specific topic.’

Just like deciding whether or not to go for a licence, companies should weigh the pros and cons of the various ways to embed insurance in their line of business.

‘These models come with their own set of restrictions and conditions to be met,’ Caroline says. ‘Is it better to opt for these rather than getting a licence? That’s a discussion to have with an advisor and the various players involved to make sure you go with the best solution for the medium and long term.’

Conclusion: whichever route you choose, an insurance intermediary can simplify things

Embedded insurance comes with a lot of opportunities. When we look at the spirit of insurance and consumer protection regulations, embedded insurance is meeting some of those objectives much more than any other distribution model. After all, Caroline argues, it offers an insurance product that is closely aligned with a customer’s needs.

It makes insurance products easier to access in the right place and at the right time. And because embedded insurance is digital-first, it improves the customer experience by providing transparent, easy-to-understand coverage at the right price.

As the IDD states, when carrying out insurance distribution, insurance distributors shall always act honestly, fairly and professionally in accordance with their customers’ best interests. 

While licensing remains a key concern for companies, there are paths available that still allow companies to embed insurance as an added value for their customers.

At Qover, we believe that technology can be a helpful tool to managing regulatory complexity, by enabling a seamless insurance experience across borders and facilitating data reporting to various regulators.

‘Another very powerful way to address regulatory challenges is the cooperation between the different players in the insurance distribution chain: risk carriers, insurance intermediaries, tech orchestrators, etc.’ Caroline says. ‘By defining clear responsibilities and leveraging one another’s expertise, we can overcome the regulatory challenge and turn it into a strength and, ultimately, a business advantage.’ 

If you have any questions or concerns regarding how insurance regulation applies to your business, get in touch.