Following a demands and needs assessment workshop that was held on 23rd November 2022, the Malta Financial Services Authority (the “MFSA”) issued a revised version of the ‘Nature and Art of Financial Supervision – Conduct Supervision – The Demands and Needs Assessment’ (the “Circular”) which is intended to provide guidance and outline best practices in the context of the demands and needs assessment which insurance distributors are required to carry out in accordance with their regulatory requirements.
As outlined in the Circular, insurance distributors are to ensure that the insurance policy they propose or recommend to a client is consistent with that client’s demands and needs – similarly, insurance distributors are not to offer to clients a product/s which do not meet their demands and needs. Furthermore, the Circular provides that the assessment of client demands and needs by insurance distributors is required to be carried out prior to the sale of all types of insurance contracts, not only Insurance Based Investment Products.
The demands and needs assessment is required to be undertaken by all insurance undertakings and insurance intermediaries, including by Tied Insurance Intermediaries (“TIIs”) and Ancillary Insurance Intermediaries (“AIIs”) carrying out insurance distribution activities. Entities appointing such intermediaries are also required to have measures in place to ensure that their TIIs and/or AIIs are adequately considering the demands and needs of their clients and may also consider providing standard templates to assist in the pre-contractual phase of acquiring useful and relevant information from the client in relation to the type of insurance product offered.
A demands and needs assessment should be carried out before a product is offered to a client and therefore prior to the completion of a proposal form. The questions asked to clients may be similar to those asked for the purposes of underwriting, with the difference that the replies provided by clients should be assessed to select the product/s which would best suit the client’s demands and needs. A demands and needs assessment shall also be required in the case of online sales and in the case of renewals. Furthermore, there must be a positive action on the part of the insurance distributor in order to specify the demands and needs of that client, and the mere provision of the policy quotation and/or the provision of the Insurance Product Information Document shall not be deemed to be a positive action on the part of the insurance distributor.
The Circular indicates that the MFSA considers as good practice the adoption of a procedure whereby a structured and formal assessment is made in order to ensure consistency in the level of information gathered from all clients by all members of the insurance distributors’ staff. Questionnaires may be used for this purpose, although these are not mandatory provided that sufficient information is collected from clients through other means. In the case of commercial policies which are more complex in nature, the assessment may require more time, records of meetings, gathering of documentation, exchanges of correspondence, on-site visits etc…
Insurance distributors are expected to provide the client with a demands and needs statement in good time before the contract is concluded, which statement should include: (1) a record of the requirement the insurance product is intended to meet; (2) the type of product that is being purchased; and (3) the reasons why the particular product has been offered to the client, i.e. how the product offered would meet the client’s demands and needs on the basis of the information provided by the client to the insurance distributor for this purpose.
Insurance brokers are expected to consider a sufficiently large number of policies available on the market (where possible) with a view to identify those policies which would meet the client’s demands and needs. A demands and needs statement would be required to be provided to the client for each policy so identified, such that the client would be in a position to choose the policy under which to bind cover out of those indicated by the broker. Insurance distributors are furthermore expected to keep sufficient records with respect to: (1) the questions asked for the purposes of the demands and needs assessment and the respective replies provided by the client; (2) the result of the assessment which is to be communicated to the client; and (3) a copy of the demands and needs statement provided to the client.
By means of the Circular, the MFSA is encouraging all insurance distributors, including those which have not been subject to an MFSA inspection, to come in line with the guidance contained in the Circular.
This article was written by Dr Nico Fauser (Advocate, Insurance & reinsurance).
