Short answer
EU insurance law uses two connected but distinct control systems.
Solvency II governs financial resilience through valuation, technical provisions, own funds, risk-sensitive capital, governance and an own-risk and solvency assessment. Supervisors can intervene before insolvency and escalate recovery measures when capital requirements are breached.
The Insurance Distribution Directive (IDD) governs product design and sales: customer best interests, demands and needs, clear information, conflicts, incentives and product governance. Insurance-based investment products (IBIPs) attract added inducement, cost, suitability and appropriateness rules.
The systems overlap, but one does not replace the other. A well-capitalised insurer can still mis-sell an unsuitable product, and a carefully sold product does not cure inadequate reserves or capital.
Cross-border supervision also depends on whether the distributor is an intermediary or the insurer itself; host penalties do not displace home-state authorisation control.
Firms need prudential, product-governance and customer-sales records. They must also check national IDD implementation and host-state rules for each distribution channel.
Solvency II protects policyholders through financial resilience
Solvency II applies a balance-sheet and risk-management framework to EU insurers and reinsurers, subject to its scope rules and exclusions. It is principally prudential law, not a sales code.
Assets and liabilities use market-consistent valuation. Technical provisions generally comprise a best estimate plus a risk margin. Eligible own funds must cover the Solvency Capital Requirement (SCR), while eligible basic own funds must cover the Minimum Capital Requirement (MCR).
The SCR is calibrated to quantifiable risks and, under Article 101, corresponds to a 99.5% value-at-risk confidence level over one year. The MCR is a lower threshold: falling below it exposes policyholders and beneficiaries to an unacceptable level of risk if the undertaking continues operating.
Article 44 requires integrated risk management across underwriting, reserving, assets, liquidity, concentration and operational risk. Article 45's own-risk and solvency assessment (ORSA) addresses overall solvency needs, continuing compliance and material divergence from SCR assumptions. It informs management and supervision; it is not another capital formula.
supplies detailed valuation, capital, governance and reporting rules.
Supervisory intervention begins before failure
An insurer must immediately notify its supervisor of non-compliance, or specified prospective non-compliance, with the SCR or MCR.
For an SCR breach, the undertaking must submit a realistic recovery plan; the ordinary restoration period is six months, subject to defined extensions. For an MCR breach, a short-term finance scheme is required and eligible basic own funds must generally be restored, or the risk profile reduced, within three months.
Supervisors can restrict asset disposal as finances deteriorate. The regime therefore intervenes before insolvency.
IDD governs the sales relationship
The IDD is a minimum-harmonisation directive implemented through national law. Member States may impose stricter protection where EU law permits.
Article 17 requires fair, clear and non-misleading communications. Remuneration or staff targets must not encourage one product where another would better meet the customer's needs.
“when carrying out insurance distribution, insurance distributors always act honestly, fairly and professionally in accordance with the best interests of their customers.” —
Before a contract is concluded, Article 20 requires the distributor to identify the customer's demands and needs. The proposed contract must be consistent with them, and the customer must receive objective, comprehensible information. If advice is given, the distributor must make a personalised recommendation and explain why it best meets those demands and needs.
“Any contract proposed shall be consistent with the customer’s insurance demands and needs.” —
This is distinct from the more detailed IBIP suitability test. Calling a sale “non-advised” or conducting it online does not bypass demands-and-needs analysis.
Product governance starts before the first sale
Article 25 IDD and require manufacturers to operate a documented product-approval process before marketing a new insurance product or making a significant adaptation.
The manufacturer identifies a granular target market and incompatible groups, then tests whether the product meets that market's needs over its lifetime. Relevant testing includes scenario analysis and, depending on risk, quantitative work. A failing product must not launch.
After launch, the manufacturer monitors the product and distribution. Potential customer harm requires remediation and prompt notice to affected distributors and customers.
Distributors need written arrangements to understand the product and target market, prevent detriment and manage conflicts. They must flag inconsistent distribution or potential harm to the manufacturer.
Target-market governance does not decide every individual case. A sale within the target market can still fail demands-and-needs or suitability tests; an out-of-market sale requires justification and monitoring.
Commissions are controlled, not generally banned
The IDD does not ban commissions EU-wide. It combines disclosure, conflict management and a best-interest constraint.
An intermediary must disclose whether it receives a customer fee, premium commission, other economic benefit or a combination. A direct fee's amount or calculation method, relevant ownership links and the basis of advice must also be explained.
For IBIPs, Article 29 permits a fee, commission or non-monetary benefit paid by or to a third party only where it does not harm the quality of the service and does not impair compliance with the duty to act honestly, fairly, professionally and in the customer's best interests. Member States may prohibit or further restrict such payments.
requires assessment of inducement schemes for detrimental impact. Warning signs include disproportionate benefits, mainly upfront incentives without an appropriate refund mechanism, volume thresholds and schemes encouraging one product despite a better alternative. Disclosure alone does not neutralise harm.
IBIPs require additional suitability or appropriateness controls
IBIPs expose customers to investment risk and therefore attract enhanced rules in Articles 27–30 IDD and Delegated Regulation 2017/2359.
When providing advice, the distributor must obtain enough information about the customer's knowledge and experience, financial situation and ability to bear losses, and investment objectives and risk tolerance. It may recommend only a suitable product and must provide a suitability statement. The assessment also applies to relevant later personal recommendations, such as advice to switch investments.
For a non-advised IBIP sale, the ordinary rule is an appropriateness assessment based on knowledge and experience. The customer must be warned if the product is not appropriate or information is insufficient. A Member State may allow execution-only distribution of specified non-complex IBIPs at the customer's initiative, but only on all Article 30(3) conditions. It is not a general internet-sales exemption.
IBIP conflicts must be managed; disclosure is a last resort, not a substitute for effective controls.
Value for money is part of supervisory product scrutiny
EIOPA's July 2026 connects value-for-money scrutiny of unit-linked and hybrid products to IDD product testing, including whether costs are due, proportionate and aligned with target-market needs.
The benchmarks are not price caps, safe harbours or proof of breach. The IDD texts do not expressly establish them. This is non-binding supervisory methodology indicating which products may receive further scrutiny, not legislation rewriting the IDD.
Cross-border distribution divides home and host responsibilities
The IDD permits cross-border distribution through freedom to provide services or a branch, following notification procedures. For intermediaries, the home authority normally supervises registration and organisational matters, while the host authority supervises a branch's compliance with the IDD's information and conduct-of-business chapters in its territory.
Insurance undertakings distributing their own products are different. In , the Court of Justice held that Solvency II Article 155's home-host cooperation procedure applies where a host authority finds that an undertaking breached the PRIIPs Regulation or national IDD rules. The host may nevertheless impose penalties for infringements in its territory without first exhausting that procedure, provided it is not penalising authorisation conditions and does not effectively deprive the insurer of its right to operate there.
The host state can enforce stricter “general good” rules in its territory. Authorities must cooperate, while persistent large-scale consumer detriment, home-state inaction, urgent protective needs or structures designed to avoid host rules can justify host intervention.
EIOPA's supplies an operational framework for authorities; it is not a private sales rule.
The 2025 Solvency II review is not yet the operative baseline
amends Solvency II, but Member States must generally transpose it by 29 January 2027 and apply those measures from 30 January 2027. As of this article's review date, it is enacted future law rather than the current operating baseline. Firms should plan for implementation without describing its amendments as already applicable.
Conclusion
Solvency II asks whether an insurer can honour obligations through sound valuation, reserves, capital, governance and early recovery. The IDD asks whether products are designed and sold fairly, transparently and without distorted incentives.
Sources
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This article provides general legal information, not advice for a specific matter. Laws, facts and procedural deadlines may change the result. Follow the linked primary sources and obtain local advice before acting.