The purpose of the insurance policies paired with mortgages or other loans (PPI - Payment Protection Insurance) is to protect the clients form prejudicial events that could affect the repayment of the loan/mortgage
In order to achieve this specific aim, insurance companies and intermediaries must observe the duties of disclosure, transparency and fairness (with specific reference to the Bank of Italy’s provision adopted on 29 July 2009, as amended and integrated) in order to establish a strong confidence relationship with their clients.
The frequent breach of these duties, revealed by enquires and complaints submitted by consumer associations, brought IVASS (the Italian insurance supervisory authority) and the Bank of Italy to draft a communication which highlights some critical aspects of insurers’ and insurance intermediaries’ (including banks and financial intermediaries) activities in respect of PPI policies. Through a specific research concerning the PPI market, IVASS and Bank of Italy revealed the following red-flag issues:
- The insurance products are sold together with the granting of the mortgage/loan, for which the insured pays a single premium;
- The combined sale of insurance policies and mortgage/loans is not respectful of the principle of accessoriness and non-compulsoriness of the PPI policies;
- The provision of various clauses, terms or conditions adverse to the clients: e.g. i) duration cover not consistent with the term of the mortgage/loan; ii) non-detailed clauses; iii) excessively high deductibles and excessive and unjustified costs; iv) various exclusions which result in a reduction of the scope of the coverage provided by the insurance; v) unclear wording, in contrast with duties of disclosure, fairness transparency and integrity;
- Declaration of good health state: the insurers and the insurance intermediaries often deny the coverage under the insurance policy when the claim is already filed, asserting that the insurer did not declare any previous illness in a pre-printed declaration;
- In case of early extinction or transfer of the loan undertakings, the reimbursement of the premium is not automatically conceded;
Intervention required to insurers and intermediaries
In the light of the above mentioned critical aspects, IVASS and Bank of Italy provided some warning advices and identified different areas of intervention for insurers and intermediaries. In particular, according to Code of Private Insurances – Italian Legislative Decree 209/2005, section 183 related to the duties of disclosure and fairness in the offer and during the execution of the insurance contracts, IVASS and Bank of Italy expect that insurance companies and intermediaries observe the advices below.
Insurers (in case of policies with “rotating cover1”)
- The “one size fits all” coverage is not acceptable. All policies must be designed and tailored in order to respect the specific needs and characteristics of the clients;
- Insurers must provide instructions to intermediaries for the verification of the satisfaction of the conditions of insurability of the risk and the suitability of the products to the client’s needs and for the completeness of the pre-contractual information;
- Insurers must create an internal control structure aimed at verifying the marketing of the products, the efficiency of the distribution networks and the compliance with the instructions provided;
- The insurance policies must grant the purchaser with a withdrawal right that can be exercised within 60 days of purchase;
- T&C’s of the insurance policies must be provided in the contract and the purchaser must be properly informed through the pre-contractual documentation relating to the loan agreement and the insurance relationship and through an information notice;
- T&C’s of the insurance policies must not include exclusions which could significantly reduce the perimeter of the cover;
- The declaration of good health shall be provided in conscious manner through a specific interview where the client must provide accurate information on previous illnesses and the state of health (for that scope the insurers must use specific questionnaires). A unilateral declaration of good state of health shan’t be considered adequate;
- The insurers must adopt solutions involving a full refund of the premiums and expenses paid if the policies have been purchased by persons that do not meet the subjective requirements for cover.
- For policies for which a single premium has been paid, in case of early extinction or transfer of the loan undertakings, the part of the premium paid relating to the remaining period of insurance with respect to the original expiry shall be returned to the client without the need for his/her request.
- The part of the premium returned shall be calculated on the basis of the years and fractions of years remaining before the expiry date of the cover and of the residual capital insured (see also IVASS Regulation no 35/2010 art. 49).
- Insurers must verify that the insurability and suitability of the insurance products are met with regard to the specific client’s needs.
- Considering that insurance policies are accessories to the loan contracts, they must be separated, in fact the loan can be granted even without an insurance policy, which is an optional; hence, the premium must be separated from the loan instalment;
- The offering conditions must avoid the coercion in the negotiation of the loan and of the insurance policy, hence the client must be totally free to decide whether the policy is suitable for his/her needs;
- Intermediaries must verify whether the policy is tailored to the client’s needs and provide a description of the characteristics, duration, costs and limits of the insurance cover in order to allow the policyholder to make an informed decision consistent with his or her needs during the policy contracting phase.
IVASS and Bank of Italy have therefore advised insurers and insurance intermediaries that their administrative bodies should adopt specific rules and internal policies for the handling of the PPI policies (and of the complaints related to them) observing the instructions described above, and also draft a plan for the future initiatives to be taken within 90 days of publication of the above mentioned letter, in order to ensure that the policies and offering are consistent with the supervisory authorities’ instructions and indications.
Once approved internally, the mentioned plan must be effectively implemented within the following 90 days.