Introduction
High product diversity and price dispersion at national and EU level
Limited consumer choice and barriers to shopping around
Challenges with cancellation of CPI products and switching to different providers
High profitability for insurers and banks and conflict of interests

Comment


Introduction

The European Insurance and Occupational Pensions Authority (EIOPA), with the support of various national competent authorities (NCAs), has conducted a thematic review on the functioning of the EU market for credit protection insurance (CPI) products sold via banks through distribution channels (ie, acting as insurance intermediaries) and how well it succeeds in delivering for consumers.

The thematic review focused on identifying potential sources of conduct risk and consumer detriment in order to allow the EIOPA and the NCAs to take relevant policy and supervisory measures if needed and to assess whether consumers are being treated fairly in this field.

The EIOPA highlights that there is high heterogeneity at the EU level in terms of products, business models and national legal frameworks, and that some of the issues identified by the review may be more relevant for some countries than others.

The thematic review focused on three main CPI products sold with mortgages, personal loans and credit cards, which – when properly designed and sold to consumers – may offer protection against different life events (eg, death, job loss or incapacity to work).

This article highlights the review's main findings.

High product diversity and price dispersion at national and EU level

CPI products may offer great benefits to consumers. However, when looking and the design and sale of these products, some consumer protection issues arise. There may be significant differences in terms of the following aspects, not only in different countries but also within the same country:

  • terms and conditions;
  • exclusions and product designs; and
  • general features – for example:
    • the lack of a uniform name across the European Union;
    • different age limits; and
    • different no-claims and waiting periods.

While diversity gives consumers more options, it may lead to confusion, since it may be difficult to understand and compare the products and make informed purchasing decisions.

Further, the EIOPA observed a huge price range between providers, even within the same country.

Limited consumer choice and barriers to shopping around

Consumers have limited choices and face many barriers to shopping around for offers. The EIOPA highlights that consumers may choose different providers only in theory; in practise, this possibility is constrained due to cross-selling practices carried out by the majority of the banks, which only sell CPI tied with their own credit products. Moreover, banks often fail to inform consumers that they can buy CPIs from another provider.

Challenges with cancellation of CPI products and switching to different providers

Issues regarding cancelling and switching to a different provider also emerged from the review. In many cases, consumers are required to get approval from the bank and fulfil certain conditions before cancelling their policies. For example, some insurers require consumers to repay loans first, before cancelling the CPI policy.

In most cases, this happens because the CPI policy is a group policy and the policyholder is the bank and in most cases the beneficiary. Therefore, the consumer has to get approval from the bank to cancel its policy/affiliation.

High profitability for insurers and banks and conflict of interests

The remuneration arrangements between insurers and banks may increase the incentive to sell CPI products due to the high profitability of these kinds of products. If not properly mitigated, this may lead to negative impacts on consumers. The thematic review shows that the interest of consumers may be misaligned with those of some banks and insurers, which may adopt a conflicting strategy to prioritise profits from the sale of CPI products above delivering good consumer outcomes.

Comment

Given the issues outlined above, the EIOPA wants to ensure that CPI products lead to good outcomes for consumers both at national and EU level.

To this end, the EIOPA is set to issue a warning to insurance companies and banks (as insurance distributors) to address the concerns assessed in the review relating to conflicts of interest emerging from high remuneration levels and sales practices.

Insurers (as manufacturers of CPI products) and banks (as insurance intermediaries) are expected to have fully implemented the requirements set by the EU Insurance Distribution Directive and its product oversight and governance measures. When insurers and banks identify potential issues that could lead to negative outcomes for consumers, they are expected to take remedial actions.

Moreover, the EIOPA has undertaken to carry out additional measures, such as working with:

  • the European Banking Authority and the European Central Bank to cover topics such as risk management frameworks and the mitigation of conflict of interests; and
  • NCAs to provide support in identifying outliers in their markets that may carry a heightened risk of consumer detriment (eg, players making excessive profits above others in the national market or charging high commissions).

In addition to the measures taken by the EIOPA, when relevant, the NCAs should take relevant actions within their powers in order to address specific issues identified in their markets.

Finally, the EIOPA directly encourages consumers to shop around before purchasing a CPI product and carefully read the terms and conditions of CPI products, with particular attention to the exclusion and cancellation policy.

For further information on this topic please contact Valentina Grande at DLA Piper Studio Legale Tributario by telephone (+39 02 80 61 81) or email ([email protected]). The DLA Piper Studio Legale Tributario website can be accessed at www.dlapiper.com.