On 13 January, Insurance Europe published a position paper in response to EIOPA and the other European Supervisory Authorities' work on noncomplex products and comprehension within the frameworks of the Insurance Distribution Directive (IDD) and the packaged retail and insurance-based investment products (PRIIPs) regulation.
The paper points out the difference between insurance-based investment products and other financial instruments under MIFID II. MIFID II financial products often have a high degree of opacity of the connection between the consumer's investment and the possible risks and returns to the customer. They also include elements of gambling. Most insurance-based investment products do not share these traits and the same risks don't apply to consumers. Insurancebased investment products usually reduce risk for customers and can provide a means of protecting them from the volatility of the market.
Insurance Europe advises that insurancebased investment products that reduce risk for customers should be seen as non-complex for the purposes of the IDD and therefore could be sold by means of execution-only transactions. It makes the following comments in regard to insurance-based investment products: whether the product has a guarantee should be taken into account; whether the product is protected by a national insurance compensation scheme should be taken into account; the surrender value of insurance-based investment products is not relevant for complexity; switching clauses should not be put on the same level as converting rights; that beneficiary clauses do not influence the performance or return of the product should be considered; that the relationship between an insurance-based investment product and tax regulations is not relevant should be considered; and it should also be considered the total commitment is fixed and does not vary overtime and that this is something that customers might have difficulty understanding.
The PRIIPs regulation provides for a comprehension alert to be provided to customers when selling a complex PRIIP. The paper sets out criteria which Insurance Europe believes should be taken into account to identify PRIIPs that should be considered as difficult to understand and not simple. These criteria are: the product invests in underlying assets in which retail investors do not commonly invest; it uses a number of different mechanisms to calculate the final return of the investment, creating a greater risk of misunderstanding on the part of the retail investor; and if the investment's pay-off takes advantage of retail investor's behavioural biases, such as a teaser rate followed by a much higher floating conditional rate, or an iterative formula.
A link to the paper is here.