The European Insurance and Occupational Pensions Authority ("EIOPA") has recently warned insurers and banks acting as insurance distributors to address problematic issues in connection with the offering of credit protection insurance products to consumers.
Credit protection insurance ("CPI"), also known as payment protection insurance, is a type of insurance product protecting borrowers from servicing their financial commitments such as a home or car loan, should the said borrower be made redundant or unable to work through illness or accident and hence become unable to service his/her debt.
By means of the issuance of the EIOPA warning (the "Warning"), insurers and banks (acting as insurance distributors) have been warned to:
- Take action to address issues of high remuneration paid by insurance manufacturers to insurance distributors for the sale of CPI products; and
- Prevent detrimental conflicts of interest between insurers and banks from arising (the relationship between insurers and banks is also known as the 'bancassurance' model).
The Warning comes after the issuance of a thematic review entitled the "Thematic Review on Credit Protection Insurance sold via banks" conducted by EIOPA on the 4th October 2022 (the "Thematic Review"). While acknowledging various benefits of CPI products, the Thematic Review unveiled significant risks for consumers arising from poor underwriting and sales practices as well as insufficient management of conflicts of interest in the context of bancassurance sales. The key findings were as follows:
- there is limited consumer choice and barriers to shopping around for alternative CPI products, since banks generally sell CPI exclusively together with the core product, i.e. the debt;
- given a variety of risks covered by CPI policies (i.e. life and non-life), there is high product diversity and price dispersion at national and EU level, leading to wide variations in exclusions and product design;
- cancelling a CPI product and switching to another provider is not straightforward, with consumers being required to obtain prior consent from their bank in order to cancel a policy;
- CPI products are a profitable business for both insurers and banks, which makes the business conducive to high risks of conflicts of interest; and
- strong ties between insurers and banks can reinforce the risks of conflicts of interest.
Following the issuance of the Thematic Review and the Warning, EIOPA expects insurers and banks to put consumers' interests first and to accordingly take measures to avoid the occurrence of further consumer detriment.
EIOPA expects all insurers and banks to fully comply with the Insurance Distribution Directive ("IDD"). EIOPA expects that where consumer detriment has occurred, all insurers and banks concerned should remedy the situation by mitigating and preventing further occurrences of consumer detriment.
Action should be taken in the following areas:
- Manufacturing of CPI products: manufacturers should ensure that their products meet consumers' needs, in that they need to offer fair value and ensure fair pricing practices. Insurers and banks should ensure that the product oversight and governance ("POG") requirements system and controls are adequate to prevent undue influence of the bank in the product design (unless the bank is a co-manufacturer), and to ensure effective management of conflicts of interest.
- Distribution arrangements of CPI: insurers and banks are expected to assess and review their distribution and remuneration arrangements to ensure that, they act honestly, fairly and professionally in accordance with the best interests of their customers at all times. In particular, an assessment should be made as to whether the commissions earned are justified by the costs incurred to provide the CPI product and by a benefit offered to the target market. Commissions earned by banks and insurers for the sale of CPI products should be justified and proportionate.
Following the issuance of the Thematic Review and the Warning, it is anticipated that EIOPA will prioritise its monitoring efforts of the CPI market. In the event that insurers and bankers fail to comply with the IDD and/or the POG requirements, they should expect the relevant competent authority to exercise its supervisory powers which may include on-site inspections, the imposition of sanctions and/or administrative measures, such as requiring the bank to stop the sale of products for which they cannot substantiate with sufficient and adequate product testing, that the high commissions are justified, or even withdrawing the bank's registration as an insurance intermediary from the national register.
Insurers and banks should also note that competent authorities are also not excluded from cooperating with other relevant authorities in their jurisdiction, including the relevant competition and consumer protection authorities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.