Retail Investment: Value for Money

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Written by Pablo Pernía Martin: Vice-chair, Conduct of Business Committee, Insurance Europe and Director of the Legal Department, VIDACAIXA, Spain

Ensuring consumers get products that best meet their needs

Risk coverage is a complex business whose ultimate objective is to protect the client. Providing value for money is a priority for the insurance industry. Insurers continually strive to develop products that best meet the expectations and evolving needs of consumers, as well as changing market conditions. Consumer satisfaction is essential to the success of any insurer and a necessary condition to stay ahead of the curve in a competitive market.

Value for money is not just a buzzword. In Europe, a comprehensive supervisory framework already exists which already accomplishes a high level of protection for consumers, while helping authorities to spot outliers and take action where necessary.

The long list includes the EU’s Insurance Distribution Directive (IDD) and the Delegated Regulation on Product Oversight and Governance (POG). These were complemented by the Supervisory Statement by the European Insurance and Occupational Pensions Authority (EIOPA) in November 2021, and EIOPA’s detailed methodology to assess value for money in the unit-linked market of October 2022.

And it does not stop there. National Competent Authorities are in the process of assessing how to make use of EIOPA’s guidance, with some already testing new approaches for value for money that best reflect their market’s realities.

Beyond this, the European Commission’s Retail Investment Strategy (RIS) proposal put forward additional rules on value for money, including the creation of a pan-European benchmark based on cost and performance criteria. In parallel, EIOPA recently launched a consultation to gather stakeholders’ views on how to develop value for money benchmarks.

The need for a holistic approach

Unfortunately, both the Commission and EIOPA proposals place too much emphasis on costs, and not enough on the qualitative elements that contribute to offering quality and diversity to consumers such as the biometric coverage and the existence of a financial guarantee.

Furthermore, they do not consider the quality and the benefits offered by Insurance-based Investment Products (IBIPs) which are crucial to meet consumer needs and to their purchasing decision. In practice, a narrow approach to value for money based solely on cost cannot work for insurance, as IBIPs are built on both quantitative and qualitative aspects – and this makes them different from other types of investment products.

When it comes to IBIPs cheaper is not always better. And it is wrong to assume that cheaper, lower-quality IBIPs will always meet consumers’ needs and goals and provide them with value for money. To put it into perspective, a unit-linked product with a limited biometric coverage may be cheaper than a product that has a significant biometric coverage but both products serve different purposes and satisfy different clients’ needs.

Benchmarks as supervisory tools only

Another big risk lies in policymakers’ approach towards value for money benchmarks. It is all very well for supervisors to wish to identify products that do not provide sufficient value for money, and to that end, to develop tools to monitor the market and the application of POG. Protecting consumers is important, and it is equally important to preserve consumer choice, product diversity and innovation.

It is therefore crucial that any new tools remain within the sole remit of supervision to avoid any potential negative consequences in the market. Insurers should not be forced to compare their products against any potential benchmarks. What is key is that the product remains consistent with manufacturers’ target market’s demands and needs, regardless of its position vis-à-vis the benchmarks. Insurers’ freedom and flexibility in product design must be preserved.

On a different note, such tools should not lead to more data collection nor additional burden for insurers. Insurers keep explaining that there are already a wide range of data available based on the PRIIPs Key Information Documents, which will soon be even more accessible thanks to the European Single Access Point (ESAP), as well as national reporting and Solvency II reporting. In line with President von der Leyen’s commitment to reduce administrative burden by 25% for companies, it should not become more difficult for insurers to do business.

Unintended consequences

So, what would happen if value for money benchmarks go beyond a mere supervisory tool and instead form part of the POG requirements and are imposed on product manufacturers? This could have negative consequences on the market, in the form of price controls and product standardisation. There is a high risk that benchmarks will put insurers under pressure to ensure that their products meet the reference benchmarks. It would become too burdensome to justify any deviation – potentially causing the market to converge towards the acceptable threshold predefined by competent authorities.

The result would be less competition and less innovation in the market. And this would be extremely detrimental to the consumers’ interests, who in the long run would suffer from a reduction in choice.

The insurance industry deems it essential that the EU market remains based on free competition and value for money benchmarks or any other tool should not be used to rank products, nor to form a barrier to entry of new participants. This argument was also supported by the Finnish Competent and Consumer Authority (FCCA) which observed that benchmarks can reduce incentives for companies to enter the market and develop new products^[1]. 

The experience with the pan-European personal pension product (PEPP) shows that over-regulated products, characterised by unrealistic performance expectation and with strict caps on costs, do not work in practice. Today, only one single distributor in Europe is offering a PEPP.

This is also why benchmarks should not be used as a consumer disclosure tool. If presented to the wider public, they would expose product manufacturers to reputational and commercial risks should they fail to meet the benchmarks. This is because the information published could be misused or misinterpreted by the different stakeholders, including competitors, comparison websites, press and journalists, social media and finfluencers, consumers and their representative organisations, and would lead to misleading or simplistic conclusions on what are the “good” or “bad” products on the market.

Investors, or potential investors, could be tempted to choose the cheaper option at the top of the list. But this does not necessarily mean better products for their objectives, needs and financial situation. Rather, it would unduly confuse consumers, instead of helping them assess the benefits of insurance products and of encouraging them to participate in the capital markets.

Mismatch of initiatives

Also, the overlap of EIOPA’s work with the ongoing deliberations on the Retail Investment Strategy proposal further complicates the regulatory landscape. This is because as part of the Retail Investment Strategy, policymakers are still weighing up the pros and cons of introducing benchmarks in the market, while EIOPA is already defining its own approach. The lack of alignment between these initiatives will create uncertainty and risks of overlap or inconsistencies. This mismatch thus not only amplifies complexities, but it also hinders the development of coherent strategies to address value for money, affecting specifically to the insurance sector and creating an unlevel playing field with other competition industries.