Travel insurance industry hit with regulatory warning over business models

Insurance law expert Iain Sawers of Pinsent Masons, the law firm behind Out-Law, said in the wake of the warning, insurers and intermediaries should look at how they distribute their products in order to ensure that they were compliant with legislation.

EIOPA’s warning follows the publication of a thematic review on consumer protection issues in travel insurance (62 page / 1.4MB PDF).

The review found that the travel insurance market was buoyant as more people chose to travel, but there was a potential risk of low-quality products and services for consumers due to certain remuneration structures and newly established partnerships with distributors through international tenders, sometimes based solely on commissions paid to distributors. The sale of travel insurance products online also posed increased conduct risks.

In its warning to the industry (4 page / 126KB PDF) EIOPA addressed the key issues identified in the review, in particular what it described as “problematic business models”. These involve remuneration structures based on high commission levels, as well as business models that combine high commission with extremely low claims ratios. EIOPA said these models offered poor value for money to consumers.

The authority said such business models were not consistent with the fundamental regulatory principles set out in the EU’s Insurance Distribution Directive (IDD), which include acting in the best interests of the customer and obligations on product oversight and governance.

“The travel insurance sector will be reassured by EIOPA’s finding that there is no general market failure of the market as a whole,” Sawers said.

“However, EIOPA does identify consumer detriment due to certain business models and remuneration structures and gives a clear message to expect intensified supervision in the sector as national regulators look to ensure better outcomes for consumers. Insurers and intermediaries should assess product and distribution arrangements to ensure compliance,” Sawers said.

EIOPA said both it and national authorities would be closely monitoring how effectively consumers' needs would be taken into account in product development and testing as well as during distribution.

It warned that authorities would be intensifying their risk-based supervision of insurance undertakings and insurance intermediaries, particularly in markets where risks had been identified.

National authorities would be exercising supervisory powers including imposing sanctions for failures to comply with the requirements set out in the IDD.

The EIOPA warning continues a trend for regulators to focus on consumer protection and pricing issues. Earlier in October the UK’s Financial Conduct Authority (FCA) published an interim report on its study of the UK general insurance market, which identified potential remedies to increase transparency and reduce prices for customers.

The FCA has also consulted over the potential impact of a no-deal Brexit on the travel insurance industry, publishing proposals to make it easier for customers with pre-existing medical conditions to find insurance cover once they lost access to state-provided healthcare in EU member states.