EIOPA re-emphasises unit-linked insurance product value for money

The supervisory statement, published on 30 November 2021, sets out a framework which should assist insurance product manufacturers in assessing whether their unit-linked products offer value-for-money and whether adequate measures are taken to mitigate risks relating to product complexity. Given the number of unit-linked providers in the Irish market operating on a cross-border basis, this supervisory statement is very relevant.

EIOPA focuses heavily on the product oversight and governance framework set out in the Insurance Distribution Directive (IDD) and Commission Delegated Regulation 2017/2358 (POG Delegated Regulation) in the supervisory statement and states that there are disparities in how manufacturers and distributors of unit-linked products are applying value for money principles to unit-linked products. As a result, performance/benefits in unit-linked products may not perform as expected and certain costs may become uncompetitive over time.

EIOPA clearly believes that the basic value for money principles are already captured in the product oversight and governance framework, particularly the IDD and the POG Delegated Regulation. The supervisory statement is therefore a re-emphasis of those principles with additional detail and specificity inserted around value for money in unit-linked products and is being introduced to clarify the specific obligations of insurance undertakings writing unit-linked business under the product governance framework as opposed to creating new obligations.

The statement comes at an interesting time given the Central Bank of Ireland (CBI) has recently confirmed ensuring compliance with product oversight and governance principles as being one of its regulatory objectives. It therefore seems very likely that the CBI will be rigorously applying the principles in the supervisory statement. As a result, Irish authorised insurance undertakings writing unit-linked business will need to ensure that their product oversight and governance procedures and documentation meet the requirements of the supervisory statement as soon as possible.

Product oversight and governance supervision

The statement clarifies EIOPA’s expectations with respect to value for money of unit-linked products, and explicitly links the requirements which apply to unit-linked providers to their obligations under the product oversight and governance framework.

The supervisory statement requires that the product oversight and governance process and documentation must contain a pricing process and a complexity assessment.

Target market

Under the POG Delegated Regulation, the product approval process has to ensure that products are aligned with the needs, objectives and characteristics of the target market and do not adversely affect customers, in order to prevent customer detriment.

The supervisory statement makes clear that unit-linked products which offer poor value for money are not aligned with the objectives of any target market on the basis that no target market has as its objective receiving poor value for money.

Value for money

EIOPA considers that products offer value for money where the costs and charges are proportionate to the benefits to the identified target market (i.e., investment performance, guarantees, coverage and services), as well as reasonable taking into account the expenses borne by providers.

Manufacturers are required to address value for money risks in the pricing process which is part of the product oversight and governance process, and they should be reflected in the product oversight and governance documentation. The product oversight and governance documentation can be requested by national competent authorities and should include evidence of the following:

• the costs and charges are properly identified, quantified and not undue;
• adequate and sufficient testing on whether the product offers value for money to the target market through the lifetime of the product; and
• costs and charges, investment performance, guarantees, coverage and services offered are regularly reviewed.

Costs and charges due

The supervisory statement expressly provides that costs and charges must be “due”. Due costs are costs charged to customers which are consistent with the target market’s needs and objectives and are clearly identified and quantified. In particular, due costs are those costs which manufacturers can clearly link to services rendered or expenses made and which are proportional to the efforts and expenses incurred by the (co)-manufacturer or distributors.

For the identified costs, national competent authorities should be able to assess whether the insurance product manufacturer has sufficiently established that the costs are proportionate compared to market standards; to the type of service provided; and to the target market’s needs, objectives and characteristics. In particular, EIOPA expects that underlying funds managed by affiliated entities are only made available when they offer at least similar value for money than comparable funds on the market. These assessments should be evident in the product design, product testing and pricing process and systems and controls should be in place to ensure conflicts of interest are managed and mitigated.

Adequate and sufficient testing of product value for money

The supervisory statement requires manufacturers to test their unit-linked products appropriately, including via scenario analyses. This should be done before bringing to the market new products or products that have been significantly adapted, or when the needs, objectives and characteristics of the defined target market or the risks posed to it have significantly changed.

National competent authorities should be able to assess whether there has been sufficient testing of unit-linked products in both a qualitative and quantitative manner. The testing must demonstrate that each product feature delivers value for money and over its lifetime meets the needs, objectives and characteristics of the target market. 

Regular review

The pricing process which the supervisory statement requires manufacturers of unit-linked products to undertake should allow the national competent authorities to confirm that those manufacturers continuously monitor and regularly review unit-linked products in order to, amongst other things:

• identify events which could materially affect the main features, the risk coverage or the guarantees of those products;
• assess whether the products remain consistent with the needs, objectives and characteristics of the identified target market; and
• review the net performance of the underlying funds against market benchmarks.

Linking product complexity and target market granularity

Manufacturers should be able to demonstrate that they have developed their own notion of complexity and have placed their products on a complexity scale whereby the granularity of the target market is proportional to the product complexity. The more complex a product is, the more granular the target market should be. Higher complexity may result in more advice being required at the point of sale, leading to higher costs.