The Retail Investment Strategy: unlocking its full potential for life insurance

Contribution to the Eurofi Magazine - September 2022

The Retail Investment Strategy is a key plank of the European Commission’s Capital Markets Union and aims to promote more transparency, simplicity, fairness and cost-efficiency for retail investment products across the internal market.

EIOPA strongly supports these objectives. Insurance-Based Investment Products (or IBIPs) are often the first, if not only, retail investment product which consumers buy. Life insurance, because of its societal benefits, is often connected to tax and inheritance-related incentives, leading many investors to opt for insurance over other available retail investment products. 

Therefore, firms must actively engage with consumers and support them on their investment and savings journey to address growing protection gaps. The EU regulatory framework for retail financial services can assist by:

• Driving appropriate longer term investment behaviours and opportunities;
• Creating a safe environment for consumers that enables them to make the right choices, and ensure products are suited for the proposed target market;
• Promoting further the principle that investment products should be cost-efficient and simple to understand and contribute to improve consumers’ overall finance health; and
• Enabling a risk-based approach to conduct of business supervision.

At the end of April 2022, EIOPA delivered technical advice to the Commission on Retail Investor Protection where we set out our views in a number of areas such as enhancing consumer disclosures, tackling damaging conflicts of interest in the sales process and addressing complexity in the retail investment market.

Improving the quality of consumer disclosures is a critical first step. We see the need for a shift towards truly consumer-focused disclosures, built upon an enhanced supervisory framework that fits the digital age. The starting point when designing consumer disclosures should be behavioural research and consumer testing. 

More needs to be done to tackle damaging conflicts of interest arising throughout the product lifecycle, including the product design phase when underlying funds are selected for unit-linked products. We think improvements to the existing rules on inducements are necessary and a combination of different policy options could also bring specific benefits. Too often the debate is a binary one between banning or not banning commissions.

To address cost-efficiency and complexity in the retail investment market, there needs to be more coherence in the current regulatory requirements to identify which products are complex. We would like to see a clearer notion of the objectives when considering product complexity and cost-efficiency of IBIPs and take due account of the level of complexity in the different stages of the product lifecycle. Furthermore, improvements to the Key Information Document can bring greater transparency on the impact of the costs of “wrapper” products. 

There is also scope for making the sales process for life insurance products simpler and more affordable, but this should not be at the expense of a lower level of consumer protection. The ongoing digital transformation in the sale of financial products and further automation of the sales process such as more enhanced portability of the suitability assessment, can help in this respect, but we need to make sure that any risks (such as misuse of customer data) are also effectively supervised. 

Recent ideas put forward to amend the existing suitability/appropriateness assessments with a more portfolio-style approach need, in our view, to consider the specific nature and structure of the products involved. The goals which the customer seeks to achieve may be fundamentally different when comparing, for example, a sophisticated investor buying equities and seeking to maximise return with a consumer buying life insurance seeking to secure some savings for retirement, and coverage for risk of death, critical illness or disability. 

Some IBIPs are associated often with long recommended holding periods of 20-30 years with limited possibilities for customer intervention during the contract period. This can present challenges for consumers purchasing such products to properly assess the true cost of those products and their risk. Therefore, consumers may often require ongoing advice from an intermediary because their personal circumstances may change during that period.

In conclusion, if we really want to unlock the full potential of the CMU and the Retail Investment Strategy, it is important that the EU regulatory framework sufficiently takes into account the relative size and structure of the European insurance market, its existing heterogeneity and the way consumers engage in this market. Insurance distribution is one of the most important ways that allows small savers and investors to participate in capital markets. Therefore, a more consumer-focused approach which gives due consideration to the unique structure of insurance distribution could bring real benefits in this respect.

Thanks to David Cowan for his contribution to this article.