At the end of April, EIOPA issued a thematic review considering potential consumer protection issues in the unit-linked insurance market due to monetary incentives and remuneration payments between the insurers and providers of asset management services, both internal and external providers.
The review considered not only the structure and magnitude of such payments, but also the impact on the unit-linked products and whether insurers affected are appropriately addressing any conflicts of interest and acting in the best interests of policyholders.
The review has shown, rather unsurprisingly, that monetary incentives are widespread. Although external fund managers only manage 28% of the assets covered by the survey, they attracted almost half of the remuneration total. In house fund managers manage 69% of unit-linked assets, leaving just 3% managed by the insurers themselves. Almost 60% of assets are actively managed funds and 63% are invested in equity or multi-asset funds – both of which attract higher levels of monetary incentives and remuneration.
The significant level of reliance on the asset management sector raises questions about the value added by the insurers and also how conflicts of interest are identified and addressed. The concern relates to the actual practice, rather than a lack of conflicts of interest policies.
Given the increasing importance placed on disclosure requirements, insurers will need to consider augmenting disclosures around the incentives received. The report reveals that nearly 70% of insurers do not disclose the amounts received to policyholders and only 25% pass the full amount onto policyholders, representing 30% of the total received across the industry.
In addition, despite the prudent person principles and outsourcing requirements of Solvency II, over 30% of insurers delegate monitoring processes to the asset managers.
Given the findings, it is unsurprising that EIOPA has concluded that there is potential for consumer detriment, arising from poor/missing disclosure, inflated costs due to the insurer retaining the incentives/remuneration payments and possible sub-optimal investment choices. As the volume of European insurance savings products sold under the unit-linked model continues to increase, it is likely that further EIOPA action will be taken in this area.
In light of the forthcoming disclosure requirements under both the Insurance Distribution Directive and the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulations, both insurers and asset managers would be advised to consider what action they should take to address conflicts of interest and improve disclosures to policyholders. For the asset management industry, it is unlikely to be sufficient to consider the insurer as a professional customer only, without recognising that consumers are investing in the unit-linked products.
More fundamentally, though, the findings of the review call into question the long-standing business relationships between insurers and asset managers and provide an early warning that a complete re-think may be required by the industry, before it risks becoming mandated. The avoidance of consumer detriment by both sectors must remain a key consideration.