As a follow up on its supervisory statement on value for money disclosed last November 2021, EIOPA published last 31st October 2022 a methodology to assess the value for money of Unit Linked (UL) and hybrid (multi-class) products. The document should be considered as a work in progress, as it will be reviewed on a regular basis and re-published if need be.
The aim of the methodology is twofold: on one hand it ensures a minimum common approach to be followed by the National Supervisory Authorities (NSAs) in the European market; on the other hand it makes clear to insurance companies and distributors the supervisory expectations to meet when drafting their own Product Oversight and Governance (POG) policies.
The idea behind the methodology it to scrutiny the UL and hybrid products by following a three-layer analysis. The three layers are
- market wide assessment: through which NSAs should identify products requiring higher scrutiny
- enhanced supervision: through which NSAs should assess different indicators and determine whether the product offers value for money to certain identified target markets
- POG assessment: though which the NSAs should have a clear opinion, for those products where layers [1] and [2] did not give a clear answer (it may be the case of products offering value for money to some target markets only).
[1] Market wide assessment
The goal is to monitor the trade-off between costs and return in a wide market, with the aim of identifying potential outliers to be better scrutinised in the second layer. The outliers can be selected by using a relative (10%, 5% or 1% of the tail of the distribution) or fixed (specific level suitable for the indicator considered) threshold.
For what concerns the costs, it is important to determine whether the distribution ones are included or borne separately by the customer and directly paid to the intermediary; while regarding the return, it is important to consider the inflation, that negatively affects the real value of the product.
Comparable and standardized information on costs and returns can be found in the PRIIPs KID documents, available for all the commercialised products, that show the Reduction in Yield (RIY) caused by the costs at different point in time and the Internal Rate of Return (IRR), according to different scenarios and different Recommended Holding Periods (RHP). These two can be combined to rank products and identify the least profitable (lower IRR) jointly having the highest RIY. Another source of information can be found in the collection of additional ad hoc product-related information on costs and past performance that the majority of NSA gather in the context of the EIOPA Costs and Past Performance Report.
To carry out the analysis at undertaking level, the NSA may use the retail risk indicators based on Solvency II data, that show the returns of the assets backing UL products and the commission rates. Another way of judging the undertakings is to look at the quality of the 5 top largest funds it invests in.
[2] Enhanced supervision
The assessment should be carried out at individual product level, to draw more detailed conclusions.
The NSA should either carry out a product profitability testing or leverage on the work performed by the undertakings as part of POG, providing a challenging set of assumptions to be applied, especially concerning the returns of the underlying funds. In terms of profitability, indicators as the “surrender value” and “biometric risk benefit” against the amount of premium paid shall be measured after 1y and after half of the total RHP. For what concerns the costs, indicators such as “surrender costs” against “surrender value” (1 year before the RHP) or “entry costs” against “total costs paid” (cumulated until 1 year before the RHP) shall be measured.
As an alternative to the product profitability testing, the PRIIPs KID documents can be used to find some indicators, still challenging the backing assumptions.
Finally, a qualitative check list can be ticked to investigate the presence of elements that usually represent a non-monetary value to policyholders, who may be willing to bear extra costs. Examples are subjects like sustainability, digitalization, level of advisory or bonuses like gift cards.
[3] POG assessment
The final step of the methodology envisages to interpret the set of information gathered in layers [1] and [2] in light of the POG process followed by the undertakings.
It is applied to those products which, based on layer [2], may offer value for money despite having high costs and/or having certain features not easy to understand for any target market. NSA should assess whether the costs are due, and the services are aligned with the needs, objectives and characteristics of the target market.
Reference:
- EIOPA, Methodology to assess value for money in the unit-linked market, 31 October 2022
