Last 4th October 2022 EIOPA issued a thematic view on the functioning of the EU market for Credit Protection Insurance (CPI) products, that revealed several in place practices detrimental to the policyholders. Consequently, the regulator also issued a warning directed to insurers and banks that should ensure a better value for money for the consumers, especially because these products are not tailor made. As a brief recall, CPI products offer a term life coverage whose insured capital is linked to the debt of the credit provided by a financial institution.
EIOPA expects the bancassurance distributors to improve their practices, by fully complying with the Insurance Distribution Directive (IDD) and the Product Oversight and Governance (POG) requirements, avoiding too high remunerations, and preventing conflicts of interest. This improvement will be fostered by National Competent Authorities’ (NSA) on-site inspections and other investigatory methods, with potential sanctions and administrative measures applied to insurance companies and banks when needed.
EIOPA highlighted 4 main areas of concern related to CPI products:
- High remunerations and conflict of interest
CPI products appear to be highly profitable for both insurance companies and distribution banks, the latter receiving high commissions, with significant conflicts of interest and poor business practices, such as aggressive sales techniques and mis-selling, aimed at maximizing their profits. This is exacerbated by the fact that 34% of the banks apply incentive schemes for their employees to sell CPI products. Unfortunately, a large portion of the Gross Written Premiums (GWP) paid by the policyholders is retrieved by the banks and the customers receive just a little in terms of claim payouts (on average, below than 30%). Looking at the period 2018-2020, EIOPA found that the commissions paid to banks ranged a share of GWP:
- from 30% to 70%, for >50% of mortgage CPI policies
- from 40% to 80%, for >66% of consumer credit CPI policies
- from 40% and 90%, for most credit card CPI policies
- Limited choices
Following point #1, albeit is should be theoretically possible for the policyholders to combine a credit product offered by a certain bank with a CPI product sold by any provider, 83% of the banks tie their credit to the insurance products they distribute, to get higher commissions. Indeed, the 63% of the insurers, that belong to a strategic alliance or to the same financial holding of banks, pay higher commissions to such banks compared to other non-exclusive distribution agreements. High commissions are the result of the bancassurance business models in place. In addition, certain banks offer the possibility to pay the single premium of the policy by increasing the loan, generating higher costs of interest.
- Difficult actions
Furthermore, albeit is should be theoretically possible for the policyholders to cancel the policy or to switch provider, 43% of the insurance companies interviewed claimed that, to do so, their customers shall beforehand get an agreement from the bank providing the credit and fulfil certain conditions.
- Difficult comparison
Finally, it’s hard for the policyholders to understand why prices of similar CPI products can vary a lot and it’s even harder for them to compare products designed with large differences in terms of coverage, conditions, and exclusions.
To improve the customers’ value for money, EIOPA warns the bancassurance sector to take these two remedial actions:
- CPI products manufacturing
The insurers should design products that meet the needs of an identified target market, offering a fair value pricing. They shall carry out an assessment to check there are no undue costs: those in place shall be proportional to the expenses borne by the manufacturer, by the distributor and the benefits. Insurers should also assess whether the bank is a co-manufacturer of the policy and does not influence the product design, by ensuring the POG system and controls are adequate.
The insurance companies should ensure a proper product monitoring (analysing complaints, rejected claims and other KPIs) and take remedial actions (such as lowering the costs or improving the benefits) when needed. They should also monitor whether the banks acting as insurance intermediaries follow the objectives set out in the product approval process.
- CPI distribution arrangements
Insurers should assess whether the level of commissions is justified by the costs borne to provide these products and by a benefit offered to the target market, lowering unjustified and disproportionate commissions. They should also identify the most appropriate distribution channel, rather than relying on existing partnerships and/or on companies belonging to the same financial holding; they should identify possible conflicts of interests and implement mitigating measures when needed.
- EIOPA, Thematic review on Credit Protection Insurance (CPI) sold via banks, October 2023
- EIOPA, Warning to insurers and banks on Credit Protection Insurance (CPI) products, October 2023