Publication alert: EIOPA - EIOPA - Methodology for assessing value for money in the unit-linked market
We communicate that the European Insurance and Occupational Authority (EIOPA) has published the Methodology for assessing value for money in the unit-linked market.
1. Context
Following the publication of the Supervisory Statement on Value for Money in November 2021, EIOPA has worked on a methodology to ensure a consistent and convergent approach towards the implementation of said Supervisory Statement.
In this context, the EIOPA has published the Methodology for assessing value for money in the unit-linked market, which outlines a common European approach on how to identify unit-linked products which may offer poor or no value for money and require a close monitoring by national competent authorities (NCAs) to ensure risks are sufficiently identified, monitored and mitigated. The methodology also offers more clarity to insurance manufacturers and distributors on the supervisory approach to addressing value for money risks when supervising product oversight and governance (POG) requirements.
2. Main points
The approach is divided into three layers:
Layer I: Market wide assessment through which NCAs would identify products requiring higher scrutiny:
- The products in scope of the analysis should be currently commercialised ones to make sure the analysis is representative of the current market environment.
- The methodology assess undertakings or products (depending on the tool used) to monitor the trade-off between costs and returns. Moreover additional extrinsic factors may matter when assessing product value for money (e.g. inflation)
- Regarding costs it should need to be determined whether the specific product includes costs for the product’s distribution or whether such costs – according to the undertaking’s distribution strategy – are borne separately by the customer and paid directly to the intermediary. This should be taken into account when assessing value for money.
- The different tools presented are based on: i) PRIIPs KID data; ii) product national reporting; iii) Solvency II retail risk indicators; and iv) quality of funds underlying unit-linked products. These are indicative and should be adapted by NCAs.
- The products or undertakings (depending on the tool used) to be shortlisted for enhanced monitoring (Layer II) are the outliers (both in terms of low performance and high costs) according to the different metric corresponding to one (or a combination) of tools used. Outliers may be identified using relative thresholds, i.e. relative to the figures observed in the market, or on the basis of fixed thresholds.
Layer II: Enhanced supervision through which NCAs would assess different indicators and determine whether products offer value or not:
- Indicators to test independently the Value for Money would focus on both the “surrender scenario” and the “biometric risk scenario” as two independent events.
- The assessment should be carried out at individual product level, specifically testing product profitability and not undertakings’ lines of business.
- The different tools presented are based on:
- Product Profitability Testing. This exercise will allow to gain a full picture of the impact of costs and, depending on the target market, other factors like inflation, versus the performance following a consumer perspective. The product profitability testing should also verify whether the investment strategy and general functioning of the product lead to satisfactory performance.
- Enhanced PRIIPs KID analysis. Alternatively to the Product Profitability Testing, some other indicators provided in the PRIIPs KID might be used and jointly interpreted to perform an enhanced supervision.
Layer III: Assessment of POG documents. The final step of the methodology envisages to interpret the set of information gathered in the previous layers in light of the POG process followed by the manufacturers.
- For those products which, based on Layer II, may offer value for money despite having high costs and / or having certain features which may not be simple / easy for any target market to understand, supervisors should assess whether the cost are due and the services and / or the product features to which the costs relate too are aligned with the needs, objectives and characteristics of the target market.
- The POG Process relays on the following steps:
- Manufacturers’ systems and controls to ensure customer centric business models, ensuring product meets needs of the identified target market and mitigate consumer detriment.
- The definition of product’s target market, namely the identification of a group of customers, with similar characteristics, for whom the product is compatible.
- The product testing, to assess if the products meet the identified target market’s needs, objective and characteristics, over the lifetime of the product.
- The assessment of the appropriateness of the distribution strategy, to ensure manufacturer have appropriate processes and controls that determine the processes criteria and steps to be followed for the development of distribution strategies.
- Product monitoring and review, to ensure that insurance products remain consistent with the needs, characteristics and objectives of the target market.
After the finalisation of the three layers analysis, it is expected that a conclusive decision on whether products offer value for money to their identified target market would be reached. Finally, it is important to note that this approach, in particular Layer III, is not meant to replace manufacturers’ assessment of value for money. It rather aims at determining whether manufacturers have sufficiently and adequately tested that their products offer value to a given target market.
3. Next steps
This work is not yet finalised and the document should be read as a work in progress, to which further improvements will be made and the content refined after the NCAs start to apply it in practice.