Insurance consumer protection Latest developments at EU level William Vidonja, Head of Single Market & Social Affairs, CEA Budapest, 19 October 2011

European insurance and reinsurance federation, founded in 1953 Represents around 95% of European insurance market by premium income Committed to creation of favourable regulatory and supervisory framework for insurers at European and international level About the CEA

CEA members 32 national associations: 26 EU member states 6 non-EU markets Croatia, Switzerland, Iceland, Norway, Turkey, Liechtenstein 2 associate members Serbia, San Marino 3 partners Russia, Ukraine, Kosovo

Contribution to the economy More than European (re)insurers represented by the CEA Generating premium income of over €1 100bn Investing almost €7 500bn

Stakeholders in the international environment European institutionsInternational institutions AMICE European Commission European Parliament Council of Ministers EIOPA ESRB CFO Forum Insurance industry stakeholders CRO Forum PEIF ICISA RAB Other stakeholders Business EuropeBEUC EFAMA IAIS OECD FSB G-20 National insurance associations Insurance companies IMF IASB UNI-EuropaEWL Age Platform Europe

SEPA Tying & bundling MiFID E-commerce PRIPs Age and disability EU consumer protection initiatives related to insurance EU contract law UCP Financial education Data protection Consumer rights IGS IMD Collective redress ADR Gender Anti- discrimination

The need to restore trust (1) Do you remember... before the crisis? Very high consumer satisfaction and loyalty (2007 IPSOS) 7

The need to restore consumer trust (2) Do you remember... before the crisis? Very low consumer dissatisfaction (2007 IPSOS) 8

The need to restore consumer trust (3) Crisis impact Consumers distrust the industry as a whole (German confidence in financial institutions, GfK Marktforschung, 2009, based on 1,013 individuals surveyed) 13% (17%) have complete confidence in insurance companies in general (banks) 40% (60%) trust their own insurer (bank) Need to rebuild trust in the sector as a whole 9

The need to restore consumer trust (4) Impact on regulation Call for further consumer protection (German consumer monitoring, GfK Marktforschung, 2009, based on 700 telephone interviews) 2007: 65% (extreme) satisfaction with existing measures in insurance 2009: 45% Demand for active improvements in consumer/ investor protection 50% see competent advice as being of primary importance 39% see trust, seriousness and reliability in 2nd (only 11% in 2007) 5% place particular value on returns and profit opportunities 23% want safe investments and less risk Top of the list! Solutions requested from policy-makers: more rights in case of negligent advice, more financial education in schools, accreditation standards for financial advisors etc. 10

The need to restore consumer trust (5) Impact on regulation Regulators have to restore trust in themselves in financial services and insurance 11

Tying & bundling MiFID E-commerce PRIPs Age and disability EU consumer protection initiatives related to insurance EU contract law UCP Financial education Data protection Consumer rights IGS SEPA IMD Collective redress ADR Gender Anti- discrimination

Distribution: IMD (conduct of business) and PRIPs (disclosures) Q1 2011: EC retail package Insurance guarantee schemes (IGS) Q4 2012: EC legislative proposal Anti-discrimination issues Dec 2011: EC guidance on the ECJ Test-Achats ruling (gender) Draft Directive on age & disability pending in the EU Council Consumer redress: collective redress & alternative dispute resolution (ADR) End 2011: EC com on principles on collective redress + legislative proposals on ADR/ ODR + recommendation to strengthen FIN-Net European contract law 2012: EC work on an insurance optional instrument Etc. EU consumer protection initiatives related to insurance

Consumer empowerment (1) Information requirements CEA supports high level of consumer protection and recognises importance of improving information provided to consumers Information requirements should not create additional burden without providing any benefit to consumers Not a case of more information, but better information for consumers CEA has developed a Key Information Checklist (KIC) for unit-linked life insurance A short list of simple, clear information headings on key product characteristics to help consumers understand and compare products consistently across Europe

Consumer empowerment (2) Conduct of business rules Enhancing conduct of business rules Important to recognise the diversity of insurance distribution markets across the EU, reflecting differing consumer needs EU-wide “one-size-fits-all” legislation will not capture differences between existing national distribution structures Minimum harmonisation approach is necessary CEA has proposed high-level principles on selling practices for all insurance contracts Aim: to guarantee consumers an appropriate level of protection, regardless of the distribution channel, while accommodating diversity Cover fair treatment of the customer, advice, analysis of customer needs etc. Flexible enough to allow a proportionate approach 15

Consumer empowerment (3) Financial education Importance of financial education to ensure European citizens are equipped with the knowledge, confidence and skills necessary to improve their understanding of financial products and concepts, and to make informed choices of financial services to suit their particular needs CEA publication “Financial education and awareness – European insurance industry initiatives” Overview of industry initiatives across Europe Calls for European Day of Financial Education Welcomes work done at international level (OECD, EIOPA) EC has suspended its activities on financial education: Discontinued Expert Group on Financial Education Discontinued European Database for Financial Education No longer plans to issue Recommendation on financial education 16

Is there a case for IGS? Policyholders should be protected against the consequences of an insurer going insolvent Preference for measures preventing insolvency (Solvency II) IGS entails side-effects in relation to costs, moral hazard and unfairness, which IGS design options can limit to a certain extent but not eliminate Open question about IGS effectiveness: Real or fake consumer protection tool? The risk in concentrated markets The risk in non-concentrated markets 17 Insurance guarantee schemes (IGS)

Gender in insurance pricing (1) Gender Directive 2004/113/EC Prohibition of gender-based differentiation in insurance pricing (Art.5§1) MS option allowing such differentiation (Art.5§2) ECJ Test-Achats ruling, 1 March 2011 Art.5§2 invalid with effect from 21 Dec 2012 The ruling addresses the structure of the Gender Directive, but leads to challenge the way private insurance works Implications for insurers Technical challenge for insurers to adapt (deadline) Legal certainty needed asap EC guidelines expected in Dec 2011 Ruling only applies to new contracts concluded for the 1 st time after 21 Dec 2012

General implications for consumers Reduced competition, innovation and consumer choice Risk inadequate pricing: risk of premium increase, withdrawal of products (adverse selection and moral hazard) Gender in insurance pricing (2)

General examples of consequences for consumers Term life insurance –Women live longer than men & pay less –Expected premium increase eg for a single young mother looking for a term life insurance to secure her mortgage Motor insurance –(Young) women have less driving offences and claims, and therefore pay lower premiums –Unisex premiums may result in higher premiums for them Annuities –Men may stop buying annuities and prefer banking/investment products with no biometric risk coverage –Expected social impact on levels of retirement savings in the context of financial pressure on state pension schemes Gender in insurance pricing (3)

National examples Belgium Motor third party liability (MTPL) insurance: the introduction of unisex rates resulted in 2008 in premium reductions of 3–4% for young men and premium increases of 7–15% for young women The UK Motor insurance: women aged 25 and under could see the cost of cover rise by up to 25%; men of same age costs could fall by up to 10% (based on an average motor premium of £1,682 for female aged (AA Premium Index), it would mean an extra £420 a year) Annuities: men (and dependants) could see a 8% reduction in benefits, while those for women could only rise by 6% Term life insurance: expected rise of up to 35-50% in the cost of cover for women, while men could see a fall of 0-10% Gender in insurance pricing (4)

Age and disability in insurance pricing Draft Directive on age & disability Risk of spill-over effect Similar structure as Gender Directive Need for absolute legal certainty on use of age and disability in risk assessment and insurance pricing A ban on the use of these factors would lead to the end of the current insurance business model, to the detriment of consumers…

Conclusions Good intentions behind EU initiatives, but must strive for effective and intelligent consumer protection and consider the wider implications Enhance level of consumer protection, rather than introduce more regulation - quality vs. quantity Important to respect the diversity of markets and the differing demands and needs of consumers across the EU Competition allows for increased choice, lower prices and better access to insurance Proposals need to avoid “unintended consequences” for the economy, businesses, consumers and taxpayers Professional, precise and evidence-based IA, testing and consultation

CEA publications CEA Annual Report The use of gender in insurance pricing Financial education and awareness: European insurance industry initiatives European Insurance in Figures Briefing note: Insurance distribution Insurance Distribution Channels in Europe

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