CREATING A CONSUMER-FOCUSED, FAIR, EFFICIENT, AND INCLUSIVE INSURANCE MARKET - THE ROLE OF REGULATION The International Insurance Mediation Conference, th March 2011, Istanbul Mick McAteer, Director, The Financial Inclusion Centre; Chairman, European Commission Financial Services User Group; The Financial Inclusion Centre Promoting fair, inclusive financial services

CONTENTS The role of insurance in 21 st century Defining an effective consumer focused insurance market Consumer experience of insurance markets The causes of consumer detriment How to promote an effective insurance market – the role of regulation (including IMD2)

ROLE OF INSURANCE Social landscape fundamentally reshaped by environmental factors – socio-economic, demographic, commercial, and regulatory 4 pillars of society crumbling – state, family networks, paternalistic employers, personal provision Pensions, health and social care are not free goods, funding gap is growing Finite budgets to cope with rising bill for pensions, health and social care Only two ways of paying for health/ social care - state pay as you go (PAYG) or prefunding though state or private provision Consumers/ households face more uncertain, unpredictable futures

ROLE OF INSURANCE State will always play a role in people’s lives but natural limit on tax funded welfare - will focus on protecting most vulnerable plus foundation level of care for ‘middle classes’ Expectation is that state health and social care provision will have to be topped up through asset accumulation or insurance Attempt to transfer of risk and responsibility for providing for future/ insuring against risk from state to individual consumers So, along with pharmaceutical/ health sectors, financial services (especially insurance) face bright future - stand to gain from changing demographic, political and socio-economic trends If the industry can become fit-for-purpose To answer that challenge, we have to define what an effective insurance market looks like from a consumer perspective

DEFINING EFFECTIVE INSURANCE MARKETS Consumer activists have developed consumer principles to evaluate markets Access and inclusion Choice of suitable, quality products Value for money, socially useful products from competitive, efficient providers Fairness (pre and post sale) Appropriate advice from trained, competent and ethical providers/ intermediaries Transparency Accountability and governance Safety (firms must be prudently run) Economically sustainable business models Propensity to use products to save/ provide for the future Confidence and trust Financial capability to make effective decisions Information to make good choices

HOW DO INSURANCE MARKETS COMPARE? Millions of citizens served well by markets However, major problems in insurance markets of many EU countries Serious underprovision in some markets Unsuitable/ inappropriate sales (for example, UK – pensions misselling, mortgage endowments, payment protection insurance, single premium bonds) Expensive high margin products, competitive distortions Front end loaded charges – consumers locked in, barrier to competition Adverse claims experience, obscure terms and conditions Investment, pensions and securities score lowest in EU consumer markets scoreboard

CAUSES OF MARKET FAILURE Demand side factors: – Poor financial capability – Psychological/ behavioural barriers - disinterest/ inertia/ confidence, time constraints – Overall, consumer sovereignty weak in financial services Supply side factors: – Competition for distribution and oversupply pushes up charges – Conflicts of interest caused by remuneration strategies (sales targets, commission driven sales) – Unnecessary complexity – Training and competence/ professional standards low priority compared to sales targets – Regulation focus on information asymmetries, not root causes of detriment – Regulatory and tax distortions

WHY IS IMD BEING REVIEWED? Consumers insufficient understanding of risks, costs and features of products Sellers subject to significant conflicts of interest Review focuses on quality of information to consumer Conduct of business rules, conflicts of interest and transparency of remuneration National COBs diverge, some member states left unregulated Legal uncertainty due to interpretations No guarantee of level playing field Policyholders vulnerable buying direct

MAKING MARKETS WORK 1 Regulators should ensure that consumers receive clear, relevant information post- sale, not just pre-sale and at the point of sale Conflicts of interest such as commission driven sales that are the root cause of most mis-selling scandals must be addressed by a robust regulatory response Regulation should ensure that consumers receive advice on the most appropriate product/investment vehicle for their needs, not the product that suits the commercial needs of the firm or intermediary Advisers/intermediaries should be required to operate to a general high level duty of care to assess consumers’ needs and level of financial sophistication (where possible) so that appropriate advice and recommendations are made To ensure this occurs, the Commission should review and produce clear guidelines about – (i) needs assessment (for example, information gathering/‘know your customer’ requirements) to be followed in Member State regulations, and – (ii) professional standards to ensure that intermediaries/advisers operate to consistently high standards.

MAKING MARKETS WORK 2 Regulation should ensure clear separation between independent adviser (fees and whole of market) and sales agent/ representative Regulation should ensure there is a level playing field between different types of provider to ensure fair and effective competition Equivalent harmonised consumer protection IMD, MiFiD, PRIPS, AIFM) Regulation should be risk based and proportionate – interventions should be proportionate to the potential for consumer detriment More pre-emptive approach to regulation Better regulation makes markets work for consumers AND industry

SUMMARY AND CONCLUSIONS Changing social, economic and financial environment in EU represents Great challenges and opportunities for insurers – if ‘fit for purpose’ Serious and serial insurance market failures in many countries A new, coherent and consistent approach to regulation is needed Delivers real benefits for consumers, industry and society Questions?