Is Credit Protection Insurance of value for consumers?
Credit Protection Insurance (CPI) is usually offered to consumers when they apply for personal loans, car loans, mortgages, or credit cards. Essentially, the insurance is designed to cover loan payments in situations where the consumer becomes unemployed or unable to work due to illness or accidents, or if the co-borrower on the loan passes away.
The consumer value of CPI products has been a topic of discussion for a long time.
Consumer value can be said to be highly subjective and varies from individual to individual. Consumers who prioritize predictability or face challenges in meeting expenses in connection with lost income or the passing of a co-borrower, may find the insurance to be of higher value. On the other hand, those who possess existing income, sick or life insurance coverage, may deem the insurance to be of lesser value. The same can be said for those who were already incapacitated or unemployed when obtaining the insurance and are therefore only able to utilize the life insurance component of the policy.
In a report from last year, EIOPA expressed strong concern about the level of commissions, conflicts of interest and the often inadequate consumer knowledge of the scope and limitations of the insurance product. The insurance industry was found to have engaged in unfair sales practices, selling products to consumers who do not require them. EIOPA noted that the sale of CPI products as a supplementary product, often mediated by third parties, further increases consumer protection risk. EIOPA clearly expressed its expectation on both insurers and banks (acting as insurance distributors) to fully comply with the Insurance Distribution Directive (IDD), including Product Oversight and Governance (POG) requirements. Concurrently, EIOPA highlighted that both EIOPA and local financial supervisory authorities will initiate supervisory activities.
It is the responsibility of insurance companies to ensure that their products are sold only to consumers with a genuine need for the insurance. If a product is well designed, with a balanced remuneration model and a sufficiently detailed target market, the quality of consumer information becomes the determining factor.
Overwhelming consumers with excessive information may result in them not reading it all together, whilst inadequate or unclear information may lead to consumers receiving an insufficient basis for decision-making. Achieving the optimal balance in terms of information quantity, frequency, content and information channels requires careful reflection and testing.
In order to be able to make an informed decision on whether to opt for the insurance, consumers require clear and concise information about the insurance premium, it’s coverage, exemptions, eligibility criteria, qualification and waiting periods.
Some insurance companies still utilize the opt-out sales method, wherein consumers are automatically enrolled in the insurance when they sign the loan agreement. The insurance is often free of charge for a certain period, after which the insurance premium is added to the loan cost and debited accordingly, as long as the consumer doesn’t actively decline it.
This sales method can result in consumers feeling deceived into purchasing insurance they may not need. There is also a risk that the consumers have not actively considered whether the insurance meets their needs, or if they fulfil the eligibility criteria. Another issue with this sales method is that consumers may not even realize they are paying for insurance cover and may therefore not make a claim for recoverable losses. To mitigate these risks, it is crucial to provide consumers with clear and continuous information about the insurance, not just at the time of subscription, but throughout the insurance period. It is also essential to clarify that the insurance premium is not a part of the loan cost and can be declined.
As sales are usually made through insurance intermediaries, it is crucial for insurance companies to follow up and ensure that the intermediaries are only selling insurance to the defined target market and providing the consumers with enough time and information to make informed decision regarding their insurance needs. To safeguard consumer value, and identify whether adjustments to the product, target market or distribution model are necessary, insurance companies should regularly analyze their insurance portfolio, complaints, and claims results (including rejections). If commissions are paid per product sold, it is essential to follow up and ensure that the insurance is only being sold to consumers who actually require insurance, in order to avoid conflicts of interest.
The approach of the Swedish Financial Supervisory Authority
The general approach of the Swedish Financial Supervisory Authority (SFSA) towards the development and distribution of CPI products should not differ significantly from that of EIOPA. Nonetheless, it is likely that the SFSA will soon commence reviews to ensure that insurance companies comply with the IDD and POG regulations.
On 16 February, the SFSA released a report titled “No extra insurance needed when buying a TV”. According to the report, the SFSA examined the consumer value of several supplementary and product insurances and found that consumers need for supplementary insurance differ depending on age, with younger individuals having a greater need compared to older consumers, who often have little need for them. Additionally, the SFSA states that product insurance is rarely necessary, if at all. From the report, it is easily discerned that the SFSA takes a critical stance on how this type of insurance is priced and sold to consumers, without their needs being adequately addressed.
CPI products, while also a supplementary product, was not included in the scope of the initial SFSA’s investigation, however it follows reason that it would be expected to have the same approach to all supplementary products.
FCG recommends using EIOPA’s and the Swedish Financial Supervisory Authority’s reports as a starting point when evaluating the consumer value of CPI products.
The overarching question that should be asked is whether the IDD and POG regulations have been complied with. More specifically various factors need to be assessed, such as the claims percentage, the reasonableness of commissions in relation to the complexity of the product and the intermediary’s efforts, the trend in consumer complaints over time, whether consumers have received adequate information to make an informed decision about the product, and whether eligibility criteria have been met before the insurance is taken out. Another important consideration is whether the target market has been appropriately defined, or if it can be improved to prevent sales to consumers who do not need the insurance.
We at FCG are experts in consumer protection issues and can offer assistance with:
- Developing or reviewing insurance terms and conditions, pre-sale information, product fact sheets, and annual information
- Conducting GAP analyses related to IDD and POG
- Developing or reviewing internal processes
- Evaluating distribution models
- Reviewing information exchange between insurance companies and intermediaries
- Creating models for intermediary reviews
- Providing training
Get in touch with FCG Insurance Law for more information or advice.