On 4 October the European Insurance and Occupational Pensions Authority (“EIOPA”) published the Credit Protection Insurance (CPI) Sold Via Banks Report, which analyses the potential harmful effects that the distribution by insurers and credit institutions of credit protection insurance linked to mortgages, consumer credit and credit cards may have on consumers.
As is well known, credit protection insurance covers the risk of default due to personal situations (i.e., unemployment or temporary disability) affecting any consumer who borrows money from a financial institution (insured under the insurance policy). These products are usually marketed through bancassurance networks, where financial institutions distribute the insurance along with other financial instruments such as mortgages or consumer credits.
The main risks identified by EIOPA are the following:
1. Low consumer choice and difficulties in acquiring the same products through other channels
According to EIOPA, 83% of banks recognise the bundling of credit protection insurance with core financial products (i.e., the insurance is tied with other products of the bank). Moreover,
66% of financial institutions sell credit protection insurance as group or collective policies, so that the consumer can only join the policy if he or she is a customer of the bank. In addition, according to EIOPA’s data, only 45% of banks inform their customers of the possibility of purchasing this product from another provider outside the bank’s distribution network. There are also personal reasons for consumers, such as previous relations with the distributing bank, the existence of other products or services already linked with the bank (i.e., salary) or the desire to keep all the products contracted with the same entity.
2. Difficulty in comparing payment protection insurances
A high degree of dispersion in the market could be a factor that has a negative impact on consumer choice. According to EIOPA’s report, there is a high degree of atomisation of this type of products, which is reflected, among others, in the following aspects: lack of a homogeneous nomenclature, differences in the applicable coverages and exclusions, different age limits, a wide spread of prices that the same consumer can face depending on the insurance provider or the different premiums applicable to consumers with similar profiles.
3. Difficulty in cancelling or changing products
According to data provided by EIOPA, 43% of insurers admit that they require the bank’s agreement to accept the termination of a credit protection insurance policy. Moreover, when the insurance policies are single premium, some institutions require the full repayment of the credit or loan as a precondition for the cancellation of the insurance policy. In the mortgage market, and according to EIOPA, 70% of insurers do not recognise the possibility of maintaining the credit protection insurance policy in the event that the insured takes out a second mortgage with entities other than the bank.
4. Incorrect identification of consumer preferences and needs in product design
The standardised sale of this type of product leads to little to no tailoring of the product. Indeed, the fact that most of this type of insurance is marketed as group policies, where the policyholder is the bank and consumers join as an individual insured, prevents a proper alignment of interests between consumers and the bank. In this respect, EIOPA points out the existence of high premiums paid by young people and those who do not suffer from serious illness or pre-existing conditions.
5. Incorrect distribution practices
As we have already stated, credit protection insurance is, in most cases, purchased as a product linked to a main contract (i.e., a mortgage or a loan). This generates a double effect: a drag effect on the acquirer, whereby the latter pays less attention to the conditions of the payment protection insurance; and an incentive for the bank to place it, which is materialised in the payment of higher commissions or bonuses linked to sales targets. This is further supported by the distribution model. According to EIOPA’s data, the most common distribution structure is the exclusive strategic alliance (i.e., the bank partners with an insurer and exclusively sells the insurer’s insurance products).
6. High profit margin and conflicts of interest
Credit protection insurance is a very profitable product due to low placement and distribution costs and claims ratios. According to EIOPA, some banks may be using this type of product as a mechanism to offset low credit margins with the revenue generated by insurance.
As a result, EIOPA has announced a public event with the participation the industry stakeholders, as a follow-up to the roundtable that took place in March 2020. This event aims to raise awareness and set out EIOPA’s objectives in relation to the rights of credit protection insurance consumers at EU level, as well as to engage financial institutions and insurers at European and national level fostering a space for cooperation between regulators and credit protection insurance distributors.
EIOPA has also issued a formal warning to financial institutions, insurers and their intermediaries regarding the risks stemming from potential conflicts of interest that may arise because of the remuneration models followed in the distribution of credit protection insurance. In particular, the focus is on high levels of remuneration and practices such as tied sales, product placement incentives and misleading or non-transparent information. Furthermore, EIOPA has announced its intention to coordinate a response with national supervisors in order to mitigate the risks involved and to define an appropriate regulatory framework.
In short, EIOPA’s report highlights the existence of certain irregular practices in the distribution of credit protection insurance that should be corrected or modified by the different stakeholder (insurers and banks) evolving to a new more transparent distribution model tailored to the consumer needs.
For further information, please contact:
Virginia Martínez Fernández, Partner, Bird & Bird