The COVID-19 pandemic and resulting economic upheaval brought into sharp focus areas in which individuals lack financial resilience in terms of their levels of savings or protection products. In fact, even before the pandemic one in three EU households were unable to meet an unexpected financial shock, according to research by Bruegel published in July 2020. Post-pandemic, it is vital to ensure that consumers understand their protection and savings needs, have access to competitive insurance solutions and are equipped to take informed financial decisions.
At the same time, consumers' financial habits are evolving quickly, and this year alone they have changed significantly, in part driven by a dramatic increase in interactions online as a result of lockdowns. Consumers expect faster and more flexible services, easier access to greener products and paperless transactions.
The current EU regulatory framework for financial services, however, is far from achieving its aim of serving consumers' needs. There is a huge gap to bridge to ensure that the regulatory framework helps consumers engage with confidence in financial markets, diversify their risks and prepare better for retirement:
- Consumers are overwhelmed by an extremely high number of product and sales disclosures stemming from the EU regulatory framework. This makes it very difficult for them to digest all the information and identify what is most relevant for them. Because the current disclosures are too complex, long and unappealing, they fail to meet their intended aims of helping consumers make better-informed decisions. And the problem is getting worse; new regulations are further increasing the number of disclosures without considering their impact on consumers' understanding and decision-making.
- The information provided is not always the most meaningful or appropriate. For example, the current regulatory framework focuses very much on the disclosure of costs, leading to situations in which consumers are confronted with a bewildering array of different and confusing figures on potential costs. This encourages them to compare products solely on the basis of cost, even though the COVID-19 crisis has clearly demonstrated the importance of consumers understanding what a product covers. And such a focus on costs also creates the risk of a “race to the bottom”, with providers focusing on lowering costs rather than the quality of their products.
- The current rules are not always technologically neutral and do not ensure consumers can easily access and navigate product information electronically. For instance, the Insurance Distribution Directive (IDD) and the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation require pre-contractual information to be provided to consumers on paper by default. It may only be provided another way — such as on a website or in digital format — “by way of derogation”.
Improving the consumer journey
The result is consumers who are not aware of the risks they face and are not able to make the most of their savings to protect themselves. It is concerning, for instance, that almost half of the respondents to Insurance Europe's 2019 European Pension Survey were not saving for retirement. And the OECD/INFE 2020 International Study of Adult Financial Literacy, using data gathered just before the pandemic, shows low financial literacy among individuals globally, low uptake of financial products — especially insurance products, limited financial resilience and high financial stress. Confused by how financial services work, many prefer to keep their money in low-yield accounts, which is an inefficient use of their capital and limits the funds invested through the capital markets.
All this does not benefit consumers. And the impact of the inefficiencies in the EU consumer protection framework is high for the whole of society. More empowered financial services consumers could play a key role in boosting post-pandemic economic recovery and the green and digital transitions to build a more resilient and inclusive EU.
“Consumers expect faster and more flexible services, easier access to greener products and paperless transactions.”
WHAT INSURERS CAN DO
Meeting consumers' expectations and needs is essential to the success of the insurance industry. Insurers offer a diverse range of products to satisfy the varying needs of consumers across Europe. For example, insurers offer a wide range of insurance-based investment products (IBIPs) that allow consumers to combine investment with insurance cover. These products accounted for almost 90% of the European packaged retail and insurance-based investment products (PRIIPs) market in 2019.
The PRIIPs market
Consumers need to have trust and confidence in providers if they are to buy financial products. European insurers have taken many initiatives across the EU to enhance the protection of consumers and ensure that they are properly informed and treated fairly. They continually improve their services so that they remain consumers' preferred choice in a competitive and fast-changing world: developing innovative products and services; improving the clarity and transparency of the information about those products and services; offering more risk-management advice and assistance; and developing best practices in the conduct of their business.
Using new tools and technologies creates many potential benefits for insurance consumers, such as improved communication channels with their insurance providers, easier access to information and products, and products and services that are better tailored to their needs and demands. Indeed, in its 2020 Consumer Trends Report, the European Insurance and Occupational Pensions Authority (EIOPA) recognised that the COVID-19 crisis had crystallised the benefits of financial innovation/digitalisation for consumers, insurers and intermediaries.
In the same report, EIOPA likewise acknowledged that it was innovation and digitalisation that enabled Europe's insurers to maintain business continuity and continue to support their customers during the COVID-19 pandemic and lockdowns. You can find out more about this in our articles on Digital resilience and Pandemic resilience.
What Insurance Europe is doing
Now more then ever, European consumers and insurers need a fit-for-purpose, digital- and innovation-friendly regulatory framework. Insurance Europe engages in the European and international consultations and regulatory processes to help achieve regulation that works and benefits consumers. As well as contributing to individual reviews of existing legislation and the development of specific new regulations, Insurance Europe comments on the broader EU approach to the regulation of the conduct of business in financial services. It welcomed the 2020 launch of the EC's Fit for Future platform to seek to simplify EU laws and reduce unnecessary regulatory costs as part of its regulatory fitness and performance (REFIT) programme.
The European insurance industry is also engaged in numerous initiatives across Europe to increase financial literacy in relation to risk awareness, insurance protection and long-term saving for retirement. Since 2018, Insurance Europe's financial education activities have been brought together under its “InsureWisely” banner. Materials include a booklet and a series of factsheets, which are also translated and used by Insurance Europe member associations in their national markets. The latest addition to the materials is a short video for consumers about insuring themselves wisely in the digital age.
“EU policy needs to focus on consumers' real needs and expectations.”
WHAT POLICYMAKERS SHOULD DO
Policymakers need to reform the financial services regulatory framework where necessary in order to improve the consumer experience and make it easier for them to access the right products that meet their needs. At the same time, regulation that has proven to work well and provide benefits for both consumers and the industry should be preserved.
EU policy needs to focus on consumers' real needs and expectations:
- To avoid information overload, disclosures should be clear, meaningful and reflect the specific characteristics of insurance, avoiding inconsistencies, overlaps and duplications. The disclosures format also needs to be engaging and flexible to adapt to consumer preferences.
- Rules or guidelines should be innovation-friendly, technologically neutral and sufficiently future-proof to be fit for the digital age.
- Consumers should not be nudged to take their financial decisions solely on the basis of a product's potential costs, thus selecting sub-optimal but cheaper options. One key lesson from the COVID-19 pandemic is that the most crucial information consumers need to understand is the added value of an insurance product, such as the protection against risks.
- To illustrate how consumers could have access to information in a digital and engaging way, Insurance Europe has developed the example of the EPI, or Essential Product Information. To ensure disclosures are read and help consumers make decisions, it is important that the future European regulatory framework considers the benefits of similar approaches.
- Any new legislative proposal needs to be properly tested on the full range of different products to which it applies to ensure it is workable, accurate and meaningful. Consumer testing is essential and needs to demonstrate a clear improvement in consumers' overall understanding of the information received and of the decision-making process. Consumer testing is meaningful only if it encompasses a broad range of products, markets and consumers.
Meanwhile, some rules already ensure a high level of consumer protection. For instance, the Insurance Distribution Directive (IDD) includes strong and effective conduct rules for the sale of all insurance products, with additional, enhanced requirements for the sale of IBIPs. The IDD rules ensure that insurance distributors act honestly, fairly and professionally, in accordance with the best interests of consumers, helping to prevent any potential mis-selling.
Although the IDD sets a very high and robust standard, it is a minimum harmonisation directive, which means that additional national measures can be introduced if they are felt to be needed. This allows the necessary flexibility to take account of local market structures and consumer behaviour and expectations. Such an approach has significant benefits for consumers and providers alike and should be preserved.
And, last but not least, any policymaker efforts to promote and enhance financial literacy and financial inclusion would be applauded and supported by the insurance industry.