The new regulatory environment: Consumer or stakeholder?

Solvency II has always been seen by many as the Area 51 of the insurance world – mainly due to its technical nature – journalists and other stakeholders alike. It has something almost mystical about it… you know it’s something – but you don’t always get it! However, this article is not about Solvency II per se. It is about the coming of age of the consumer landscape. And it is about the future. It is about how consumers truly became stakeholders and why they need to be involved in writing good regulation more and more.

In 2001 there was little talk about consumers in general in Eastern Europe. There were no dedicated events, no consumer representatives that we knew of and basically… consumers seemed to be at the lower end of the insurance food chain, especially in the developing markets. “I’m happy to see that the attitude is now changing […] although the road ahead is still long. Current legislation is much more engaged with consumers. Continuing work is needed by regulators & industry to keep consumers at the heart of regulation” stated Gabriel BERNARDINO, Chair of EIOPA, the European regulator, during Insurance Europe 2016 Conference, in Dublin, Ireland.

Fortunately a lot of things changed in the last 15 years. And it’s not only because of the financial crisis in 2008 and the new regulatory regimes. It is about consumers becoming more active stakeholders – due to the access to information / globalization / social media / advances in IT etc. that caused a change in the global attitude. According to Prof. Karel Van HULLE of KU Leuven and Goethe University Frankfurt (who is also a Member of EIOPA’s IRSG -Insurance & Reinsurance Stakeholder Group and considered as the main arhitect of the Solvency II regime – as he was heading the Unit for Insurance and Pensions at the European Commisssion), “we are living historical moments […] witnessing the most important changes of the industry in the last 30 years.

In example, in fact, if one looks at EIOPA’s website, one can see that “Better protecting consumers, rebuilding trust in the financial system” (Link) and ensuring “transparency, simplicity, accessibility and fairness across the internal market for consumers” are two of its most important goals (Link). It is this attitude that has inspired national supervisors and other stakeholders inside the insurance community.

Now, 15 years later clients are – more than ever, engaged stakeholders. They are more involved in the European legislative process and have fair representation in different bodies. In example, EIOPA has two Stakeholder Groups: IRSG (insurance) & OPSG (occupational pensions) – both having strong consumer representation. Other institutions such as the European Commission, the EBA or ESMA share this approach etc. Moreover, following EIOPA, several national regulators across Europe have put together dedicated Consumer Protection Departments and external Working Groups involving consumers in the decision making-process.

Not to forget – EIOPA is also publishing on an annual basis a Consumer Trends Report – one of few official documents that look at the consumer protection landscape in different EU member states. And I’m happy to report that the input of the IRSG in the making of this document has always been taken into account! Hopefully the report will be improved by adding more comparable key indicators across EU Member States.

In addition to this, dedicated conferences and other events such as the ESA Consumer Protection Day or the European Consumer Protection Conference are being organized throughout Europe. Even this years’ Insurance Europe conference was entitled “Serving our customer in tomorrow’s world”.

In 2025 […] two industries will dominate: insurance and entertainment… Every business and every nation will organize themselves around these two needs.” Jacques ATTALI, A Brief History of the Future

So things are happening – although all of this is no match for the official lobbying of some 1,700+ experts that the financial services industry has in Bruxelles. Which is significantly less than the unofficial figure, as one can easily guess. But the road ahead is still quite long. Because beside the current engagement and representation, consumers will be affected by a number of new pieces of European legislation. This can hopefully further enhance their role as engaged stakeholders.

As EIOPA’s Chair said in a recent interview in Asfalistiko Nai Magazine (Greece), “the implementation of Solvency II as well as the new Insurance Distribution Directive are expected to bring significant changes to the European insurance industry, reinforcing consumer protection”. Solvency II is designed to be, at the end of the day, a CP instrument. It is designed to give clients more trust in a more stable system and its supervision. But does this message ever gets across to consumers? Will Solvency II data directly help consumers? Will they ever read a SFCR report? Most likely – NOT. But consumers shouldn’t have to worry about that. It is not their concern. All they need to know is that they are protected. That it is safe to transact with a particular firm.

However, the importance of a good understanding of Pillar III public disclosures by those who shape the public and market opinion (like analysts and journalists) is crucial and this needs to be addressed! Solvency II has to be de-coded for those not looking forward to getting a PhD in insurance. One can take here the example of the pharma industry which managed to bring balance to the way drug-labelling is done. The main idea here is that we need plain, accessible reports & meaningful info! Solvency II is definitely a huge milestone for consumer protection. But will the media, the brokers and agents be able to see thru all the formulas?

And Solvency II is only part of the equation. Another is IDD – The Insurance Distribution Directive, with the preparatory POG Guidelines, Conflict of Interest, Suitability and Reporting to Customers Delegated Acts, the IPID Implementing Technical Standards, the KID for PRIIPs Regulation (just to name a few) – which all have something in common. They will have a huge impact on consumers! So most experts agree that the role of proper regulation and supervision of sales channels / disclosure requirements is paramount!

In example, the POG – Product Oversight and Governance will regulate in detail the design of insurance products and their distribution. POG arrangements have a close link to the system of governance under the Solvency II framework, requiring firms to introduce very explicit processes and measures with regard to the design, development and monitoring of new insurance products. The intention for this expected cultural shift expected from the industry is good. But one should not forget that the devil is always in the detail…

And of course, there is the IPID – Insurance Product Information Document, for non-life products (which is trying to fix consumer’s level of engagement with disclosures, to help compare between products and to make customers focus less on the price and more the coverage). In example, if one looks at EIOPA’s latest Consumer Trends Report, complaints relating to the terms and conditions of the insurance contract represented 13% of the total complaints in EU, covering issues such as disagreements around the interpretation of the terms of the contract or insufficient transparency as regards the coverage and exclusions. This means that consumers have to be helped to understand whatever information they will be given in the IPID in order for this provision to exceed the status of a tick-box exercise. As a well-known consumer representative in the UK said, the industry has to start talking more about its responsibility and duty of care to its customers – before it can expect customers to take more responsibility for their actions.

In addition to all of the above there is the new overall strategy that the European regulator has announced – which will focus on a pro-active, risk-based conduct of business supervision. The tools employed are the thematic reviews investigating specific risks (recent review identifying how underlying investments are chosen for unit-linked life insurance products that could lead to consumer detriment) and the retail risk indicators building on Solvency II data. As one expert pointed out, the indicators do not in themselves provide much conduct relevant information, but in comparison they help to double check findings from other sources and give more detailed insights to help any further analysis.

However, one may argue that no matter how many pieces of legislation are being passed at EU level and no matter how close EU institutions are to national supervisors and how much support they get it is the transposition of these regulations, the attitude of the local regulators towards enforcing them and that of the insurance undertakings towards getting customers a fair deal and good value for money that matters the most! Only by achieving this will Europe regain the trust in insurance…

Consumers are now more involved in decision-making than ever and part of the game. They are more than ever, engaged stakeholders. And they have to be. Because globalization, the access to information, the sharing economy – are re-shaping the world. And if they will not be involved they will find alternatives. Which are already out there.

So are we all doing enough for the future? Regulation has to keep up. Because… “the insurance industry can be the industry of the future […] only if it adapts and offers appropriate solutions” as Prof. Van HULLE put it.

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