Consumers are at the heart of the insurance business
Consumer protection is rightly at the core of EU legislation. The insurance industry firmly supports high-quality EU insurance regulation that protects consumers effectively and helps them to buy the right products. Insurance is based on trust, so a firm underpinning of appropriate regulation is essential for a well-functioning industry.
Unfortunately, EU financial services regulation does not always achieve the ultimate aim of benefiting consumers. Indeed, the current regulatory processes themselves do not always lead to good outcomes. So how can policymakers ensure that regulation proposed with the best intentions is not detrimental to consumers?
What does consumer empowerment in insurance mean in practice?
Transparency
See also the Insight briefing: Better, not more, information for consumers
Education
See also our financial education page
Choice
See also the Insight briefing: Supporting innovation in insurance in a digital age
Fair treatment
See also our distribution page
What are the challenges?
Consumer protection is rightly at the core of EU legislation. The insurance industry firmly supports high-quality EU insurance regulation that protects consumers effectively and helps them to buy the right products. Insurance is based on trust, so a firm underpinning of appropriate regulation is essential for a well-functioning industry.
Unfortunately, EU financial services regulation does not always achieve the ultimate aim of benefiting consumers. Indeed, the current regulatory processes themselves do not always lead to good outcomes. So how can policymakers ensure that regulation proposed with the best intentions is not detrimental to consumers?
Avoid continual regulatory changes
New legislation is increasingly developed with a “trial and error” approach in which legislation that fails to meet its intended objectives has shortly to be revised, complemented and reinterpreted.
In recent years, insurers have been confronted with a significant increase in the quantity of regulation; from 12 to 70 regulatory frameworks, a decrease in its quality and too frequent reviews and amendments to legislation, sometimes even before they have adapted to the new rules and before there is sufficient evidence of a need for changes.
An example of this is the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, which was intended to make it easier for consumers to compare products and make better-informed decisions. However, the PRIIPs Key Information Document (KID) is difficult to understand and — at times — even misleading.
To address the flaws in the KID, the PRIIPs Regulation and its delegated regulations were followed by Commission guidelines, continuous batches of Q&As from the European supervisory authorities and two supervisory statements.
While these updates to the legal framework are made with the best intentions, they can also have negative effects on consumers. Too frequent changes can confuse consumers and affect their ability to compare products and make informed decisions. It can also negatively impact the costs of products and services.
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Avoid legal uncertainty
The clarity and quality of the regulatory framework are key factors to ensure consumers’ trust in financial services. However, the quality of recent EU legislation has diminished, leading to many cases of legal uncertainty.
This is mainly because, during the legislative process, policymakers sometimes prioritise quick political achievements over the quality of new rules, assuming that the rules can be improved during future reviews or that the Level 2 or 3 measures can address the Level 1 shortcomings.
This all has a detrimental effect on the correct functioning of the insurance market and therefore doesn’t benefit consumers in any way.
For example, the use of promising blockchain technology in insurance could be jeopardised due to potential incompatibilities with the General Data Protection Regulation (GDPR). From an insurance perspective, blockchain technology has the potential to reduce costs, increase transparency and increase consumer trust. But how can the GDPR’s “right to be forgotten” and “right to rectification” be reconciled with the fact that blockchain technology is designed to be an immutable and permanent record of all transactions?
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Avoid inconsistencies, overlaps and duplication
When preparing legislation, the cumulative impact of individual rules and the coherence of the entire regulatory framework are frequently not taken into account, resulting in inconsistencies, overlaps and duplication between different pieces of legislation.
For example, the Solvency II Directive, the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, the Insurance Distribution Directive (IDD) and the General Data Protection Regulation (GDPR) have led to a 250% increase — from 33 to 115 — in the number of individual disclosures that a broker is required to make to a customer at the precontractual stage when selling an insurance-based investment product. And the number of disclosures for an online sale is now an infeasible 161. This number will increase even further with the new Regulation on sustainability-related disclosures.
Experience shows that too much information confuses consumers and distracts them from paying attention to the most important information, such as insurance coverage and exclusions. It could lead to ill-informed decisions and potentially to unhappy consumers.
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Avoid unfit rules and disclosures that mislead consumers
Regulation needs to take full account of the unique features of insurers’ products and of their benefits for consumers and for the overall society. Unlike other financial service providers, insurers offer risk cover against unforeseen events and have a long-term and stable business model.
In addition, insurers operate through a distribution network based on a higher proportion of micro-enterprises and SMEs than other financial sectors and can offer a distinctive value proposition to customers looking for protection, investment and the peace of mind of minimum guarantees.
Unfortunately, legislation applied to insurance is sometimes copied from other sectors or is developed with products other than insurance in mind, so it fails to recognise and properly regulate insurance specifics.
Rules that are unfit for insurance or copied from another sector should be avoided, as they can hinder innovation, limit consumer choice and make it more difficult to understand the specificities of insurance products and services. It therefore has clear unintended negative consequences for consumers and the market as a whole.
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Avoid outdated rules and obstacles to pro-consumer innovation
Some regulation is already outdated at the time of their adoption. For example, 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 by default on paper. Such paper requirements will prevent further development of the internet as a distribution channel for insurance products. They fail to recognise that consumers are increasingly demanding and using online services.
Certain rules in the General Data Protection Regulation (GDPR) and the guidelines adopted by the European Data Protection Board (EDPB) also appear to be at odds with fast-evolving technology. Automating processes can enable insurers to serve consumers better, faster and at a lower cost — such as real-time insurance offered through mobile phone applications — but EDPB guidelines create legal uncertainty that may discourage insurers from introducing new automated processing and profiling techniques.
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Avoid implementation timelines that are too short
Deficiencies in the EU law-making process often leave companies with insufficient time to implement the required changes to their processes and train staff or with unnecessary, increased implementation costs because of frequent changes in legislation. This negatively affects insurers’ ability to satisfy their consumers’ needs in the best way possible.
It is unrealistic to expect the industry to begin implementation based on draft texts without the legal certainty of the final regulatory outcome.
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Financial literacy
Financial literacy is a core life skill that must be nurtured as early as possible to encourage responsible financial behaviour and to give people the confidence to take control of their finances. Improving the level of financial literacy in Europe is an important societal challenge that requires contributions from a wide range of stakeholders.
Insurance Europe's broad survey conducted in 2021 of 17 000 people in 16 EU countries, showed that more than a third of survey respondents (38%) were not saving for retirement, with 30% of those not saving saying they could not afford to.
This is alarming, since the number of people aged 65 or above relative to those aged 15 to 64 is expected to double in Europe between 2013 and 2060 according to the European Commission. With individual responsibility becoming ever more vital, public awareness of the need to make adequate provision for retirement must be raised.
The European insurance industry is engaged in numerous initiatives across Europe to increase financial literacy and the understanding of insurance in all sectors of society, ranging from young children in schools to adults and professionals in the workplace, reflecting the industry’s belief that financial education should be a lifelong process. Insurance Europe urges EU policymakers and regulators to play a greater role in supporting the implementation of national strategies for financial education.
For more information, please see our financial education page.
European regulation: how to achieve better quality
Unfortunately, EU financial services rules do not always achieve their aim of benefiting consumers and the current regulatory processes themselves do not always lead to good outcomes.
So how can policymakers ensure that regulation proposed with the best intentions is not detrimental to consumers? Insurance Europe's paper sets out how EU policymakers can ensure rules for insurers work properly and benefit consumers.
In addition, Insurance Europe developed a decision tree highlighting different reality checks to ensure that the actual impact on consumers is positive and outweighs the potential costs and risks of consumer detriment.
Has the direct and indirect impact on consumers been analysed?
Has the cumulative impact on consumers been considered?
Does changing the rules benefit consumers more than keeping a stable framework?
Is the EU the most appropriate level at which to take this initiative?
Is the proposal fit for purpose?
Is the proposal digital-friendly and future-proof?
Has the proposal been successfully consumer-tested?
Have stakeholders been properly consulted?
Has enough time been provided for implementation?
Companies are often left with insufficient time to implement new rules, creating huge compliance challenges that are to the detriment of consumers. Companies should be allowed a minimum of one year after publication of the Level 2 measures for implementation.
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