7.2.2022

Digitalization, Price Optimization and Transparancy: enhanced concerns for consumers revealed by EIOPA

In its recent annual Consumer Trends Report of January 2022 EIOPA points out the main "trends" in the sectors of insurances (life and non-life) and pensions (occupational and private) throughout Europe with special regard to digitalization, claims handling, price optimization techniques, product complexity and transparency. We will highlight some of the most important results of this report.

For a better understanding EIOPA elucidates a working definition of consumer trends: "evolutions in consumer behaviour in the insurance and pension markets related to the relationship between consumers and undertakings (including intermediaries) that are significant in their impact or novelty" (p. 9). So the main focus is on the ongoing interaction between consumers and product providers, both reacting to and even enhancing global technological, economical and societal developments and their effects on insurances and pensions.

Digitalization

One of these main trends is - without surprise - digitalization. The pandemic enhanced this already ongoing development "across the whole product lifecycle, including in relation to product design, product distribution, claims management, post sales services, fraud detection" (p. 15).

Related to the insurance sectors sales and distributors procedures as well as post-sales services and claims management have most profited from enhanced digitalization (artificial intelligence, cloud computing, distribution ledger technologies, etc.; p. 17). Even though this is - in total - more relevant for non-life in comparison to life insurance products, "for 11 Member States the sale of life insurance is predominantly concluded via digital distribution and the evolution either increased or significantly increased in the last 3 years in 13 Member States" (p.16). This is a very important conclusion for the debate on the possible online distribution channels of life and pension products like the PEPP from March 2022 on which are often more or less denied by industry representatives.

With regard to claims handling digitalization brings as well positive as negative effects. On the one hand digitalization leads "to the automation and simplification of some parts of claims handling processes, in particular in relation to low value high frequency claims". But on the other hand there are "lower payments than expected, long and complicated liquidation processes, a lack of adequate justification for claim refusals. This is mostly in relation to motor insurance, travel insurance and household insurance products" (p. 7, 19). The conclusion is quite clear: digitalization is an inevitably ongoing game changer, but in order to profit from its benefits its inherent dangers must be followed very closely to ensure trusted data management and cyber security.

Price Optimization Techniques

Obviously digitalization is linked to product innovation as well. For several years there has already been a public discussion amongst stakeholders on the ongoing "individualization" of tariffs (mainly in automobile and health sectors) by introducing additional "soft" criteria (by pay-as-you-drive or assistance options). If "individualization" goes too far, then there is the danger of minimizing the risk-pool as basis for tariff calculation too strongly, and this would be against the principle of insurance itself, i.e. mutualization of risks in a pool which must have a certain growth in order to be effective ("law of large numbers").

EIOPA now stresses an additional concern, because some insurers try to calculate the final premiums as optimized as possible by "using a number of different techniques which are largely independent from the consumer’s risk profile – sometimes relying on artificial intelligence". This kind of price optimization is not linked to individual behavior but to "aspects relating to socio-economic factors, consumers’ inertia, and consumers’ willingness to pay for certain products or services" (p 25). In fact these techniques are a kind of "scoring" procedures which may even create the "risk of unlawful indirect discrimination" (for ex. by an increase of premiums without being linked to a change of the personal situation or mainly for old/loyal consumers and vulnerable consumers; cf. p. 27).

Product Complexity and Transparency

These issues are particularly relevant for life and pension products. The general shift from classical “with-profit” life products (with minimum guarantees for the contribution phase) to hybrid, unit- and index-linked life products has been accelerating. The sharp fall of assets in March 2020 did fortunately result in slightly higher lapses/surrenders, but “no abnormal trends were observed”. But these developments elucidated even more, how strongly this “search for yield” increased the allocation risks borne by policy holders. In consequence it is rather disturbing that “the poor consumers understanding of the risks included in the risk-reward profile of unit-linked products, the high costs and the complex structure, and the lack of transparency in the sale process – including in relation to inducements – are some of the issues highlighted by NCAs” (p. 11).

EIOPA comes even to the conclusion that “in the majority of Member States there is a deterioration of the value for money of these products as costs have sensitively increased” (p. 12). Therefore as a minimum requirement EIOPA stresses that this shift to life products with reduced or even no capital guarantees has to be “accompanied by adequate mitigating measures such as improved target marketing, mitigation of conflicts of interests, and enhanced and effective transparency” (p. 10).

The same shift is observable for pension products, but at slower pace due to the long-term nature of the concluded contracts. This is particularly relevant for occupations pensions (shift from defined benefit to defined contribution schemes). On European level in total there are still much more active members and beneficiaries in DB than in DC schemes (20,5 / 14,1 million persons; cf. figure 29, p. 33) in 2020. With regard to private pensions it can be stated that the total numbers of contracts is increasing but with strong differences amongst the EU member states (p. 35). In well-developed national markets there is a large number of “IBIPs with long-term holding period and specific target market” which are sold to provide retirement benefits to policyholders (p. 36). For these products the aforementioned concerns outlined by EIOPA with regard to unit-linked products can be considered as being the same.

Therefore - not surprisingly - EIOPA stresses on the one hand that “an adequate and resilient outcome for European citizens in retirement is strictly related to a well-balanced contribution of the three pension pillars.” Product providers of occupational and private pension should play a crucial role in retirement provision, but of course under the necessary condition that they provide for “an active retirement planning” for their customers and future beneficiaries (p. 33) including less complex products, transparency on costs and returns and reliable scenarios on future benefits.

Conclusion

For a comprehensive look on the analysed trends we recommend the lecture of the complete report (statistical data on each EU member state, additional special areas of concerns like credit life insurances, cyber risks, greenwashing, unilateral changes of terms and conditions, protective/preventative products etc.). BdV like other stakeholders had contributed to this report via its membership in EIOPA OPSG and via Better Finance for EIOPA IRSG. In these documents you will find precise examples for current consumer trends and concerns in very different insurance and pension sectors.

Über mich

Ich heiße Christian Gülich (Jg. 57) und war schon immer an Kontakten ins Ausland interessiert. Während meiner Zeit an der Universität Bielefeld (Fachbereich Soziologie) war ich zu Studien- und Forschungszwecken in Aix-en-Provence, Paris, Strasbourg und Brüssel. Da liegt es nahe, dass ich mich beim BdV hauptsächlich um die EU-Kontakte (Konferenzen, Stellungnahmen o.a.) kümmere. Hier im Blog möchte ich über diese Aktivitäten berichten. Denn leicht ist es, über die EU als Moloch zu lamentieren, viel schwieriger ist es, diese komplexen Zusammenhänge verständlich darzustellen.