CREDIT PROTECTION INSURANCE (CPI) SOLD VIA BANKS

When properly designed and sold to consumers, CPI products are valuable and protect consumers against unfortunate events of life. While acknowledging the various benefits of CPI products, the thematic review unveiled significant risks for consumer detriment arising from poor underwriting and sales practices as well as insufficient management of conflicts of interest arising in the context of bancassurance sales. The key findings of the thematic review are:

1. There is limited consumer choice and barriers to shopping around

• Even if consumers are allowed in theory to select another insurance provider (with the regulatory aim of promoting competition and reducing prices) this possibility is constrained due to cross-selling practices, given that 83% of banks in the sample sell them tied to the ‘core’ product, meaning that they will not sell the CPI without the credit product.
• In addition, 66% of insurers in the sample underwrite and sell their CPI products as Group Policies where the bank is the policyholder of the policy and it will sell the CPI product only to customers that will buy bank’s credit products.

2. There is high product diversity and price dispersion at the national and EU level

• There is a large variety of CPI products at the EU level and at the national level. Given the multiple type of risks covered (life and non-life), CPI policies tend to include a large number of terms and conditions compared to other insurance products. There are also a wide variation in exclusions, product design and potential benefits to be paid depending on the risk covered.
• The situation at the EU level, but also at the national level, looks very diverse when it comes to the price the same consumer would have to pay in each country depending if they buy the CPI product from bank A or B.
• This makes it difficult for consumers to understand and compare the CPI products available on the market and make informed purchasing decisions.

3. There are issues with cancelling a CPI product and switching providers

• In some cases consumers may have difficulties with cancelling their CPI product or switching providers as 43% of insurers indicated that before cancelling their CPI policy, consumers have to get agreement from the bank and fulfil certain conditions. In most cases this is because the CPI policy is a group policy and the policyholder is the bank and in most cases the beneficiary. Therefore, the consumer has to inform and request approval from the bank to cancel its policy/affiliation.

4. There are high risks of conflicts of interest due to unusual high profitability

• CPI products are a profitable business for both insurers and banks, given the average claims ratio for the three years period 2018-2020 for mortgage CPI has been around 26% of GWP, for consumer credit CPI around 18% of GWP and for credit cards CPI around 8% of GWP. The remaining 74% to 92% of the GWP are used to cover the costs and profits of insurers and banks.
• The conflict of interests due to remuneration arrangements between insurers and banks if not properly mitigated can lead to consumer detriment. Any misalignment between the interests of the banks and insurers on one side and those of consumers on the other side can result into poor underwriting and sales practices.

5. The strong ties between insurers and banks can reinforce the risks of conflicts of interest

• 63% of insurers have close ties (part of the same financial group, strategic alliance or Joint-Venture) with their banking partner meaning that there is a substantial interest of the parties to achieve common goals.
• The thematic review unveiled a pattern where, in the case of closer ties between the bank and insurer, the level of commissions paid to banks as well as the profits retained by insurers are higher. In addition, risks of potential cross-subsidizing and reliance on non-interest income stemming from the sale of CPI may persist for some banks in the sample – as some might be offsetting low margins on their credit offerings with profits generated from the sale of CPI.

Given these findings, EIOPA and NCAs will consider a number of measures to improve the quality of outcomes for consumers in this market. EIOPA considers that while the regulatory framework in place is robust in preventing bad practices in the design and distribution CPI products, issues may persist with implementation of the rules by some market participants and enforcement may be required. EIOPA believes that improvements by the sector are necessary to deliver good consumer outcomes in a consistent manner at the national and EU level.

It is important to note that in some markets, NCAs have already carried out supervisory activities and taken relevant measures to prevent consumer detriment and address identified issues. Therefore, in order to have consistent consumer outcomes across the EU, it is key to ensure coordination and exchange of information amongst NCAs on the actions taken at the national level and to monitor the impacts of the selected tools.

Given the heterogeneity in issues identified as well as their presence in different markets, EIOPA will examine available tools to improve consumer outcomes with CPI products, including:

• A dialogue with the industry via a public event organised by EIOPA to discuss findings and expectations from the sector to improve consumer outcomes with CPI products.
• A warning under Article 9(3) of the EIOPA Regulation to insurers and banks (acting as insurance intermediaries) to address concerns relating to conflict of interest emerging from high remuneration levels and sales practices that are detrimental to consumers (tying, pressure-sales, mis-leading information).
• EIOPA will share the findings of the thematic review with the relevant Directorates of the European Commission and highlight potential issues with limited competition in the CPI market, consumer detriment arising from tied sales and issues with Group Policies and relevant implications in light of the IDD review.
• EIOPA will work with NCAs to provide support in identifying cases of outliers in their markets that may carry a heightened risk of consumer detriment (e.g. players making excessive profits above other ones in the national market or charging high commissions).
• EIOPA will engage with EU banking supervisory authorities (EBA and ECB) to exchange on risks management frameworks and mitigation of conflicts of interest arising in the context of bancassurance business models, arising from close ties between insurers and banks (acting as insurance intermediaries) for the design and distribution of CPI products.
• EIOPA will further assess the need to take additional actions, based on its mandate and legal powers, to improve consumer outcomes in the CPI market and promote coordination and exchange of information on NCAs actions to ensure a common approach and promote supervisory convergence at the EU level.

In addition to the measures taken by EIOPA, when relevant, the NCAs will take relevant actions within their powers in order to address specific issues identified in their market.

CPI Market overview

The data analysis covered 174 insurance undertakings and 145 banks. In 2020 the participating insurance undertakings collected a total amount of € 8.3 billion in GWP for the sale of 38 million mortgage CPI policies, € 5.5 billion in GWP for the sale of 44 million consumer credit CPI policies and € 615 million in GWP for the sale of 8.9 million credit cards CPI policies.

The breakdown between Regular Premium products and Single Premium products by type of CPI product is presented in Figure 3 below.

Coverage of CPI products

The CPI can provide protection against a combination of risks in one insurance policy instead of multiple policies for each type of risk. The coverage provided can vary from one insurer to another, some covering only life or non-life risks, and others covering a combination of the two.

Most insurers (75%) cover death/mortality risk as a part of the standard coverage for all 3 types of CPI products. Around 30% of insurers include in their standard coverage additional risks such as accident, sickness, loss of autonomy and disability.

Unemployment coverage is provided as part of the standard coverage by 20% of insurers for mortgage CPI, 30% of insurers for consumer credit CPI and 45% of insurers for credit cards CPI. Only 3% of insurers also offer coverage for fire.

CPI product design

Type of policies

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66% of insurers (115 out of 174) underwrite their CPI products as Group Policies where the policyholder is the bank and the consumers are affiliated to the policy as the insured person.

The overview by type of CPI products that are underwritten and sold as Group Policies shows that:

• Out of 151 insurers that underwrite and sell mortgage CPI, 82 insurers underwrite them as Group Policies.
• Out of 146 insurers that underwrite and sell consumer credit CPI, 100 underwrite them as Group Policies, and
• Out of 70 insurers that underwrite and sell credit cards CPI, 56 underwrite them as Group Policies.

This shows that a vast majority of CPI products on the market are sold as Group Policies. 90% of insurers (104 out of 115) that sell their CPIs as Group Policies indicated that the bank is the policyholder and a few insurers indicated that the policyholder could be an association or the insured person itself.

75% of insurers (86) also indicated that the ultimate beneficiary of the Group Policies is the bank3 however, 67% of insurers (77) indicated that the insured person is also the beneficiary depending on the type of CPI product and the amount of the claim. In cases where the value of the claim exceeds the amount of the outstanding loan/credit to be covered, the difference is paid to the insured person. In addition, depending on the incident (e.g. disability), the beneficiary can be the insured person.

According to a majority of insurers there are no major advantages for the consumer that Group Policies offer compared to individual policies. However, some insurers indicated that Group Policies may present some advantages:

• No medical screening and a high level of automatization;
• Limited administration and other internal costs;
• High mutualisation of the risks involves reduced pricing spreads and ensures maximum insurability, therefore the Group Policy can be more inclusive from a consumer point of view.

Some of the disadvantages of the Group Policies indicated by some insurers are:

• Adverse selection – given Group Policies allow for riskier type of consumers to be insured at a lower price there might be a risk that mostly riskier type of consumers will buy the CPI (e.g. older consumers or with health issues);
• The limited coverage and maximal insured sum;
• Higher prices for younger and healthier consumers as there is no individual pricing resulting into more expensive prices for some categories of consumers;
• No tailoring of the product according to the specific situation of each insured person;
• No possibility for transfer to another institution in case of remortgaging;
• Due to the sales process, the consumer/insured person may not be aware of purchasing the insurance policy resulting in low claims ratio;
• The insured person/consumer cannot change or adapt the coverage during the contract duration.

Premium payment

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The most frequent type of premium payment for CPI products is the regular premium paid either separately or together with the credit instalment. The single premium products account for around 32% of mortgage CPI, 51% of consumer credit CPI and 18% of credit cards CPI. The single premium is to be paid upfront in one lump sum and in some cases the single premium is added to the loan amount and additional interest costs are paid by the consumer to finance the insurance premium.

It is noticeable that the type of CPI products vary from one country to another. For example we can observe that in DE, ES, HR, IT, LU, PL, PT and SI the single premium products are preponderant. Whereas in countries like BE, CZ, EL, HU, LV, PT, RO, SE and SK the regular premium products are preponderant and in EE, FI, FR, IE, LT and MT there are only regular premium type of CPI products.

In the case of the regular premium CPI products, 50% of insurers allow consumers to choose the frequency of the premium payment between monthly, quarterly or annual.

In the case of single premium CPI products, 50% of insurers selling mortgage CPI and 38% of insurers selling consumer credit CPI allow consumers to choose the frequency of the premium payment. However half of those insurers indicated that additional fees and other costs will be incurred by the consumer in case if the premium payment is monthly, which increases the final amount of the GWP.

Bancassurance Business models

There are several bancassurance business models, which are based on the level of consolidation of the relationship between the insurer and the bank. Four main types of business models have been identified:

Based on the evidence collected, the most frequent type of business model used for the sale of CPI products is the strategic alliance, where 33% of insurers and banks that participated in the study have exclusive distribution agreements in place.

Figure 6 - Overview of main types of bancassurance business models and their preponderance

63% of insurers that sell their CPI products via the bancassurance distribution channel have close ties with their banking partner, meaning that there is a substantial interest of the parties to achieve common goals but this might also lead to emergence of potential conflicts of interests, which if not properly mitigated can result into poor conduct and risks of consumer detriment.

Financial holdings are most encountered in BE, ES, FR, IE and IT, markets where the interconnectedness between the banking sector and insurance sector is higher.

Sale of CPI products

Out of 145 banks that participated in the thematic review, 117 banks sell mortgage CPI, 127 banks sell consumer credit CPI and 53 banks sell credit cards CPI:

• 40 banks sell all 3 types of CPIs
• 64 sell both mortgage CPI and consumer credit CPI
• 10 sell both consumer credit CPI and credit cards CPI
• 1 sells both mortgage CPI and credit cards CPI
• 14 sell only mortgage CPI
• 14 sell only consumer credit CPI
• 2 sell only credit cards CPI

55 banks have indicated launching new CPI products in the past 3 years. The new products have the following characteristics compared to older products sold by the banks:

• Change from group policies to individual policies and introduction of medical surveys that allowed for reduction in commission for distribution and decrease in the total GWP;
• Extension of coverage to include disability and other health conditions;
• Introduction of unemployment coverage;
• Increase of the age limit for coverage to be provided;
• Inclusion of risks related to COVID-19.

Only 23% of banks indicated that in order to get a mortgage loan from their bank, the borrower is obliged to purchase a CPI product, and only 8% for credit cards and 7% for consumer credit.

The difference in percentage from one product to another could be explained by the fact that the EU regulatory framework in place on mortgage loans allows “for creditors to be able to require the consumer to have a relevant insurance policy in order to guarantee repayment of the credit or insure the value of the security”.5 Therefore, some of the banks have implemented policies that require consumers to purchase a CPI type of product for mortgage loans.

Although not mandatory in most cases, 86% of banks sell their CPI products together with the main credit product on an add-on basis (together with mortgage, consumer credit and credit cards).

And most of the banks (83%) sell the CPI products tied to the ‘core’ product meaning that they would not sell their CPI products without the credit product, for example in cases where the consumers would like to get the mortgage from another bank.

Only 3% of those banks that sell their CPI product on an add-on basis with their main credit products, accept to sell the CPI to consumers that may be taking a credit product from another bank.

Out of 143 banks that provided a reply, 111 banks (78%) accept a CPI product from another provider and 32 banks do not.

Out of 111 banks that accept a CPI product only 44 banks perform an equivalence review of the CPI proposed by the consumer from another provider.

The 67 banks indicating not performing an equivalence assessment reported that this is because the CPI is not mandatory for the consumer to purchase, therefore the bank does not assess the insurance product from another provider.

45% of the banks indicated informing consumers that they can buy the CPI product from another provider than the bank, while 55% of the banks do not.

Product complexity and diversity

CPI products tend to be complex and very diverse making it very difficult for consumers to compare products and shop around. There is a large variety of CPI products at the EU level and at the national level. Given the multiple risks covered in nature, CPI policies tend to include a large number of terms and conditions compared with other insurance products. There are also a wide variation in exclusions, product design and potential ways for the claims to be paid depending on the risk covered.

CPI policies provide cover for a set of risks that may vary from one bank to another with some policies providing cover for only one type of risks or multiple ones:

• Death/mortality
• Accident and sickness
• Total and irreversible loss of autonomy
• Total or partial temporary disability
• Permanent partial disability
• Unemployment
• Fire
• Other.

Different CPI policies have different age limits (between 59 and 99 years old) and different no-claims or waiting period (between 0 days and up to 1 year) for each risks covered before claims can be submitted by the consumers.

In addition there is no common term for the CPI products and in different markets they have different names from one bank to another. For example in the countries where EIOPA carried out consumer interviews (see the section on Consumer interviews) focused on mortgage CPI there are different product names used by different banks:

• In Belgium these are called “assurance solde d’emprunt” or “assurance solde restant dû”
• In Bulgaria “Защита на кредитополучателите“ or “Защита на плащанията”
• In Estonia „aenukaitse kindlustus”, “laenukaitse kindlustuse” or “elukindlustuskaitse”
• In Germany “Restschuldversicherung” or “Risikolebensversicherung“
• In Italy “assicurazione sul mutuo” or “assicurazione vita sul mutuo”
• In the Netherlands „Overlijdensrisicoverzekering hypotheek” or “Levensverzekering hypotheek”
• In Portugal “Seguros de Vida Proteção ao Crédito Habitação”, “Seguro de Proteção de Pagamentos” or “Plano Proteção Pagamentos” (Seguro Proteção Vida)
• In Sweden “Bolåneskydd” or „livförsäkring lån”.

In addition many banks and insurers use commercial brands for the CPI products such as Life+ or Serenity, Family protection etc.

Both insurers and banks participating in the thematic review have been asked to provide a quote for a mortgage CPI product for six different consumer profiles for the same mortgage loan conditions. The six different consumers profiles identified were to take a mortgage loan from the banks for a total amount of €100,000 for a total duration of 15 years. The participants were asked to indicate the amount of the GWP for the mortgage CPI, the type of policy (group or individual), the cover provided (type of risks covered), type of premium (Single or Regular), the frequency of premium payment and the amount of discount to the GWP, if any.

The situation at the national level, but also at the EU level, looks very diverse when it comes to the price the same consumer would have to pay for a mortgage CPI product. Moreover, there is a high variation in some countries where the same consumer would have to pay a significant difference in price if selecting one bank over another.

A first observation is that in some markets, the price for a mortgage CPI offered by different banks is flat for all consumer profiles. This is the case for those banks selling Group Policies where the GWP doesn’t vary by customer age, health conditions or employment situation, meaning that the same price will be paid by a younger customer who is in a good health condition as an elder person that may be closer to the retiring age and have some health problems.

This situation is encountered in CZ, EL and HU. However, it is also noticeable that in other markets where Group Policies are sold, the pricing of the mortgage CPI policies varies depending on the risk category of the customer – which is not in line with traditional Group Policies underwriting methods. This means that the price paid by a consumer will be adjusted depending on its age, health condition and employment status. This can be observed in ES, HR, FR, IT, LT and SK.

As expected the price variation by consumer profiles is most observed in the markets where Individual Policies are predominant. In these markets the price setting of the premium is done individually for each type of risk profile of the consumer and we can observe that riskier consumers will pay more for their mortgage CPI product.

In the case of Single Premium mortgage CPI products, these are sold only in some markets and tend to be more predominant compared to the Regular Premium Products.

For example in IT, around 80% of insurers sell the mortgage CPI products with a Single Premium and only 20% of insurers sell them with a Regular Premium. A similar situation can be observed in BE, ES, LU and SI, where more than 50% of participants sell Single Premium mortgage CPI products.

High profitability for insurers and banks

Profitability analysis for banks

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The CPI products seem to be a highly profitable business for both insurers and banks, given the average claims ratio for the three years period 2018-2020 for mortgage CPI has been around 26% of GWP, for consumer credit CPI around 18% of GWP and for credit cards CPI around 8% of GWP only. The remaining 74% to 92% of the GWP are used to cover the costs and profits of insurers and banks. The profitability analysis of the CPI products for banks may not be easily done, given most banks have no cost allocation model in place for the distribution of the CPI products or insurance products more generally.

Out of 145 banks, 107 (74%) indicated not having a cost allocation model in place and were not able to indicate the total costs for the distribution of the CPI products.

In the absence data on costs for distribution of CPI products from a large number of banks, no estimate of how much of the remuneration received from insurers goes to cover costs, is possible.

However, 38 banks indicated as calculating costs for the distribution of the CPI products either directly allocating costs for each product independently or allocating costs to their insurance distribution activity for the whole portfolio of insurance products sold or jointly with the main credit products.

The most predominant type of cost allocation model used is the ABC (activity based costing). The ABC is a costing method that assigns overhead and indirect costs to related insurance products and is allows for recording of micro-activities, time spent and professional figures employed. As explained by several participants the ABC model allows them to calculate the costs for insurance distribution activities by multiplying the execution time by a cost per unit of time for the volume of activity (e.g. number of policies issued in a year per unit cost). The cost per unit of time includes both the cost of personnel carrying out the activity, the costs of workstations, utilities and real estate spaces. The latter are therefore allocated to the product only for the amount of time absorbed (FTE), for this reason they are considered as direct costs. Production costs (e.g. cost of IT procedures) are attributed to the product on the basis of a group industrial accounting system, used to re-allocate the costs of the service units to the divisions (segment reporting). This system provides for a breakdown of costs by product (e.g. current accounts application, mortgage application, etc.)

Out of 38 banks that allocate costs to the sale of CPI products, 27 banks were able to provide the total costs (direct, indirect and other costs) per new sale of a CPI product. Based on the cost information provided, a profitability analysis, presented in Figure 27, was carried out based on the quote for a Mortgage CPI provided by the banks and as well as the information on the remuneration level as a percentage of total GWP.

The level of total costs per new sale for a Mortgage CPI varies significantly from one bank to another in different markets. Some banks indicated as little as 4€ of total costs per new sale up to 656€ per new sale by other banks. Such difference might be explained by several factors such as country, cost allocation model used, type of sale (standalone or add-on), sales processes and bank employees that execute the sale (mortgage officers or separately allocated staff for insurance products), amount of GWP and other factors.

It appears that the distribution of the CPI is profitable for all 27 banks and the amount of remuneration (profit) retained after deduction of costs varies significantly from one bank to another based on the % of GWP perceived as remuneration and the total GWP for a mortgage CPI.

We have not scrutinised these cost models for robustness, and present the findings for the purpose of illustration only. However, even if we take the banks’ cost models at face value, the profitability for the sale of CPI products is high.

Overall, it seems that banks do not know what the costs for distributing CPI products are, therefore the high levels of remuneration perceived for distribution cannot be explained by the level of costs, given no precise information is available. And even when the banks know the amount of costs, the sale of CPI products seems to be in most cases, highly profitable.

Profitability analysis for insurers

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The profitability analysis for insurers from the underwriting and the sale of CPI products can be explained in this case by looking at the net underwriting result (NUR) and the combined ratio. The NUR is calculated as the total GWP less claims payments, commissions and expenses as a percentage of GWP charged during a specified period, it excludes investment income earned on held premiums. The combined ratio is a measure used by insurance companies to help determine their profitability. The ratio is calculated by taking the total of both losses and expenses and then dividing them by the premium, a ratio below 100% indicates the company is making an underwriting profit while a ratio above 100% means the company is paying out more in claims than the premiums collected.

The numbers on combined ratios reported by insurers for all three products show that a large majority of insurers have combined ratios below 100%. Worth stating that this means that CPI underwriting is a profitable business.

For the three CPI products (mortgage, consumer credit and credit cards) designed with a regular premium it is noticeable that the distribution of the combined ratio is multimodal and is skewed to the right with a peak at 30% and 70% for mortgage CPI; 95%, 70% and 5% for consumer credit CPI and 90% and 10% for credit cards CPI.

[Quick reading guide on distributions analysis for Figure 28, Figure 29, Figure 30, Figure 32, Figure 34, Figure 36 and Figure 38: each histogram represents the distribution of each variable, showing how often each different value in the dataset occurs. E.g. for the distribution of the combined ratio in Figure 28 here below for Regular Premium Mortgage CPI products, the first bar, set around 10%, represents the proportion of insurers which reported a combined ratio (as % of GWP) between 0% and 10%. The second bar would mean that around 7% of the insurers reported a combined ratio between 10% and 20%. The following rectangular bars should be interpreted in a similar way]

A similar situation can be observed for mortgage and consumer credit CPI products designed with a single premium. The distribution of the combined ratios is multimodal and skewed to the right with peaks around 50% and lower.

Poor value: Scale and magnitude

The evidence collected from both insurers and banks shows that many consumers buy a CPI policy from their bank together with a mortgage, consumer loan and to a less extent credit card. The prices paid for CPI policies can be high, especially in the case of mortgage CPI policies where the total GWP can go up to €15,000 - €20,000 for a total credit amount of € 100,000.

Figure 49 to Figure 58 show the part of GWP used to cover commissions to banks, NUR of insurers and the claims paid to consumers for each insurers that participated in the thematic review.

Mortgage CPI

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The vast majority of insurers (82%) reported claims ratio between 0% and 40% of GWP. This means that in most cases, for every €1 paid by consumers in premiums they get as little as 0 cents to 40 cents back in claims. The figure below is providing an overview for the year of 2019 however there is minor variation in the data reported for all three years 2018 to 2020, therefore the figure is representative overall. Some insurers failed to provide the full information on commissions and NUR however given the expense ratio for Regular Premium Mortgage CPI is in most cases below 20% (shown in Figure 31) it is easy to picture the approximate situation that applies.

For Mortgage CPI sold with a Regular Premium, 70% of insurers reported claims ratio below 30% of GWP, this covers a total business € 2.2bn of collected GWP (30% of total GWP) and 11m policies (30% of total policies).7

For a total of 18m policies (51% of total policies), insurers reported a claims ratio between 30%-40% and this covers a total business €3.3bn (46% of total GWP) – while the commissions paid by insurers to banks for the sale of these policies were around 40%-50% of GWP – a total of around €1.5bn. The Figure 50 complements the Figure 31 and shows detailed data on the number of policies and corresponding GWP for which insurers have reported low claims ratio and paid high commissions rates to banks8.

[Quick reading guide on the scale and magnitude tables from Figure 50, Figure 52, Figure 54, Figure 56 and Figure 58: the data in the columns represents the potential impact on consumers, both in terms of # policies and GWP (in absolute and relative amounts), for each range reported per indicator. E.g. cases linked to claims ratios between 0% and 10% of GWP are expected to affect 547 938 policies, which represent 2% of the total policies of the total number of policies sold by all insurers in the sample. Columns on GWP provide the expected impact in terms of GWP, which in this case, is expected to account for 85 634 EUR of written premiums, representing around 1% of the total GWP collected by the insurers in the sample. Such impacts are then estimated for each interval (row by row reading), and for the three key risk retail indicators (claims ratio, net underwriting result and commission rate headers)]

Figure 50 - Scale and magnitude: low claims ratios and high commission rates for Regular Premium Mortgage CPI, 2020

In the case of Single Premium Mortgage CPI, the situation looks worse for consumers as only 5 insurers reported claims ratio between 40% and 50% of GWP. It is also noticeable that the claims ratio of Single Premium products are generally lower compared to the Regular Premium products.

For Mortgage CPI sold with a Single Premium, 65% of insurers reported a claims ratio below 20% of GWP, this covers a total business € 777m of collected GWP (85% of total GWP) and 1.8m policies (75% of total policies).

For the sale of 1.4m policies for a total GWP of € 566m – insurers paid to banks in commissions between 30% and 70% of GWP – a total of around € 252m. The Figure 52 complements the Figure 33 and shows detailed data on the number of policies and corresponding GWP for which insurers have reported low claims ratio and paid high commissions rates to banks.

Figure 52 - Scale and magnitude: low claims ratios and high commission rates for Single Premium Mortgage CPI, 2020

Consumer credit CPI

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Consumer credit CPI products seem to bring lower value to consumers, however compared to Mortgage CPI products, the share of commission rates paid to banks seems to be higher putting more pressure on the NUR of insurers.

For consumer credit CPI sold with a Regular Premium, 86% of insurers reported claims ratio below 30% and this covers a total business of € 1.9bn (74% of total GWP) and 23m policies (80% of total policies). For the sale of 24m policies for a total of GWP of € 2bn – insurers paid in commissions between 40%-60% of GWP – a total of around €1 bn. The Figure 54 complements the Figure 35 and shows detailed data on the number of policies and corresponding GWP for which insurers have reported low claims ratio and paid high commissions rates to banks.

Figure 54 - Scale and magnitude: low claims ratios and high commission rates for Regular Premium Consumer Credit CPI, 2020

Compared to Regular Premium consumer credit CPI, consumers that purchased a Single Premium consumer credit CPI are worse off, as the average claims ratio is 11% of GWP and the maximum claims ratio reported by only one insurer is 39% of GWP.

For Consumer Credit CPI sold with a Single Premium – 85% of insurers reported claims ratio below 30% and this covers a total business of € 2.5bn (85% of total GWP) and 14.2m policies (95% of total policies). For the sale of 2.2m policies banks received up to 10% of GWP in commissions, for 2.7m policies – 30%-40% of GWP, and for 5.2m policies (42% of total policies) – banks got in commissions between 40% and 70% of GWP.

Figure 56 - Scale and magnitude: low claims ratios and high commission rates for Single Premium Consumer Credit CPI, 2020

Credit cards CPI

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The average claims ratio for credit cards CPI in 2019 was 8% of GWP. As shown in Figure 39, 89% of insurers reported claims ratio below 20% of GWP.

This covers a total business of € 577m (95% of total GWP) and 7.7m policies (87% of total policies).

For the sale of 2.3m policies (26% of total policies) for a total of € 138m of GWP (22% of total GWP) - banks received in commissions € 103m, between 70%-80% of total GWP. For the other 4.8m policies accounting for a total of € 409m banks received in commissions between 40%-70% of GWP. The Figure 58 and Figure 54 complements the Figure 39 and shows detailed data on the number of policies and corresponding GWP for which insurers have reported low claims ratio and paid high commissions rates to banks.

Denied claims and Complaints

Denied claims ratio

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In addition to the analysis on the claims ratio, it is important to look at the denied claims ratio9. For the purposes of the thematic review, insurers have reported data on denied claims. We defined the denied claims as claims submitted by policyholders/insured persons and dully processed by the insurer which have ended without payment. For the purpose of the thematic review, only claims completely denied where considered as claims denied. Claims partially denied are not to be considered as claims denied.

High numbers of denied claims can indicate potential issues with unsuitable sales, coverage and exclusions, as well as consumer understanding of the product and their expectations not being met at the claim stage. Generally in relation to the three CPI products we can observe an EEA average denied claims ratio between 20% and 30%, consistent across the three reporting years 2018-2020 as shown in Figure 72 to Figure 76 in Annex IV – additional figures, to all CPI products, and types of premium. Consistently throughout the years, the average EEA averages are higher for consumer credit CPI products, and particularly single premium.

However, looking at the results on a country by country analysis we can observe a variation in the average denied claims ratio from one MS to another and from one CPI product to another. It can be noticed that the average denied claims ratio is higher for consumer credit CPI products and credit cards CPI products compared to mortgage CPI products. This is also in line with the findings on the claims ratio shown in Figure 49 to Figure 57 where claims ratio are lower generally for consumer credit CPI products and credit cards CPI products.

Complaints

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High number of complaints, regarding unsuccessful claims, may indicate failures with the CPI products, the distribution and sales process or that insufficient information has been provided to consumers regarding the coverage and other product features. The number of complaints is also commonly used to assess the performance of the products and the general policyholder experience when buying and claiming on the CPI products.

The number on complaints reported by the insurers are generally insignificant compared to the number of policies or number of claims. In connection with low claims ratio this could raise concerns around consumer awareness of owning CPI products.

Additionally, many undertakings have stated that the figures reported to regulators (‘Ombudsman’) are far more limited. Despite that, complaints figures raise some concerns with potential product manufacturing and distribution issues, both looking at the breakdown by distribution channel and by main cause.

The picture is quite steady across the 3 years under analysis and overall, claims related complaints have the biggest share out of the total complaints reported by insurers, particularly for Consumer Credit CPI Regular Premium, also reflecting the findings in terms of claims and declined claims presented in the previous sections.

Despite the low number of reported complaints, and the poor data quality on this field, it is possible to notice that generally higher declined claims ratios are linked to higher number of complaints, especially related to claims, which might indeed raise some concerns in terms of claims handling processes and systems.

The main observation is that consumers mainly submit complaints to insurers in relation to claims, which might indicate issues with the claims handling process but also issues with the coverage of the CPI products and exclusion clauses, which can lead to a mis-match between consumer expectations and actual product cover. This risk is heightened in the case of the CPI products as most products are sold as Group Policies that have no or limited individual underwriting before the policy issue. This practice, referred to as “underwriting at claim stage” where a group of consumers is insured collectively without individual up front underwriting. However, unless sufficient attention is paid to ensure that customers fully understand the implications and exclusions concerned, this can lead to materially unfair outcomes with customers’ benefit expectations not being met at claim stage.

We can also observe that in the case of the Single Premium CPI products, the complaints related to the Premium of the mortgage CPI and consumer credit CPI are considerably higher compared to the Regular Premium products. This can be explained by the fact that consumers are presented with the total amount of the GWP at the point of sale and are required to pay the full amount of the GWP in one lump sum which may increase attention of consumers on the size of the total premium to be paid. In addition, this could also be explained by the fact that in some cases consumers are offered the possibility to finance the GWP, however this raises additional interest costs for consumers, ultimately increasing the total amount to be paid by consumers for the CPI product.

The overview on the main reasons of why consumers complain, in combination with the analysis of the denied claims ratio and claims ratio raise significant concerns with the value of the CPI products as well as the sales practices – given that overall consumers get little value in return and not all of them may be eligible to submit a claim.

Termination/Cancellation

Given in most cases the CPI products are sold as Group Policies where the bank plays a key role as the distributor, policyholder and often the beneficiary of the CPI policy – certain conditions for cancellation are defined by the bank and have to be respected by the consumer:

• Some insurers indicated that as required by the bank, the consumer has to first repay the full amount of the credit before being able to cancel its CPI policy
• Where the bank is the beneficiary of the CPI policy, the consumer has to get a signed approval by the bank
• In cases where the CPI policy is mandatory, the consumer has to bring to the bank the new CPI policy for an equivalence assessment of the cover provided and the bank has to allow the switch of the provider.
• In other cases, the consumer can only cancel the policy after a certain time (e.g. 5 years from the purchase).

In addition in the case of mortgage CPI policies, only 30% of insurers indicated that if consumers would like to remortgage their loan with another bank they would have the possibility to maintain the existing CPI policy. Most of the insurers allowing this possibility to consumers sell individual policies. However in cases where the previous bank was the beneficiary of the policy a signed confirmation is required in order to replace the new bank as the new beneficiary of the mortgage CPI policy. Some insurers selling Group Policies indicated that the consumer is free to decide if to keep the CPI policy in general, however it is not clear whether the policy will be linked to the new provider and the new credit agreement or not.

Product design

In relation to product manufacturing, most CPI products covered by the thematic review are underwritten and sold as Group Policies that have no or limited individual underwriting before the policy issue. There is no major advantage of Group Policies compared to Individual Policies for consumers, however there are issues related to manufacturing that could lead to consumer detriment, stemming from the product approval process, including incorrect identification of the target market as well as weak assessment of consumer’s objectives, interests and characteristics. In addition, the bank is in a conflicting position where it acts as the policyholder (and in most cases the beneficiary) of the Group Policy and as the distributor of it, for which it perceives remuneration from the insurer. There also some issues with cancelling or switching providers for some consumers that purchased a Group Policy, as often the approval by the bank is required (as the policyholder), and certain conditions have to be fulfilled. In addition, a consumer that purchased a Group Policy may not be able to maintain it in case of remortgaging and would have to purchase a new one.

The thematic review also unveiled the existence of single premium CPI products in some markets, where consumers are required to pay the total amount of the premium in one lump sum at the contract signature. Many banks selling single premium CPI products (for mortgages and consumer credit) offer the possibility to finance the premium together with the main credit product for which consumers would face additional interest costs. Such practice is detrimental to consumers given increased costs and unnecessary financial burden compared to regular premium CPI products. Further complications may arise if consumers would like to reimburse their loan in advance or switch providers either for the CPI policy or for the main credit product, as they would need to request a reimbursement of the unearned premium.

Sale

Cross-selling of the CPI products with the main credit products raise concerns, as it seems that tying practices limit consumer choice and present a barrier for shopping around. Most banks in the sample sell the CPI product tied to the credit product, meaning that consumers can only buy the CPI product if they take the main credit product from the same bank. In theory, they could shop around for alternative products however the high penetration rates indicate that consumers very often stick with the same bank for both the CPI and credit product.

There is a high diversity of products both at the national and EU level, both in terms of coverage and characteristics as well as prices, which makes it very difficult for consumers to compare products and make informed purchasing decisions. In some markets, the offer for the CPI product (coverage and price) that the same consumer would get from two different banks can be very different, which can indicate issues with limited competition in the market and/or product differentiation. Other indicators of limited competition for CPI products in some markets are the extremely high commission rates that some banks charge, either due to their market and/or negotiation powers, and may drive higher prices for consumers.

The high commission rates charged by the banks appear to be unreasonable and cannot be explained by potential high costs for distribution as most banks do not allocate costs for the distribution of CPI products and do not know what these are. Even in the case of those few banks that were able to share data on distribution costs, the distribution of CPI products seems to be a very profitable business.

The close connection between insurers and banks in the case of bancassurance distribution models can lead to risks of conflicts of interest as there is a substantial interest of the parties to achieve common goals. The data analysis on commissions charged by banks and net underwriting results of insurers showed a pattern where, in the case of closer ties between the bank and insurer, the level of commissions paid to banks as well as the profits retained by insurers are higher. Given most insurers and banks (63%) are part of the same financial group, in a strategic alliance or have a Joint-Venture, strong risk management frameworks to mitigate potential conflicts of interest are needed.

Overall the thematic review unveiled the preponderance of insufficiently good consumer outcomes at the EU level, with different levels of concerns in some markets more than in others. It is important to note that some of the issues presented in this report do not reflect the situation in all countries as there are differences in terms of product offering, national legal framework and past supervisory actions taken by NCAs to address previously identified issues with CPI in their market.

Some CPI products are delivering unsatisfactory outcomes for consumers given:

• Inconsistent prices at the national level as well as high price dispersion in some countries;
• Difficulties for consumers to compare products, shop around and switch providers;
• High profitability of CPI products for many banks and insurers, and
• Issues with poor value and lack of consumer-centricity of CPI products.

In addition to past and future actions by NCAs, EIOPA will take immediate and medium to long term measures to set clear expectations for the market and monitor the changes in consumer outcomes.

Following publication of the thematic review, EIOPA will organize a public event with industry and stakeholders, as a follow-up to the Roundtable in March 2020, to present the findings and the measures to be adopted. The aim will be to raise awareness on the identified issues and discuss EIOPA’s expectations on consumer outcomes with CPI products at the EU level. The event will also seek to get feedback from stakeholders on the measures to be adopted and potential industry needs for further EIOPA and NCAs’ guidance on various topics.

EIOPA will issue a warning under Article 9(3) of the EIOPA Regulation to insurers and banks (as insurance intermediaries) to address concerns relating to conflict of interest emerging from high remuneration levels and sales practices that are detrimental to consumers (tying, pressure-sales, mis-leading information).

EIOPA will share the findings of the thematic review with the relevant Directorates of the European Commission and highlight potential issues with limited competition in the CPI market, consumer detriment arising from tied sales and issues with Group Policies and relevant implications in light of the IDD review.

EIOPA will work with NCAs to provide support in identifying cases of outliers in their markets that may carry a heightened risk of consumer detriment (e.g. players making excessive profits above other ones in the national market or charging high commissions).

EIOPA will engage with EU banking supervisory authorities (EBA and ECB) to exchange on risks management frameworks and mitigation of conflicts of interest arising in the context of bancassurance business models, arising from close ties between insurers and banks for the design and distribution of CPI products.

EIOPA will further assess the need to take additional actions, based on its mandate and legal powers, to improve consumer outcomes in the CPI market and promote coordination and exchange of information on NCAs actions to ensure a common approach and promote supervisory convergence at the EU level.

Nonetheless, the IRSG believes that the current regulatory framework is very robust. In addition to the unfair commercial practices directive and the mortgage credit directive, the insurance distribution directive (IDD) includes the sales of CPI/PPI by banks in its scope. The IDD strict rules ensure a very high level of consumer protection and have many safeguards designed to avoid mis-selling risks, for example:

Before being offered insurance products, consumers are asked to undertake a “demands and needs” test so that the offer is consistent with their real expectations and needs.

• IDD requires insurance distributors to act in the best interests of their customers.
• There are solid rules in place on remuneration and preventing or managing risks of conflicts of interest.
• The minimum harmonisation approach allows national authorities to further put in place additional requirements, as they see fit for the needs of the national markets.

Therefore, the IRSG believes that the focus should be on implementing and enforcing the current rules to guarantee a level playing field and fair competition between all distribution channels, rather than developing and imposing new ones at the EU level. Moreover, the IDD has been applying in most Member States for only three years, one of them being 2020, where trends have been characterized mainly by the pandemic. Thus, it is too early to have a clear picture of the impact of IDD.

BEUC

Credit protection insurance policies sold alongside mortgage and consumer loans offer policyholders and their relatives protection in the event that they become unable to re-pay the loan, for instance in the event of a policyholder’s death or incapacity to work. When properly designed and sold to consumers, credit protection insurance policies can offer benefits and help consumers in the event that they can no longer pay the monthly instalments on their loans. Nevertheless, many of BEUC’s member organisations have identified significant consumer protection issues with the way these products are designed and sold to consumers, including many harmful practices that have led to poor consumer outcomes.

Key issues identified

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BEUC has identified the following main concerns based on market studies and feedback from our member organisations:

1. Payment of high commissions for the sale of PPI

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The most straightforward distribution channel for selling credit protection insurance policies is through loan providers (such as banks), who have a potentially captive audience of consumers to whom to sell credit protection insurance policies. This ‘point of sale’ advantage for loan providers means that insurers often pay very high commissions in order to secure distribution for their products. There is evidence that credit providers in Europe can attain very high commissions for selling credit protection insurance policies to consumers. For instance, a recent study13 by the German financial supervisor Bafin found that commissions are a very lucrative source of income for loan providers, with some banks receiving up to 70% of the premiums paid out in the form of commissions. In 2017, a study14 by the Belgian financial supervisor FSMA found that over half of the premiums paid by consumers were used to pay charges and sales commissions and that PPI products very often offered poor value for money for consumers. Between 2011 and 2015, companies collected an average of €65m in PPI premiums per year but paid out on a claim in only 0.24% of the contracts in force, which is very poor compared to other insurance products. In France, UFC-Que Choisir estimates that out of 100 euros of premiums paid by insured consumers, only 32 euros are returned to consumers in compensation.15

2. Concerns around tying practices and bundling of insurance products with loans

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Tying practices, where banks require consumers to opt for a specific credit insurance policy when taking out a loan, raise significant consumer protection concerns. Tying practices lead to situations where consumers have no choice between different insurance providers, can harm competition between insurance providers, and result in consumers taking out insurance products that are not best suited for their needs, that are too expensive or that provide inadequate cover. Tying practices have generally been prohibited under the Mortgage Credit Directive, but broad exceptions to this rule mean that Member States can still permit tying practices where creditors can clearly demonstrate that tied products results in a clear benefit to the consumer.16 A recent evaluation17 by the European Commission found that tying practices remain prevalent in the EU, and raises concerns to what extent such practices by banks are compliant with the tying provisions under the Mortgage Credit Directive. In Italy, an investigation18 by AltroConsumo found that banks often continued engaging in unfair commercial practices such as tying, with banks frequently requiring consumers to buy specific insurance policies to be able to take out the loan.

Bundling practices, where banks cross-sell credit protection insurance policies alongside mortgage and consumer loans, also continue to raise consumer protections concerns. Bundling practice can impede the ability of consumers to shop around or carefully examine the costs and the terms and conditions associated with the insurance policy. When taking out a credit or a mortgage loan, consumers are often mainly focused on the primary loan that is being offered, paying significantly less attention to the terms and conditions associated with add-on insurance products such as credit protection insurance policies. A recent survey by UFC-Que Choisir found that when purchasing their own house, a majority of respondents (46%) taking out a mortgage loan focused principally on the interest rate associated with the mortgage loan, with far fewer respondents focused on the costs of the credit protection policies (only 18% of respondents were concerned about the costs of the insurance policy). UFC-Que Choisir’s analysis19 shows that consumers often have insufficient knowledge about credit protection insurance, and that most consumers are not aware that purchasing a loan insurance policy from an alternative company could offer them significant savings. In France, it is estimated that up to 87.5% of insurance contracts offered alongside mortgage contracts are held by insurers who have a very close link to the bank selling the mortgage credit. Yet evidence from UFC-Que Choisir shows that opting for a different insurer than the one provided through the bank can often result in significantly lower costs for consumers, saving consumers on average €5,000 over the lifetime of their mortgage.20

Credit institutions very often also take advantage of the behavioural biases of consumers to encourage consumer to opt for the bundled insurance product, even though this may not be in their best interest. For instance, many credit institutions offer interest rate discounts on the cost of the loan, if the consumer opts for the bundled credit protection insurance policies. This can lead to situations where consumers buy a credit protection policy solely to get the interest rate discount (even if it may not be the most suitable or most cost-effective product), and such nudges often impede consumers from shopping around and comparing offers from different providers (that may be more suitable or cost-effective). According to an investigation by our Belgian member Test Aankoop, very often the interest rate discounts offered by the banks are not sufficient to offset the higher premium costs associated with the bundled insurance product, and consumers are very often better off finding alternative insurance cover from a different insurance provider.21 According to our French member UFC-Que Choisir, the credit protection insurance policies offered by banks are often also of lower quality than those offered by alternative insurers.22 Lastly, there is evidence that banks very frequently employ aggressive sales techniques to push credit protection insurance policies to consumers.23

3. Excessive premium differentiation between different insurance offers

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At the same time, market studies by consumer organisations often also reveal extreme price differences between credit insurance protection policies offered by different insurance providers. For instance, Stiftung Warentest found certain banks could often charge up to four times higher premiums to consumers for policies offering very similar levels of cover.24 Similarly, a survey by Arbeitkammer in Austria found that the tariffs offered by six banks for securing a mortgage loan of €100,000 could be up to four times higher depending on the chosen insurer.25 According to the investigations by Arbeitkammer and Stiftung Warentest, banks very frequently also do not include the premium costs of the credit protection policies in the Annual Percentage Rate of Charge (APRC) associated with the loan, especially in cases where the credit protection insurance policy is voluntary. Arbeitkammer has called for banks to be required to always include the cost of the credit insurance in the APRC, regardless of whether the policy is optional or mandatory the consumer to take out the loan.

4. Right to be forgotten and intrusive medical questionnaires

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Cancer survivors often face major hurdles getting access to essential financial services, including credit protection insurance policies when taking out credit. In many EU countries, insures very often charge significantly higher premiums when taking out credit protection insurance policies if consumers had a history of cancer. This means that cancers survivors often have to pay unaffordable premiums (or even denied the possibility of cover), despite evidence that cancer survivorship rates have dramatically improved across the EU. In Belgium, following a successful campaign by Test Aankoop, a ‘right to be forgotten’ was introduced in 2020 for cancer patients when taking out credit protection insurance policies.26 Test Aankoop has called for this right to be forgotten to be extended to diabetics, due to recent improvements in treatments and in the average life expectancy diabetes patients.27 Several other EU Member States, including France, Belgium, Luxembourg and the Netherlands have adopted national legislative initiatives recognising a right to be forgotten for cancer survivors, and such a right should be extended EU-wide.28

Beyond establishing an EU-wide right to be forgotten, BEUC’s member organisations also have concerns that some of the medical questionnaires that consumers are required to complete to evaluate the risk of death and calculate premiums include questions which are not medically relevant.29 In 2017, Test Aankoop raised concerns that many of the medical questions asked to consumers when taking out credit insurance products were too vague, not relevant, excessive and that these violated a consumer’s right to privacy. In 2018, a Belgian court ruled that insurance providers had to amend the types of questions they could ask of consumers.30

5. Pre-ticked boxes

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Credit protection insurance policies are an add-on insurance product that can be sold to consumers through the use of pre-ticked boxes. Pre-ticked boxes often result in consumers purchasing financial services products that they may not need, or that may not be the most suitable for them. For instance, in 2018, the French consumer protection and competition authority DGCCRF31 carried out a mystery shopping exercise which found that the option to buy a payment protection insurance policy was pre-ticked by most credit sellers. In 2014, the UK Financial Conduct Authority (FCA) banned pre-ticked boxes for the sale of add-on insurance products because of the negative impact they have on consumer behaviour and outcomes (i.e. consumers were often more likely to buy inappropriate or unsuitable products, did not think whether they needed them, and the products often offered very poor value for money).32 Consumers should be required to take an active and informed decision whether they need an add-on product that is being offered to, and the use of pre-ticked boxes should be prohibited in financial services under the review of the Distance Marketing of Financial Services Directive.33

BEUC policy recommendations

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• A requirement to fully disclose the amount of commissions paid to financial intermediaries when recommending credit protection insurance policies, and the introduction of a maximum cap on the payment of commissions to intermediaries. In Germany, the consumer organisation vzbv called for a maximum cap on the payment of commissions that intermediaries can receive for recommending credit protection insurance policies to consumers.34 In May 2021, the German legislator decided to limit commissions on residual debt insurance. From 1 July 2022, these commissions may not exceed 2.5% of the insured loan amount.35
• A strict prohibition on tying practices when selling credit protection insurance products to consumers. In particular, the broad exceptions under Article 12 of the Mortgage Credit Directive should be removed, and banks should be strictly prohibited from engaging in any form of tying practices.
• Stricter rules regarding the cross-selling of credit insurance policies at the point of sale by credit distributors selling mortgage and consumer loans, including for instance by:
• Requiring insurers to present multiple potential alternative credit protection insurance offers at the point of sale when selling mortgage loans to consumers, including at least one offer from insurance firms without close ties to the credit provider.
• Prohibiting the sale of credit protection insurance policies at the point of sale, as already implemented in the United Kingdom.36 In the UK, credit protection insurance policies cannot be sold until seven days after the loan was sold. Stricter cross-selling rules will allow consumers to take the time to reflect and take an informed decision on whether they need a credit protection insurance policy, or to consider alternative potential offers from different insurance firms.
• Allowing consumers, at any time, before and after taking out the credit agreement, to switch the insurance contract offered by the bank to an equivalent policy from an alternative insurer.
• Promoting the use of independent comparison tools to help consumers to compare between credit protection insurance policies, and signposting these comparison tools to consumers in relevant disclosure documents.
• A ban on the use of pre-ticked boxes when selling add-on insurance products to consumers under the review of the Distance Marketing of Financial Services Directive.
• An EU-wide right to be forgotten for consumers when taking out credit insurance protection insurance policies

Insurance Europe

Insurance Europe supports EIOPA’s work on mortgage life and other credit protection insurance (CPI) sold through banks and recognises the value of “thematic reviews” in examining market practices and highlighting potential areas in which improvements are possible. CPI and payment protection insurance (PPI) sold through banks can provide significant value and benefits by supporting consumers’ needs and demands.

CPI and PPI are insurance products with significant benefits for consumers

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1. Coverage of risks

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By protecting consumers against biometric and work-related risks and partly or fully paying off loans should unfortunate events occur, CPI protects consumers taking out mortgages and credit, and their loved ones and heirs, from concerns such as loss of income, repossession of their homes and other consequences of unexpected events. It also helps to protect assets, to provide the peace of mind to plan and realise projects and to maintain a standard of living. The main risks typically covered by CPI/PPI are the most common reasons for personal insolvency and include:

• death
• unemployment
• disability or work incapability
• dread diseases

Thus, CPI/PPI help households’ resilience and peace of mind in times of distress.

2. Consumer perspective

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CPI is known and used by customers, who consider it essential and helpful. A 2021 study by global market research company Ipsos in nine European countries (Belgium, Czech Republic, France, Germany, Italy, Poland, Spain, Sweden, United Kingdom) showed a high level of awareness of CPI in Europe (69% of interviewees know about it) and the majority of consumers recognise its role in protecting their loved ones (76%), their properties (75%) and its ability to maintain their standard of living (75%) and provide peace of mind (73%).

CPI can also provide protection against risks that are perceived to be growing: job loss is the most common reason to expect not to be able to repay a mortgage and 34% of consumers reported they would like to be better protected against it (a 6% increase on 2019). 40% of consumers would like better protection against serious illness (+7% from 2019).

The many other benefits provided include:

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• Community of interest: The distributor has a strong community of interest with its consumer. It aims to provide the most suitable guarantees for all investor profiles. Indeed, the payment of the insurance benefit in the event of a claim enables the loan to be repaid, which is positive both for the customer and for the bank.
• Tailored products: The insured sum, the duration and the terms of the policy are tailored to the loan or credit request and thus to the individual consumer’s needs both at inception and when their needs change. For instance, the duration and terms can be adjusted if there is a partial repayment.
• Loan/insurance consistency: As both the loan and the insurance are processed in the same information system, the CPI will be automatically adapted if there is any change in the loan, without the need for other administrative actions.
• One-stop shop: The bank provides customers with a single point of contact to request a loan and a policy, facilitating communication, allowing simpler processes and saving time. A single point of sale lowers costs for producers, distributors and consumers, and this is particularly relevant in the current ultra-low or even negative interest rate environment.
• Helpful advice: Distributors are able to recognise areas in which there is a need for cover and can point out gaps in protection to their clients, allowing them to take the necessary measures to close those gaps.
• Maintaining a healthy credit score: The ability to repay loans following unexpected negative events avoids customers receiving negative ratings.
• No/limited risk assessment: Coverage can be provided quickly and there can be limited need to provide data (especially data relating to personal health) to the distributors.
• Better pooling: Broad distribution allows for better mutualisation of risks, pooling costs and opening access to financial services to the largest possible number of consumers.
• Freedom of choice: Consumers can generally choose whether to take out insurance. Where banks require insurance for a mortgage, the customer is free to choose any policy that includes the required guarantees.

A service essential to the economy

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• As regards large items of credit, such as a mortgage, in a world without CPI/PPI consumers would face greater difficulty accessing credit markets and they could be deprived of access to many goods, services and loans without insurance that mitigates the risk for the bank. CPI/PPI are thus important collateral for the banking sector and contribute to financial stability.
• CPI/PPI are essential to the financial resilience of European households and national economies.
• During the COVID-19 pandemic, many customers needed to suspend their loan repayments. Banks have facilitated many loan renegotiations, besides their ad hoc exceptional measures. They have also systematically taken care of adjusting the CPI/PPI cover to the extension of the loan’s duration. By delivering quickly in this complex situation, they have shown their ability to act in the best interest of their clients.
• The guarantee to receive the sum insured is reinforced by technical provisions and solvency capital that must be sufficient to have such guarantee.
• CPI/PPI supports access to credit and thus promotes investment by private households. During the COVID-19 crisis, for example, households with CPI did not necessarily need to increase their savings to cover the financial burden of loan payments in the event of unemployment, since the CPI already covered this risk. A recent study by RWI (Leibniz Institute for Economic Research in Germany) showed that the positive effects of CPI/PPI in terms of protection against unemployment alone (through the long-term stabilisation of personal spending, among other factors) amount to around €15bn per year in Germany. Thus, CPI contributes to economic growth in general and the post-COVID-19 recovery in particular. CPI/PPI helps prevent over-indebtedness since it protects against financial difficulties stemming from three of its main causes: death, unemployment and incapacity to work. In some countries, credit protection is mandatory, indicating that it is considered an important instrument for consumer protection.

A service keeping pace with new needs

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• CPI/PPI insurers are preparing innovations and improvements such as: new coverages; fewer exclusions; wider access to insurance for people with serious medical conditions (e.g. French AERAS system); faster underwriting and claims processes through digitalisation and, where possible, links to public databases; and customer-focused product development (e.g. examination of the risks covered taking account of possible changing customer needs).

A robust regulatory framework for sales practices and distribution

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The Insurance Distribution Directive (IDD) significantly enhances consumer protection and addresses many of the issues or potential issues in relation to CPI/PPI previously identified by EIOPA in its Consumer Trends Reports. The sale of insurance products via a bank is entirely within the scope of the IDD and subject to strict requirements that provide consumers with a very high level of protection and that effectively prevent the risk of mis-selling.

These include:

• Demands and needs: In order to avoid cases of mis-selling, the sale of insurance products should always be accompanied by a demands-and-needs test on the basis of information obtained from the customer. Any insurance product proposed to the customer should always be consistent with the customer’s demands and needs.
• Best interests: Article 17(1) of the IDD sets out the principle that when carrying out insurance distribution activities, distributors must always act honestly, fairly and professionally in accordance with the best interests of their customers.
• Information provision: Article 20 of the IDD states that the insurance distributor shall provide the customer with relevant information about the insurance product in a comprehensible form to allow the customer to make an informed decision.
• Cross-selling: The current regulatory framework ensures adequate consumer protection.
• Remuneration: The IDD contains robust rules on remuneration and against conflicts of interest. Insurance distributors have a general duty to identify and mitigate any potential conflicts of interests. In addition, distributors are required to ensure that the remuneration (commissions, fees, non-monetary benefits) does not impact their responsibility to act in the best interests of the client. If properly applied, this prevents the offering of excessive commissions identified by EIOPA.
• National measures: Although very strict, the IDD requirements can be supplemented where appropriate by additional requirements at national level. This is because the IDD takes a minimum harmonisation approach, allowing national regulators to introduce additional national measures tailored to the needs of their national market. This is, for example, the case in some member states, which require repetition of the information previously disclosed on cancellations rights, explaining to the customers their rights to withdraw after taking out an insurance policy. The measure is designed to give customers the time to make an informed decision about their insurance products.

In conclusion, the IDD already provides a strong framework for preventing bad practices in the sale of mortgage and credit insurance by banks where it is properly implemented and enforced. National regulators are already provided with the tools they need to supervise this market and should be supported by EIOPA in taking measures to address bad practices.

Finally, it should also be highlighted that the Thematic Review considers consumer outcomes on the basis of only a few years, and it is certainly not representative as insurance builds on the basic principle of risk equalisation over time. Premiums are accumulated over a very long period to compensate for losses at one point in time, including large claims events.