Response to joint Discussion Paper on Key Information Documents (KIDs)
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Regarding the liquidity risk, the business model of insurance obliges the insurance company to fulfil the contractual obligations at any time, and with the Solvency II regime even under stressed conditions. Insurance premiums are paid in advance and benefits in life insurance are only paid in a predefined event (e.g. death, at the end of a contract).
Furthermore, it is essential that premium taxes are factored out from the cost structure of an investment product. The tax regime for PRIIPs varies significantly among the different PRIIPs and among different countries and thus cannot be compared.
Further characteristics of insurance based PRIIPs have to be taken into account regarding cost disclosure of insurance based PRIIPs: The contract period of life insurance contracts is predefined in the contract and it is ranging from some years to more than 40 years, dependant on the individual contract conditions. Premium payments can be made in the form of single premium payments at the beginning of the contract or as current premium payments during the contract period. Current premium payments may be affected annually, semi-annually or monthly. The amount of premium payments is fixed in the contract, is individually concluded and varies significantly between policyholders. With regard to insurance based PRIIPs different options for the pay-out phase can be concluded in the contract. At the end of a contract period the policyholder can take out the invested money in the form of a lump-sum or as life-long or temporary annuity payments. These characteristics depend on the individual client und are not known at the time when the KID is drafted.
However, there is no standard coverage of biometric risks but it varies from tariff to tariff or even within one tariff there are different options for the coverage of biometric risks. The coverage of biometric risks (e.g. death, invalidity, occupational disability, protection of dependents etc.) is compensated through the risk premium which is part of the total premium. Thus, the risk premium cannot be regarded as cost factor of a life insurance product since the policy holder gets the coverage of biometric risks in return of the premium payment as a service. The amount of the risk premium depends on the individual consumer due to his individual risk profile (e.g. age, health status), which is not known at the time of drafting the KID. This should also be considered in the further discussions.
3: Do your agree that market, credit and liquidity risk are the main risks for PRIIPs? Do you agree with the definitions the ESA’s propose for these?
For insurance based PRIIPs credit and liquidity risk are not that relevant than for other PRIIPs. This has to be shown to the consumer. E.g. when it comes to credit risk in Austria the so called “Deckungsstocksystem” protects the policy holder from the risk of losing money because of an insolvency of an insurance company. The Austrian “Deckungsstock” constitutes a special internal fund that is designed to satisfy the claims of policyholders in the event of an insolvency of the insurance undertaking and is therefore exempt from creditors’ attachment.Regarding the liquidity risk, the business model of insurance obliges the insurance company to fulfil the contractual obligations at any time, and with the Solvency II regime even under stressed conditions. Insurance premiums are paid in advance and benefits in life insurance are only paid in a predefined event (e.g. death, at the end of a contract).
10: Are you aware of any practical issues that might arise with performance scenarios presented net of costs?
Regarding performance scenarios, special characteristics of different types of PRIIPs have to be considered. Insurance based PRIIPs not only offer investment opportunities but they also provide guarantees and insurance cover against biometric risks, such as death, invalidity, occupational disability, protection of dependents etc. The risk premium which is dedicated to cover these risks cannot be regarded as cost factor of insurance based PRIIPs since the customer gets insurance protection in return. The risk premium is calculated according to the personal conditions of the potential customer and thus is not the same amount for each client.13: Do you have any views, positive or negative, on the different examples for presentation of performance scenarios? Please outline advantages and disadvantages, and provide any other examples that you are aware of that you think would be useful.
The presentation of the risk indicator should not only be done in a negative way.18: Do you have any views on how implicit costs, for instance costs embedded within the price of a structured product, might be best estimated or calculated?
It is necessary to exclude the risk premium from the cost structure of an insurance based PRIIP since it cannot be considered as cost but as compensation for additional benefits for the coverage of biometric risks.Furthermore, it is essential that premium taxes are factored out from the cost structure of an investment product. The tax regime for PRIIPs varies significantly among the different PRIIPs and among different countries and thus cannot be compared.
Further characteristics of insurance based PRIIPs have to be taken into account regarding cost disclosure of insurance based PRIIPs: The contract period of life insurance contracts is predefined in the contract and it is ranging from some years to more than 40 years, dependant on the individual contract conditions. Premium payments can be made in the form of single premium payments at the beginning of the contract or as current premium payments during the contract period. Current premium payments may be affected annually, semi-annually or monthly. The amount of premium payments is fixed in the contract, is individually concluded and varies significantly between policyholders. With regard to insurance based PRIIPs different options for the pay-out phase can be concluded in the contract. At the end of a contract period the policyholder can take out the invested money in the form of a lump-sum or as life-long or temporary annuity payments. These characteristics depend on the individual client und are not known at the time when the KID is drafted.
20: Do you agree that a RIY or similar calculation method might be used for preparing ‘total aggregate cost’ figures?
In order to ensure comparability among different insurance based PRIIPs and other PRIIPs the “Reduction in Yield – RIY” would be an appropriate figure showing the client the effect of costs on the yield of a PRIIP. However it has to be taken into account that an appropriate solution for presenting the yield of life-long annuity contracts has to be found, e.g. by assumptions, because it is not possible to inform about the yield of the contract in advance since the age which the consumer will reach is unknown.24: Do you have any views on possible assumptions that should be made, and how these might be calibrated or set?
The costs of life insurance products are calculated on different bases. E.g. there are costs calculated based on the amount of the premium and costs which depend on the underlying assets. When developing the presentation of costs in the KID this factor has to be taken into account. Taking into account that the contract period is individually concluded and varies from some years to some decades, presenting the total cost for the whole investment period of life insurance products doesn’t allow for an effective cost comparison.27: In terms of a possible breakdown of costs, are you aware of cost structures for which a split between entry or exit costs, ongoing costs, and costs only paid in specific situations or under specific conditions, would not work?
As some PRIIPs differ from others it should be taken into account that also the risk factors differ substantially among the different PRIIPs. As the extent of risk exposure depends on the type of PRIIP we prefer a presentation where the level of each single risk (market, credit and liquidity risk) can be derived from (discussion paper page 39 – example from Italian research).37: What is the key information that needs to be given to the retail investor on insurance benefits, and how should this be presented?
One of the most important particularities of life insurance products in comparison to other retail investor products is the coverage of biometric risks which is part of the contract. This has to be presented in the KID. Consumers should be informed that an insurance based PRIIP provides for additional benefits like insurance protection.However, there is no standard coverage of biometric risks but it varies from tariff to tariff or even within one tariff there are different options for the coverage of biometric risks. The coverage of biometric risks (e.g. death, invalidity, occupational disability, protection of dependents etc.) is compensated through the risk premium which is part of the total premium. Thus, the risk premium cannot be regarded as cost factor of a life insurance product since the policy holder gets the coverage of biometric risks in return of the premium payment as a service. The amount of the risk premium depends on the individual consumer due to his individual risk profile (e.g. age, health status), which is not known at the time of drafting the KID. This should also be considered in the further discussions.