Response to joint Discussion Paper on Key Information Documents (KIDs)
Go back
Related to experience and knowledge expected of the consumer, additional information should be given on the complexity of the product. An obligatory link should be established between the degree of complexity of the product and the necessary knowledge and experience of consumer enabling a transparent and informed investment decision.
6: Do you think that performance scenarios should include or be based on probabilistic modelling, or instead show possible outcomes relevant for the payouts feasible under the PRIIP but without any implications as to their likelihood?
Performance scenarios should always be based on probabilistic modeling.7: How would you ensure a consistent approach across both firms and products were a modelling approach to be adopted?
In order to ensure a consistent approach, “historical” data should be added. A good example is the data of long-term development of guaranteed interest rates and of surplus participations related to “classical” German life insurances. Additionally back-tests should regularly be published by the insurers.8: What time frames do you think would be appropriate for the performance scenarios?
Related to insurance products the appropriate time frame depends on the duration of the contract (normally 10, 12, 20 or 30 years for life insurances and annuities).9: Do you think that performance scenarios should include absolute figures, monetary amounts or percentages or a combination of these?
KIDs for insurance products should always include absolute figures (especially guaranteed amounts and performance scenarios of surplus / benefits.) Related to life insurances and annuities, the guaranteed amounts are more important than the performance scenarios of more or less probable benefits.10: Are you aware of any practical issues that might arise with performance scenarios presented net of costs?
Yes, practical concerns are related to distribution channels. Distributors with their face-to-face contacts to the customers must never omit the costs of the products they sell. Costs reduce the amount actually invested (investment part of premium) from the very beginning of the contract, consequently even with an excellent “intrinsic performance” of the chosen PRIIP the maturity value will considerably be reduced at the end of the product life-cycle (by effect of compound interest). In new categories of PRIIPs the maturity value may additionally be reduced by performance fees.11: Do you have any preferences in terms of the number or range of scenarios presented? Please explain.
Instead of a predetermined number or range of scenarios, we propose the mandatory use of the Monte Carlo simulation for PRIIPs.12: Do you have any views, positive or negative, on the different examples for presentation of a summary risk indicator? Please outline advantages and disadvantages, and provide any other examples that you are aware of that you think would be useful.
No exceptions should be made for life insurances and annuities with regard to the presentation of a summary risk indicator. This presentation has to be equal for all other PRIIPs. The options proposed on pages 37 to 39 in the Discussion Paper are strongly welcomed by us.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.
Again we propose the mandatory use of the Monte Carlo simulation for PRIIPs (cf. comment 11). Probabilistic modeling should always be included.15: Do you agree with the description of the consumer´s perspective on costs expressed in the Key Questions?
We propose adding these factors to the key questions: one-off/single acquisition costs and ongoing administrative costs (related to key question 5: how do costs impact on my returns?). The “classical” capital life insurance contracts in Germany (more than 80 million contracts) are calculated by the zillmerisation method, therefore the entry fees are particularly high. Following to German law these costs have always to be presented by absolute monetary amounts. Additionally the ongoing development of surrender values should be presented.16: What are the main challenges you see in achieving a level-playing field in cost disclosures, and how would you address them?
Yes, we agree. Associated with life insurances and annuities not only entry, administrative and investment fees are important, but exit fees and biometric costs are particularly relevant for consumers. Mainly biometric costs do not have to be disclosed until now. Therefore the mandatory disclosure of all categories of costs is all the more important.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?
Additionally to ongoing costs of administration and of capital investment (as for pure saving products), insurance products include biometric costs. This special feature does not only represent costs, but may be a source for additional benefits for the insurers, too (depending on the more or less “prudential” calculation of life expec¬tancy). That is reason, why these costs have to be disclosed aiming at a level-playing field amongst all categories of PRIIPs.20: Do you agree that a RIY or similar calculation method might be used for preparing ‘total aggregate cost’ figures?
In contrast to “fair value” (for structured products) and to “total expense ratio” (for open-ended funds), “reduction in yield” (RiY) might be used for preparing “total aggregate cost” figures. But why should RiY be used for investment funds, if there is already a common calculation method of costs? RiY itself has to be seen in a very critical way: costs are calculated in relation to yields or returns, which are only probable, but the costs are always fixed. Therefore we propose as alternative and transparent reference parameter for costs the global sum of all payments or premiums by the customer (retail investor or policy holder). Besides RiY is only valid, if the contract is not cancelled before reaching maturity.21: Are you aware of any other calculation methodologies for costs that should be considered by the ESAs?
The reference parameter for costs should be the global sum of all payments or premiums by the customer (as retail investor or policy holder). Ongoing payments or premiums are like constant costs for the individual customer, which regularly reduce his income and therefore have to be taken into consideration by him very exactly.22: Do you agree that implicit or explicit growth rates should be assumed for the purpose of estimating ‘total aggregate costs’? How might these be set, and should these assumptions be adjusted so as to be consistent with information included on the performance scenarios?
Yes, we fully agree that implicit or explicit growth rates should be assumed for the purpose of estimating total aggregate costs. Only this assumption can prevent from any kind of mis-leading information for consumers. Additionally we stress that the same parameters and methods (related to total aggregate costs) shall be used for all categories of PRIIPs.24: Do you have any views on possible assumptions that should be made, and how these might be calibrated or set?
Standardisation of format must not hinder the disclosure of particularly important costs categories like entry, exit or biometric costs. There should be a mandatory provision that related to specific categories of PRIIPs certain costs categories have always to be disclosed (in the case of insurance products these are entry, exit and biometric costs at least).25: What do you think are the key challenges in standardising the format of cost information across different PRIIPs, e.g. funds, derivatives, life insurance contracts?
We propose a possibility of choice amongst several tables and graphics. The mandatory use of texts and graphical presentations should be clarified by implementing technical standards prepared by ESAs.26: Do you have a marked preference or any objection for any of the presentational examples? If so, why? Please provide any alternative examples which you believe could be useful.
Until now a breakdown of costs was not possible only for very few insurance products. Transparency of costs is essential for consumers aiming at an “informed” investment decision or conclusion of contract (cf. our comments to questions 16, 17 and 19). If the breakdown of costs structures is not possible in some exceptional cases, the manufacturer should be obliged to publish a transparent explanation of the reasons.29: How do you think should cumulative costs be shown?
In Germany there are more than 80 million contracts of capital life insurances and annuities, which almost all are calculated according to the zillmerisation method. That is the reason, why entry or acquisition fees (as costs category) have to be included as well as biometric costs of life annuities. The early redemption costs are already included. They are particularly important, because more than 50% of life insurance contracts are cancelled before reaching maturity.30: Do you have any views on the identity information that should be included?
Yes, we fully agree.31: Do you consider that the criteria set out in recital 18 are sufficiently clear, or would you see some merit in ESAs clarifying them further?
Yes, we fully agree.32: Do you agree that principles on how a PRIIP might be assigned a ‘type’ will be needed, and do you have views on how these might be set?
Yes, we fully agree.36: Do you have views on the information PRIIPs manufacturers should provide on consumer types?
Life insurances and annuities are contracts mostly with an agreed duration of several decades. But statistics show that in Germany more than half of the contracts are cancelled before reaching maturity. The reasons, why consumers do not have available anymore the necessary financial means fulfilling the ongoing premiums and therefore have to cancel, differ very much: unemployment, divorce, disability, indebtness etc. Therefore the information on “investment horizon” should obligatorily be complemented by the hint that regular income and sufficient savings for emergency cases will have to be available for the consumer in the long term.Related to experience and knowledge expected of the consumer, additional information should be given on the complexity of the product. An obligatory link should be established between the degree of complexity of the product and the necessary knowledge and experience of consumer enabling a transparent and informed investment decision.