The IRSG would like to stress out the importance of recognising the fact that insurance products which cover several risks (multi-risk products) are not considered as a ‘package’ of combined products (footnote 7 on page 19 refers only to “certain” multi-risk insurance policies). Therefore, the IRSG would welcome a clearer recognition of multi-risk products in the main text of the guidelines, which would ensure a closer alignment with IMD 2.
Also, clarification should be introduced in the guidelines in the sense that the obligation on providers is to inform the customer about whether the different components of a ‘package’ are offered for sale separately by that same provider. In other words, it should not be understood that there is an expectation on providers to have a full knowledge of all the different products that are available on the market, in general.
Indeed, the IRSG agrees with the potential benefits of cross-selling practices that have been identified in this consultation paper. Cross-selling practices have many positive beneficial effects for both provider and consumer, which include cost savings through economies of scope, better risk management, reduced transaction costs, and a ‘one-stop-shop’ effect.
In addition, within the insurance sector, multiple risk coverage allows insurers to diversify and pool together risks which may otherwise prove too expensive for consumers, or too risky for insurers, as stand-alone coverage. For instance, the coverage of natural disasters, where available, is often combined with more standard risks under the one extended policy. Such multi-risk insurance policies enhance the availability of cover for risks which could otherwise be purely uninsurable or simply not affordable for a client, and so lead to better overall risk management for the provider and a more effective price for the consumer.
While the IRSG agrees that the identified practices can cause potential detriment, this is not entirely representative of all cross-selling practices. For example, with regard to the limitation of mobility in para 10 on page 13, it is important to point out that there are many insurance products which are long-term in nature that provide benefits to consumers, despite any potential limitations on mobility.
There are a number of behavioural drivers of potential detriment identified that are not specific to cross-selling and are covered under general sales rules (e.g. remuneration, information disclosure, suitability / appropriateness).
While the general principles behind the examples can be easily understood and applied to many products, many of the examples do not adequately take into account the particular character of insurance products, for example (a) the potential for (or avoidance of) adverse selection by bundling certain product components (especially example 1) and (b) potential for overlaps in coverage (as could be understood from example 5).
Ad (a) example 1 seems to imply simple additivity of prices of the components with the same “features”. This is no fair assumption if the separation of a component (e.g. a special cover) would lead to an adverse selection against that product, i.e. would lead only high-risk costumers to sign on. This may lead to the need to increase prices for this component further and ultimately to the impossibility to offer this cover. Therefore the total cost of a cover may differ substantially from the sum of some partial covers. This vulnerability of insurance products to adverse selection is typical and well-documented.
Ad (b) the idea to avoid overlaps in coverage altogether is problematic for insurance products. Coverage may be defined in many different dimensions, therefore the identification of overlaps itself is not always straightforward. In addition, the extreme position of a rigorous obligation to avoid all overlaps (as opposed to tolerating minor overlaps) may be prohibitively costly. In consequence, there should at least be a holistic assessment with respect to the materiality of potential overlaps and adequate thresholds for relevance.
The IRSG is of the opinion that the proposed requirement in Guideline 1 (para 13, page 22) goes beyond what is being proposed under any of the Level 1 texts on cross-selling (e.g. IMD 2, MiFID 2, Payment Accounts Directive), as it contains an obligation to provide the consumer with the price for both the overall package of products and for each of the component products, irrespective of whether the component products are available for sale separately or not. It should be made clear in the guidelines that the obligation only applies when the components in the package are also offered or sold by the firm separately.
Guideline 2 states that all relevant costs of the package and its components should be made available in good time. It should be made clear, however, that this refers to the price/premium and any additional costs, and does not entail an obligation to provide the consumer with a breakdown of detailed information on all the cost elements contained in the premium. Such detailed information on costs would go further than any proposed provisions on IMD 2. The most relevant information for the consumer is the price he will pay for the package and the price that he would pay for the individual components in the event that they can be bought separately.
While the IRSG fully supports the provision of clear information to consumers, it is worth pointing out the potential consumer detriment that may result from setting the default options as ‘No’, requiring consumers to actively select insurance coverage components and to make a conscious decision to buy them. In this case, there is a danger that by having to ‘opt-in’ to the various different components, a consumer may unwittingly fail to cover himself against certain risks, thereby resulting in gaps in coverage and the level of protection.
Moreover, the risk of double coverage may arise when a consumer has to seek out each individual aspect of insurance coverage from different providers, each offering their own different products.
Guideline 8 deals with the assessment of demands and needs, and suitability/appropriateness, all of which are dealt with under the respective primary legislation. As such, there is no benefit in issuing specific guidance for the case of cross-selling.
In the second illustrative example for Guideline 8 (page 27), concerning how the interaction of different components may modify the risks of the package, the reference to ‘risks’ is not appropriate in the insurance context, where insurance is taken out to provide cover against risk and thus has a very different meaning to risk in the banking or investment context.
Guideline 9 proposes to introduce requirements regarding adequate training for relevant staff. However, the issue of training is already provided for under IMD 2 for persons involved in insurance distribution.
Guideline 10 proposes to introduce requirements regarding conflicts of interest in the remuneration structures of sales staff distributing tied or bundled packages. However, requirements with regard to remuneration are currently being discussed and decided upon by the co-legislators, and will be included in the Level 1 text of IMD 2 and apply to the sale of all insurance products. It is therefore not appropriate for the guidelines to introduce provisions concerning remuneration structures for the specific case of cross-selling.
With regard to the post-sale splitting of products that had been purchased as part of a package (para 29, page 28), the IRSG feels that it should be made very clear that this is not intended to enable consumers to circumvent the fact that they have purchased a package. Otherwise, some consumers may subsequently seek out cheaper products in order to replace one of the items in the package and continue to enjoy the beneficial rate of the remaining item, despite the fact that it is the very nature of the overall package that allows for the beneficial rate to be offered in the first place.
The guidelines need to be fully aligned and consistent with IMD 2, which is still in the process of being negotiated and so is yet to be finalised, as each and every change to the legal regime causes additional costs to companies, which may ultimately end up being passed on to consumers.