CREATING A CONSUMER-FOCUSED, FAIR, EFFICIENT, AND INCLUSIVE INSURANCE MARKET - THE ROLE OF REGULATION

1. The Financial Inclusion Centre Promoting fair, inclusive financial services CREATING A CONSUMER-FOCUSED, FAIR, EFFICIENT, AND INCLUSIVE INSURANCE MARKET - THE ROLE OF REGULATION The International Insurance Mediation Conference, 28 - 29th March 2011, Istanbul Mick McAteer, Director, The Financial Inclusion Centre; Chairman, European Commission Financial Services User Group;

2. CONTENTS • The role of insurance in 21st century • Defining an effective consumer focused insurance market • Consumer experience of insurance markets • The causes of consumer detriment • How to promote an effective insurance market – the role of regulation (including IMD2)

3. ROLE OF INSURANCE • Social landscape fundamentally reshaped by environmental factors – socio-economic, demographic, commercial, and regulatory • 4 pillars of society crumbling – state, family networks, paternalistic employers, personal provision • Pensions, health and social care are not free goods, funding gap is growing • Finite budgets to cope with rising bill for pensions, health and social care • Only two ways of paying for health/ social care - state pay as you go (PAYG) or prefunding though state or private provision • Consumers/ households face more uncertain, unpredictable futures

4. ROLE OF INSURANCE • State will always play a role in people’s lives but natural limit on tax funded welfare - will focus on protecting most vulnerable plus foundation level of care for ‘middle classes’ • Expectation is that state health and social care provision will have to be topped up through asset accumulation or insurance • Attempt to transfer of risk and responsibility for providing for future/ insuring against risk from state to individual consumers • So, along with pharmaceutical/ health sectors, financial services (especially insurance) face bright future - stand to gain from changing demographic, political and socio-economic trends • If the industry can become fit-for-purpose • To answer that challenge, we have to define what an effective insurance market looks like from a consumer perspective

5. DEFINING EFFECTIVE INSURANCE MARKETSConsumer activists have developed consumer principles to evaluate markets • Access and inclusion • Choice of suitable, quality products • Value for money, socially useful products from competitive, efficient providers • Fairness (pre and post sale) • Appropriate advice from trained, competent and ethical providers/ intermediaries • Transparency • Accountability and governance • Safety (firms must be prudently run) • Economically sustainable business models • Propensity to use products to save/ provide for the future • Confidence and trust • Financial capability to make effective decisions • Information to make good choices

6. HOW DO INSURANCE MARKETS COMPARE? • Millions of citizens served well by markets • However, major problems in insurance markets of many EU countries • Serious underprovision in some markets • Unsuitable/ inappropriate sales (for example, UK – pensions misselling, mortgage endowments, payment protection insurance, single premium bonds) • Expensive high margin products, competitive distortions • Front end loaded charges – consumers locked in, barrier to competition • Adverse claims experience, obscure terms and conditions • Investment, pensions and securities score lowest in EU consumer markets scoreboard

7. CAUSES OF MARKET FAILURE • Demand side factors: • Poor financial capability • Psychological/ behavioural barriers - disinterest/ inertia/ confidence, time constraints • Overall, consumer sovereignty weak in financial services • Supply side factors: • Competition for distribution and oversupply pushes up charges • Conflicts of interest caused by remuneration strategies (sales targets, commission driven sales) • Unnecessary complexity • Training and competence/ professional standards low priority compared to sales targets • Regulation focus on information asymmetries, not root causes of detriment • Regulatory and tax distortions

8. WHY IS IMD BEING REVIEWED? • Consumers insufficient understanding of risks, costs and features of products • Sellers subject to significant conflicts of interest • Review focuses on quality of information to consumer • Conduct of business rules, conflicts of interest and transparency of remuneration • National COBs diverge, some member states left unregulated • Legal uncertainty due to interpretations • No guarantee of level playing field • Policyholders vulnerable buying direct

9. MAKING MARKETS WORK 1 • Regulators should ensure that consumers receive clear, relevant information post-sale, not just pre-sale and at the point of sale • Conflicts of interest such as commission driven sales that are the root cause of most mis-selling scandals must be addressed by a robust regulatory response • Regulation should ensure that consumers receive advice on the most appropriate product/investment vehicle for their needs, not the product that suits the commercial needs of the firm or intermediary • Advisers/intermediaries should be required to operate to a general high level duty of care to assess consumers’ needs and level of financial sophistication (where possible) so that appropriate advice and recommendations are made • To ensure this occurs, the Commission should review and produce clear guidelines about • (i) needs assessment (for example, information gathering/‘know your customer’ requirements) to be followed in Member State regulations, and • (ii) professional standards to ensure that intermediaries/advisers operate to consistently high standards.

10. MAKING MARKETS WORK 2 • Regulation should ensure clear separation between independent adviser (fees and whole of market) and sales agent/ representative • Regulation should ensure there is a level playing field between different types of provider to ensure fair and effective competition • Equivalent harmonised consumer protection IMD, MiFiD, PRIPS, AIFM) • Regulation should be risk based and proportionate – interventions should be proportionate to the potential for consumer detriment • More pre-emptive approach to regulation • Better regulation makes markets work for consumers AND industry

11. SUMMARY AND CONCLUSIONS • Changing social, economic and financial environment in EU represents • Great challenges and opportunities for insurers – if ‘fit for purpose’ • Serious and serial insurance market failures in many countries • A new, coherent and consistent approach to regulation is needed • Delivers real benefits for consumers, industry and society • Questions?