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EIOPA Travel Insurance Review
On Oct. 9, EIOPA issued a review on the travel insurance business.
EIOPA identified consumer protection issues in travel insurance and issued a warning.
Travel insurance is mostly small-ticket business, but it can be critical for consumers, since impact of insufficient cover/denied claims can be extensive at individual level.
Key findings of EIOPA thematic review consumer protection issues in travel insurance.
Travel insurance market as a whole does not appear to face a general market failure.
Products remain valuable for consumers, but some business models entail heightened conduct risks, including remuneration structures based on very high commissions.
Strong potential of poor value for money for consumers due to some insurers paying extremely high commissions to distributors, in some cases over 50% of the premium.
In one case, insurer paid 5.5 times more in commissions than consumers received back in claims, with commission level of 77% of the premium paid by consumers.
Average commissions in travel insurance are 24% of gross written premium (GWP).
Strong potential of poor value for money due to very wide variations in claims ratio.
Some claims ratios below 20% of GWP compared to average ratio of 40% of GWP.
Increased conduct risks due to new market players entering market and selling travel insurance products online as ancillary activity (e.g. airline, ferry companies, banks).
Potential risks from partnerships with new distributors established via international tenders based on commissions rather than on the quality of the products distributed.
High degree of consumer detriment due to potential high degree of dismissed claims through no pre-contractual medical screening and around 70% of insurers excluding pre-existing medical conditions from the coverage of travel insurance products.
Potential increased costs for consumers as in most cases assessment of overlaps in cover only conducted at the claim stage and not already during the sales process.
Insurers assess only at claim stage, which policy will cover incident and split costs.
EIOPA issued warning to the travel insurance industry as a supervisory response.
Main issues addressed are problematic business models with remuneration structures based on extremely high commission levels and ones that combine high commission with extremely low claims ratios, offering poor value for money to consumers.
Such business models are inconsistent with fundamental regulatory principles in IDD.
E.g. act in consumer best interests and obligations on product oversight, governance.
Market participants expected to comply fully with the insurance distribution directive.
Notwithstanding that insurance undertakings remain free to set premiums or prices, they should nevertheless assess their product offering and approval process.
This includes their identification of target markets, to ensure that their products offer fair value to customers and are fully capable of meeting the needs of their customers.
Insurance undertakings and insurance intermediaries should assess their distribution agreements to ensure that they are able to act always honestly, fairly, professionally.
To ensure better outcomes for consumers, EIOPA, NCAs will monitoring how effectively consumers' needs are considered in product development, testing and in distribution.
EIOPA, NCAs will intensify their risk-based supervision of insurance undertakings and insurance intermediaries, notably in the national markets where risks are identified.
Exercise supervisory powers, including investigatory powers and powers to impose sanctions for failures to comply with conduct of business requirements set out in IDD.
E.g. act in best interest of customers and not pay/receive remuneration that conflicts with this duty; not to enter into arrangements by way of remuneration, sales targets that could provide incentives for recommendation of a particular insurance product.
Obligation to maintain, operate, review approval process for each insurance product, specifying an identified target market, assessing relevant risks to that target market.
Where risks are identified and other supervisory measures are not successful, taking into account the principle of proportionality and in line with national law, NCAs will exercise their powers to impose administrative sanctions and other measures such as:
Requiring distributor to cease conduct and to desist from a repetition of that conduct.
As last resort, re insurance/ancillary insurance intermediary, withdraw from register.