Bank of Lithuania proposes to increase transparency in life assurance market and protection of user interests by amendments to the law
Life assurance undertakings must be obliged by law to more clearly disclose information on applicable laws, potential conflicts of interest, and facilitate possibilities for users to terminate contracts or change their service provider. These, as well as other amendments for increasing transparency, competition and user protection have been provided for in the draft amendments to the Law on Insurance prepared by the Bank of Lithuania, which has been submitted to the Ministry of Finance.
‘We seek essential changes in the field of endowment and unit-linked life insurance, where we have identified serious transparency and insufficient user protection issues. Implementation of the proposed amendments would increase the responsibility of insurance undertakings, prohibit charging services that insurance undertakings basically do not provide, while users would clearly see all product costs,’ says Ingrida Šimonytė, Deputy Chair of the Board of the Bank of Lithuania.
Major amendments proposed:
1. To prohibit taking a fee on asset management where life assurance undertakings do not really provide the asset management service. In many cases, insurers do not manage the assets of unit-linked life insurance customers and related risk, confining themselves to the selection of collective investment undertakings, managed by professional managers, for the investment of customer funds.
2. To obligate an insurer, prior to concluding an endowment assurance and unit-linked life insurance contract, to provide a user with clear information on all costs expressed in monetary terms and give an example illustrating the impact of inflation. The results of the investigation conducted by the Bank of Lithuania revealed that the return on funds periodically invested for the acquisition of a unit-linked life insurance product (without taking into account the state tax incentive), in many cases, is negative or not above average long-term inflation level, even when accumulating for a long period. This means that, often, the only incentive for a user to invest under such a contract is not the operating performance of the insurance undertaking but the tax incentive.
3. To set a time limit for an insurance undertaking to arrangein equal parts and deduct from user insurance premiums the costs related to the conclusion of an endowment assurance and unit-linked life insurance contract. This time limit should be no less than three years. Currently, in many cases, these costs, due to immediate payment of commissions to insurance intermediaries, are deducted over the first two years. In this case, a smaller share of a user’s contributions is allocated for investment, while upon termination of the contract, the user, owing to these uncovered costs, does not recover or recovers only a small share of investment capital accumulated.
4. To set a requirement that, where a user terminates his/her contract, the insurance undertaking would not be able to deduct from the surrender value payable to the user any fees other than the fee for the termination of the insurance contract. It is proposed to limit the amount of this fee to 2 per cent of the value of accumulated capital but not above EUR 50. Currently very high fees for the termination of an insurance contract ‘lock’ users and eliminate any incentives to consider more effective investment alternatives.
5. To establish that all information provided by insurance market participants to existing and potential customers should be fair, clear and not misleading, while advertising information should, in addition, be easily recognisable. This requirement will enable existing or future customers to receive objective information on the service and, accordingly, take a more rational decision concerning it.
The above-named amendments to the Law have been prepared upon identification by the investigations conducted by the Bank of Lithuania of insurance market issues, proposal of ways to address them in an open discussion, and taking into consideration the comments and proposals from insurance market participants and other persons concerned during the open discussion. The Bank of Lithuania has transferred the prepared draft amendments to the Law on Insurance to the Ministry of Finance. Once the amendments are agreed with authorities and the public, they will be submitted to the law-maker for adoption.