To achieve transparency and better consumer protection, changes in the regulation of the unit-linked life assurance market are necessary
Having recently investigated the unit-linked life assurance market in several directions, the Bank of Lithuania puts forward for a public discussion proposals on how to deal with fundamental problems within this fast developing market.
“We have identified the ‘grey’ zones which do not ensure proper protection of consumer interests. Therefore, we have worked out specific proposals, after implementing which, the unit-linked life assurance market would become essentially safer and more sound; the duties and responsibilities of all financial market participants, offering investment services for natural persons, would be unified; the risks and likely losses for consumers would be mitigated,” says Ingrida Šimonytė, Deputy Chair of the Board of the Bank of Lithuania.
One of problem areas is a fee taken for asset management, although life assurance undertakings virtually do not provide this service. In many cases insurers do not manage the assets of unit-linked life assurance customers and related risk, confining to the selection of collective investment undertakings, managed by professional managers, for investment of customer funds.
Insufficient transparency of a unit-linked life assurance product and limited competition lead to particularly large deductions of commissions. Often customers are not advised of the fees collected by other investment managers, which may have a great influence on the size of the customer’s capital being accumulated. For example, if a customer chooses an investment trend involving high risk and accumulates EUR 58 per month for 20 years, the life assurance undertaking would deduct EUR 1,796 of fees from the insurance contract, while the fees of the investment managers would amount to another EUR 3,765.
The results of the Investigation of the Influence of Administrative Fees on Investment Capital, conducted by experts of the Bank of Lithuania, revealed that the return on the funds that were periodically invested for the acquisition of an investment life assurance product (without taking into account state tax reliefs), in many cases, even when accumulating for a long period, is negative or not above average long-term inflation levels. In addition, very high fees for the termination of an insurance contract “lock” consumers and eliminate any incentives to consider more effective alternatives.
Problems, raising concerns, are also present in the unit-linked life assurance services selling process. The investigations conducted by the Bank of Lithuania showed that often the customer’s needs, objectives and levels of risk exposure, as well as information on the customer's knowledge, experience and financial condition are determined carelessly and unprofessionally. As a result, customers are proposed investment trends not in line with their risk category.
The conclusions of the Bank of Lithuania coincide with customer assessment. The respondents of the Survey of Households on Financial Products reported the following reasons why unit-linked life assurance did not meet their expectations: the product’s profitability was lower than was promised; high fees for the product; limited possibilities to replace the product or its supplier.
Having identified the problems within the unit-linked life assurance market, the Bank of Lithuania has formulated an effective package of measures to deal with current market issues. It is proposed to set tight requirements for the investment trend management service; prohibit imposing of a fee for assets management where life assurance undertakings actually do not provide the assets management service; reform the system of the product’s distribution, while preventing a conflict of interests; obligate to reveal, in a transparent and simple form, the fees in their absolute value and limit the fees for the termination of the contract.
The Bank of Lithuania invites life assurance market participants, consumers, their representatives and other parties concerned to submit their opinion regarding these as well as other proposals by 29 June.