Session 6: Panel onSession 6: Panel on Consumer Protection Consumer Protection

Jeffery YongIAIS Secretariat

Regional Training Seminar IAIS-ASSAL

San Salvador, 24 November 2010

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

AgendaAgenda

1. The importance of consumer protection

2. International standards

3. Examples of market abuses Developed market Emerging market

4. Summary

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Insurance is different – sound regulation is Insurance is different – sound regulation is important important

Tangible Products• Immediate use of

product

• Warrantee to repair or replace faulty products

• Can shop around for best deal

Insurance• Future (uncertain?)

benefit

• Not possible to identify ‘defects’

• Information asymmetry between consumers and insurers

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Potential areas for market abusesPotential areas for market abuses

Discretion

Opaqueness

Sales practices

• Investment-linked products – variable charges

• With-profits products – non-guaranteed future bonuses

• Hidden charges – non-/misleading disclosure

• Acquisition costs – misaligned incentives

• Policy churning – poor policy value

• Automatic enrolment

• High surrender penalties

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Poor market conduct can threaten financial Poor market conduct can threaten financial health of insurance companieshealth of insurance companies

Tarnish reputation

Unexpected liability

Threat to financialposition/ solvency

Undermineconfidence

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

AgendaAgenda

1. The importance of consumer protection

2. International standards

3. Examples of market abuses Developed market Emerging market

4. Summary

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

ICP 2ICP 255 Consumer protection Consumer protection

Essential criteria: Act with due skill, care and diligence Establish policies on fair treatment of consumers and ensure

compliance (systems and staff training) Seek information to assess insurance needs before giving

advice/ concluding contract Provide appropriate and timely information (product: benefits,

obligations, risks and charges; other : conflict of interest) Effective complaints handling through simple, easily

accessible and equitable process

The supervisory authority sets minimum requirements for insurers and intermediaries in dealing with consumers in its jurisdiction, including foreign insurers selling products on a cross-border basis. The requirements include provision of timely, complete and relevant information to consumers both before a contract is entered into through to the point at which all obligations under a contract have been satisfied.

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Guidance Paper on Public Disclosure by Guidance Paper on Public Disclosure by InsurersInsurers

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

AgendaAgenda

1. The importance of consumer protection

2. International standards

3. Examples of market abuses Developed market Emerging market

4. Summary

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Market conduct also cause for concern in Market conduct also cause for concern in developed marketsdeveloped markets

Mortgage endowment Precipice bonds

Payment protection insurance Travel insurance

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Statistics – UK Financial Ombudsman ServiceStatistics – UK Financial Ombudsman Service

New cases by area of complaint for year ending 31/3/2010

Banking and credit44%

Insurance42%

Investments and pensions

14%

Breakdown by types of complaints

Sales and advice, 66%

Claims, 28%

Administration, 6%

Breakdown by types of products

Payment protection

55%

Mortgage endoments

6%

Unit-linked bonds

7%

Others32%

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Emerging market experience – critical year Emerging market experience – critical year illustrationillustration

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

……led to adverse public reactionsled to adverse public reactions

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Misleading advertisements tested financial Misleading advertisements tested financial literacy and sophisticationliteracy and sophistication

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

AgendaAgenda

1. The importance of consumer protection

2. International standards

3. Examples of market abuses Developed market Emerging market

4. Summary

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Conclusion - key challenge is striking the right Conclusion - key challenge is striking the right balancebalance

Consumer Protection

Moral Hazard

Session 6: Panel on Consumer Protection23 Nov 2010San Salvador

Thank you for your attention. Any questions/ comments?

jeffery.yong@bis.orgwww.iaisweb.org