In summary, concerning obligations, financial service providers must have adequate procedures and measures in place when offering or assembling financial products, particularly insurance products, and making them available in the market. These procedures and measures are intended to ensure that the development of an insurance product takes into account the interests of clients and, if applicable, beneficiaries in a balanced manner.
The mentioned obligations require that insurance products demonstrably result from this consideration of interests. Article 32, paragraph 2 of the Financial Supervision Act (BGfo) stipulates that the procedures and measures mandated in paragraph 1 must be documented. Additionally, this second paragraph outlines specific requirements that must be met by these procedures and measures. The procedures and measures should ensure that:
- The target audience of the insurance product is defined, with an analysis and description of the intended objective of the target audience.
- Analyses are conducted to determine the functioning of the insurance product as a whole and its individual components in various scenarios, demonstrating that the insurance, considering its nature, does not compromise the aforementioned objective.
- Product information and, to the extent reasonably expected, the distribution of the insurance product are tailored to the target audience mentioned above.
- Regular monitoring and, if necessary, appropriate adjustments to the procedures and measures take place.
At determined intervals or when warranted, insurers, authorized agents, and intermediaries must apply the documented procedures and measures to the insurance products they offer or assemble and make available in the market (Article 32, paragraph 3 BGfo). If an insurance product undermines the interests of the customer or beneficiary for whom the product is developed, it must be promptly adjusted or withdrawn from the market (Article 32, paragraph 4 BGfo). As of now, the option provided in Article 32, paragraph 5 BGfo to establish further regulations through ministerial decree regarding the provisions of paragraph 1 has not been utilized.
Directive on Insurance Distribution
Regarding insurers, the obligations imposed on them under Article 32 of the Financial Supervision Act (BGfo) do not stem from European regulations. The same applies to authorized agents and intermediaries.
The Insurance Distribution Directive 2, which must be implemented in our legislation by February 23, 2018, brings about a change in this regard. Article 25 of the Insurance Distribution Directive states that “Insurance undertakings, as well as intermediaries developing insurance products for sale to customers, ensure the establishment, application, and review of a procedure for the approval of each insurance product or significant modifications to existing insurance products before it is marketed or distributed to customers.”
Unlike the current BGfo provision, Article 25 of the Insurance Distribution Directive does not apply to large risks defined in Article 1:1 of the Financial Supervision Act. This is a logical limitation since the directive aims to protect consumers, and consumers do not have an interest in these large risks, which are, by their nature, insurable by businesses and, in some cases, professionals. Where the BGfo regime lacks the ability to differentiate, the directive provides that flexibility: the product approval process must be proportionate and suitable for the nature of the insurance product.
Insurers and authorized agents developing insurance products must provide distributors not only with all relevant information about the insurance product but also with all relevant information about the product approval process. They must also adequately inform distributors about the specified target audience for the insurance product. Article 25 of the Insurance Distribution Directive also imposes an obligation on distributors: if they advise on or offer insurance products that they did not develop themselves, they must have adequate arrangements to obtain the mentioned information and understand the characteristics and intended target audience of each insurance product.
Standard Products
Minister Dijsselbloem recently announced an investigation into the impact of standard products on consumer choice behavior. According to him, standard products can have a positive effect on consumer choices, potentially leading to more suitable decisions. The study empirically tests whether consumers are more likely to choose a standard product amid numerous financial products. If the study shows that consumer behavior is indeed influenced by a standard product, the minister will then explore how to address this.
Providers will respond to the introduction of a standard product. On this matter, the position of the Association of Insurers is clear: insurers are not in favor of standardization because customers are not interested in it. Customers want clarity about coverage; they want to know what is and isn’t covered. The Dutch Authority for the Financial Markets (AFM) also sees no added value in standard products. According to this regulatory body, the regulations regarding product development and the outcomes of supervision do not justify the introduction of standard products.
The Authority for Consumers & Markets (ACM) investigated the potential of standard products from the theoretical frameworks in competition supervision. It deems it unlikely that standard products will improve market dynamics. There is a potential risk that providers, due to the potentially small margin on a standard product, will independently exhibit strategic behavior to minimize the sales of the standard product.
The AFM has established two assessment frameworks, one for processes (product reviews) and one for products (product development).
Assessment framework for processes includes the following six topics:
- Clearly defined responsibilities
- Encouraging self-critical capacity
- Well-defined target audience determination
- Comprehensive scenario analyses and product comparisons
- Good alignment with relevant processes in the product chain
- Ensuring a timely evaluation of products
For the assessment of products, the AFM uses the KNVB standards (KNVB stands for ‘customer interest central’), which it published in its report ‘Disability Insurance for Self-Employed Individuals’ in June 2011. These standards require determining whether the product is cost-effective, useful, safe, and understandable from the customer’s perspective. This can be determined through four questions. The AFM notes that these questions are not mutually exclusive or collectively exhaustive. A product feature may lead to findings about both cost-effectiveness and safety. The answers to these questions provide an approach to the overall picture. The questions are:
- Does the product offer value for money?
- Does the product meet a well-founded need of the target audience?
- Does the product perform as intended in various circumstances, and is the outcome acceptable for the target audience?
- Is the product not unnecessarily complicated, and can the customer assess its quality and suitability effectively?
Framework for products, what are the requirements products must meet according to the AFM.
Additionally, in the product review process, a distinction is made between selling and non-selling products:
**Selling Products**
Selling products are actively marketed and sold to both new and existing customers. These products undergo assessment through the Product Approval and Review Process (PARP).
**Non-Selling Products**
Non-selling products are active for existing customers but cannot be actively subscribed to by new customers. These products also need to be assessed through PARP. However, if these products are slated for discontinuation in the near term within the agent’s product portfolio, a phased-out document can suffice. This document outlines how existing policies will be transitioned to a new target product and the timeline for this transition. The phased-out document becomes part of the PARP for the target product.
**AFM’s Framework for a Good Product Development Process**
The authorized agent possesses or should possess what the AFM refers to as a good product development and review process. The AFM’s assessment framework consists of six topics, guiding the authorized agent to ask the following questions:
- **Clearly Defined Responsibilities:**
– Are responsibilities within the product development processes (product creation, approval, and evaluation) clearly defined and adequately positioned within the organization at a higher level? This includes considerations such as directors being aware of the products managed under binding authority. Additionally, accountability for PARP within a job profile, such as the effective supervisor of the binding authority business. The authorized agent should have a process in place where these responsibilities are clearly assigned. It is also crucial to establish a dedicated space where all PARP-related matters are stored.
- **Encouraging self-critical capacity:**
– Implement processes that encourage and ensure the financial institution evaluates its own products with an open mind and sufficient critical perspective. Utilizing multidisciplinary discussion sessions, open-ended questions, and a clearly defined set of norms can facilitate this process.
- **Well-defined target audience determination:**
– Ensure that processes delineate the target audience for products accurately and relate to the fundamental need the product addresses. The process of defining the target audience should also include a description of the group for which the product is unsuitable. In practice, this target audience should align with the norms and values framework the authorized agent adheres to.
- **Comprehensive scenario analyses and product comparison:**
– Establish processes that ensure relevant scenarios for the product (with all its features) are thoroughly analyzed, and the product and the outcomes of conducted (scenario) analyses are compared with other product solutions addressing a similar need. Since authorized agents typically do not employ actuaries, rates are often determined based on calculations provided by the insurer. The results can be assessed by the authorized agent and the insurer through metrics like the Combined Ratio earned premium (CRvp).
Additionally, for insurance products, especially simple risk products, the authorized agent can highlight potential risks in the product dossier using real-world examples.
- **Good alignment with relevant processes in the product chain:**
– Ensure effective integration with other relevant processes in the product chain, including information dissemination to advisors and customers, application procedures, and complaint handling. The distribution strategy plays a crucial role in linking product development processes with other financial institution processes and should be explicitly considered during product development.
- **Ensuring a timely evaluation of products:**
– Facilitate timely product evaluations, considering a risk-oriented approach. This may involve estimating the required frequency of evaluation along with determining triggers for an earlier assessment. Developments significantly impacting the product’s functioning can serve as triggers. Products undergoing substantial modifications may also prompt a reevaluation, leading the financial institution to reassess the product’s objectives and target audience.
PARP Document
In practice, it is intended for the authorized agent to create a PARP document for each product. This document includes, among other things, the four KNVB criteria (cost-effectiveness, utility, safety, and comprehensibility) for the authorized agent with self-developed products. The criteria are then specifically filled in for the products that an authorized agent develops. It is essential to answer the formulated questions from the customer’s perspective and keeping the authorized agent’s framework in mind.
**Cost-effectiveness:**
– Does the premium correspond to the offered coverage or a reasonable chance of a payout compared to similar products?
– Is the price of a product explainable?
– Coverage differentiation. Does the coverage distinguish itself from other similar coverages?
– Service differentiation. Does it include a claims service or other components not covered by the premium but providing additional coverage?
– Are costs charged to the customer, such as renewal costs, collection costs, cancellation costs, etc.? Is this reasonable?
**Utility:**
– Is it a useful product?
– Are all offered coverages necessary?
– Are additional coverages offered optionally?
– Do coverages overlap with other products in the package and/or are insured objects covered by multiple insurances?
– Is it clear to the customer if there are risks not covered by the product?
– Are all Unique Selling Points (USPs) of the product clearly communicated?
– Is it clear for which target audience this product is intended?
– Is it clear through which channel this product is offered (e.g., via the internet)?
**Safety:**
– Does the product perform as intended under various circumstances?
– Is the outcome acceptable for the target audience?
– Which insurers are involved, and are they reputable insurers?
– Are there additional partners involved in the product?
– Is customer privacy ensured?
– Are customer interests well-protected, for example, is there age discrimination?
– Does the product comply with laws and regulations, and does it meet the requirements of self-regulation (industry agreements)?
– Are there incentives, such as the amount or structure of the compensation, that may go against the customer’s interests?
– Does the customer in the terms and conditions or in the claims handling process get informed about the possibility to file a complaint, engage an independent expert, or choose to bear the cost of a claim?
– Does a complaints handling process exist, and if so, how is it arranged?
– Are there obstacles in switching or canceling the product, and are these obstacles objectively explainable to the customer? These obstacles may also be related to the process (e.g., unnecessary administrative hurdles). Can the customer easily cancel?
– How is an improvement or deterioration in premium and/or conditions handled for the customer (e.g., is there a best-off clause, and are changes in conditions explained to customers)?
**Comprehensibility:**
– Can the target audience assess the functioning of the product effectively?
– Are the offered products easy to understand? Do customers (and advisors) demonstrably understand the premium and the coverage(s) it entails? How is this ensured, for example, through customer panels/user tests?
– How is it ensured that commission details are transparently provided when requested by the customer?
– Are the conditions written in understandable language?
– Are brochure texts/web texts clear?
– Are standard letters clear?
– Are unnecessary questions asked during the application process that are not essential for accepting insurance?
– Are simple and clear acceptance rules applied, and is the information provision assessed by compliance/legal?
– How is it ensured that all relevant information regarding the application, modification, and claims handling process is timely provided to the customer? (consider product information/policy conditions).
By posing the above questions, findings related to the product are identified that need to be addressed. The key to creating a product dossier lies in an adequate list of findings and evidence of the resolution of these findings. In addition to fulfilling the KNVB criteria, the product dossier should contain the following information:
– Conditions
– Rates
– Acceptance criteria
– Policy document
– Clauses
– Change log
– Quotation
– Application form
– Communication (standard letters, brochures, information on the website)
– Return on investment report
After creating a PARP document, joint sessions involving all departments within an authorized agency can be conducted to discuss the findings made so far. Everyone can contribute additional findings related to a product that may not have been identified based on the KNVB criteria. Finally, the PARP document is approved, for example, by a PARP Steering Group, and then signed by the management. Internally, the PARP document is thus approved and potentially available for sharing with insurers.
**KNVB Criteria for a product of a 100% insurer:**
For a product from a 100% insurer, the authorized agent needs to assess the product against its own framework to determine if these 100% products align with its policies.
**Product Development Process:**
Regardless of the type of product in the portfolio and adherence to KNVB standards, the authorized agent must always have a well-functioning product development process. This process outlines how often specific products will be evaluated and on what basis. The intention is for this to occur periodically, depending on the volume and importance of the product. Higher-risk products often require more frequent evaluations, while lower-risk ones may suffice with triennial assessments.
After three years of PARP experience, achieving a consistent approach for authorized agents remains elusive. Attempts by the Association of Insurers (Verbond van Verzekeraars) and the Dutch Association of Authorized Insurance Companies (NVGA) to establish a unified method have encountered practical objections. Insurers often persist in adhering to their individual approaches. In cases where insurers are expected to provide their PARP dossier to the respective authorized agent for a 100% insurer’s product, they are hesitant to do so in practice. As a result, authorized agents face challenges in ensuring that their conducted product and the identified target audience align with the insurer’s intentions. This leads to a situation where an insurer has implemented an effective PARP process for products distributed through the intermediary channel but inadequately contributes to a proper PARP process in their delegated authority channel. Consequently, authorized agents develop their interpretations of the PARP process, creating significant differences in product assessments and the structure of the product development process. These discrepancies may arise both between different authorized agents and between authorized agents and insurers. Therefore, a crucial recommendation for practical implementation is to establish clear PARP agreements, and more importantly, ensure that these agreements are adhered to by both insurers and authorized agents.