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Distribution of Insurance-Based Investment Products pp 3–25Cite as

The Notion of Insurance-Based Investment Products

A Cross-Sectoral Legal Approach in Europe

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Abstract

This article aims to offer an overview of insurance-based investment products, as they appeared in practice and subsequently regulated by the national and European legislators. It further aspires to provide guidance on the specific elements and risks inherent to such products from a European legal point of view, which distinguish them from other traditional insurance and investment products. Practical examples are also included in this article, which are, though, merely indicative of the forms that insurance-based investment products can take.

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Notes

  1. 1.

    Galiatsos (2013), pp. 257 et seq.

  2. 2.

    Fixed-index annuities and variable annuities are also provided.

  3. 3.

    http://www.insuranceeurope.eu/protecting-long-term-investment.

  4. 4.

    Galiatsos (2013), op.cit., p. 258.

  5. 5.

    First Council Directive 1979/267 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of direct life assurance.

  6. 6.

    Directive 2002/83 concerning life assurance.

  7. 7.

    Directive 2009/138 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).

  8. 8.

    Case C-166/11, Ángel Lorenzo González Alonso v Nationale Nederlanden Vida Cía de Seguros y Reaseguros SAE, Judgment of the Court (Fifth Chamber) of 1 March 2012, para 29. Reference for a preliminary ruling from the Audiencia Provincial de Oviedo [ECLI identifier: ECLI:EU:C:2012:119].

  9. 9.

    Council Directive 1985/577 to protect the consumer in respect of contracts negotiated away from business premises.

  10. 10.

    CEIOPS, Report on National Measures regarding Disclosure Requirements and Professional Requirements for Unit-Linked Life Insurance Products, which are additional to the Minimum Requirements of the CLD and IMD (CEIOPS-DOC-20/09, 2 July 2009) available at: https://eiopa.europa.eu/CEIOPS-Archive/Documents/Reports/CEIOPS-Report-National-Measures-Unit-Linked-Life-insurance-products.pdf.

  11. 11.

    In June 2014, the European Commission adopted new rules revising the MiFID framework. These consist of Directive MiFID II and Regulation 600/2014 (known as MiFIR). The application date of MiFID II and MiFIR, initially scheduled for 3 January 2017, has been extended to 3 January 2018. Hereinafter, where reference is made to MiFID, this shall mean Directive 2004/39/EC, while special reference is made to MiFID II and MiFIR.

  12. 12.

    Münchener Rück Munich Re Group, Unit-linked Insurance- A general report, p. 5 available at: http://www.asf.com.pt/winlib/cgi/winlibimg.exe?key=&doc=18678&img=5977.

  13. 13.

    Commission Staff Working Document, Impact Assessment accompanying the Communication from the Commission to the European Parliament and the Council on Packaged Retail Investment Products, SEC (2009) 556, p. 8.

  14. 14.

    It should be noted, though, that the content of the exemption has been slightly amended in the case of MiFID II, so that it will now apply to “insurance undertakings or undertakings carrying out the reinsurance and retrocession activities referred to” in the Directive 2009/138 (Solvency II) “when carrying out the activities referred to in that Directive” (art.2 para 1(a) MiFID II).

  15. 15.

    According to Recital (2) of the PRIIPs Regulation “Improving the transparency of PRIIPs offered to retail investors is an important investor protection measure and a precondition for rebuilding the confidence of retail investors in the financial market, in particular in the aftermath of the financial crisis”.

  16. 16.

    FCA, “Developing our approach to implementing MiFID II conduct of business and organizational requirements”, March 2015, Discussion Paper DP15/3, p. 10 et seq.

  17. 17.

    According to Recital (87) of MiFID II: “Investments that involve contracts of insurance are often made available to customers as potential alternatives or substitutes to financial instruments subject to this Directive. To deliver consistent protection for retail clients and ensure a level playing field between similar products, it is important that insurance-based investment products are subject to appropriate requirements”.

  18. 18.

    Both in the case of IMD 1.5 and subsequently through the provisions of IDD in relation to the provision of information conduct of business standards, conflicts of interest etc.

  19. 19.

    Recital (87) of MiFID II further provides:“…Whereas the investor protection requirements in this Directive should therefore be applied equally to those investments packaged under insurance contracts, their different market structures and product characteristics make it more appropriate that detailed requirements are set out in the ongoing review of Directive 2002/92 rather than setting them in this Directive. Future Union law regulating the activities of insurance intermediaries and insurance undertakings should thus appropriately ensure a consistent regulatory approach concerning the distribution of different financial products which satisfy similar needs and therefore raise comparable investor protection challenges. The…EIOPA…and ESMA should work together to achieve as much consistency as possible in the conduct of business standards for those investment products. Those new requirements for insurance-based investment products should be laid down in Directive 2002/92”.

  20. 20.

    P. Marano, The “Mifidization”: the sunset of life insurance in the EU Regulation on Insurance?, p. 2 et seq., available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2832952.

  21. 21.

    Gaetane/ Schaeken/ Willemaers, Client protection on European financial markets –from inform your client to know your product and beyond: an assessment of the PRIIPs Regulation, MiFID II/MiFIR and IMD 2, p. 18, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2494842&download=yes.

  22. 22.

    V. Colaert, The Regulation of PRIIPs: Great Ambitions, Insurmountable Challenges?, p. 2, available at: https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2721644.

  23. 23.

    European Commission Green Paper on retail financial services, COM (2015) 630 final, p. 3.

  24. 24.

    Commission Staff Working Document, Impact Assessment accompanying the Communication from the Commission to the European Parliament and the Council on Packaged Retail Investment Products, SEC (2009)556, p. 8.

  25. 25.

    Communication from the Commission to the European Parliament and the Council, “Packaged Retail Investment Products, SEC (2009)556, 557, p. 4 (http://ec.europa.eu/internal_market/finservices-retail/docs/investment_products/29042009_communication_en.pdf).

  26. 26.

    Commission Staff Working Document, Impact Assessment accompanying the document Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products, SWD(2012)187 final, p. 5.

  27. 27.

    Recital (12) and art.4 (4) of the PRIIPs Regulation.

  28. 28.

    Commission Staff Working Document, op.cit. (note 16), Box 1: What are PRIPs, p. 21.

  29. 29.

    Commission Staff Working Document, op.cit. (note 16) SWD (2012)/0191 final p. 26. In terms of terminology, it has to be noted, already, that upon the entry into force of the PRIIPs Regulation, packaged retail investment products generally referred to in this section as PRIPs, are considered to be a subset of packaged retail and insurance-based investment products (“PRIIPs”), along with insurance-based investment products. In other words, in line with the PRIIPs regulation, PRIIPs consists of PRIPs and insurance-based investment products. Besides, the initial Proposal of the Regulation used the term “PRIPs”, which, though, already included insurance-based investment products! We will refer to this change in terminology in the course of this article as well.

  30. 30.

    Commission Staff Working Document, op.cit. SEC (2009) 556, p. 8, ref.4.

  31. 31.

    Communication from the Commission to the European Parliament and the Council, “Packaged Retail Investment Products, SEC(2009) 556,557.

  32. 32.

    Communication “Packaged Retail Investment Products, op.cit. p. 3.

  33. 33.

    Communication from the Commission to the European Parliament and the Council, op. cit. (note 21), SEC(2009)556, 557.

  34. 34.

    In the case of the example given, the amount of the investment part varies on the market fluctuations, while the amount of the life insurance sum is a fix sum. It is not impossible that the insurance sum is also expressed in investments, such as units, where the insurer is obliged to pay the fix number of units in case the risk realizes or by the maturity of the policy or in case the insured demands its repurchase.

  35. 35.

    It is common practice for the unit-linked policies to include condition whereby the investment decision lies to the policyholder.

  36. 36.

    Also see MiFID II on structured deposits (art.4 para 1 (43) etc.).

  37. 37.

    Impact Assessment accompanying the Communication from the Commission to the European Parliament and the Council on Packaged Retail Investment Products, Commission Staff Working Document, SEC (2009)556, p. 42.

  38. 38.

    Communication from the Commission to the European Parliament and the Council, op. cit (note 21), SEC(2009) 556,557, pp. 5&13.

  39. 39.

    EIOPA Discussion Paper on Key Information Documents for Packaged Retail and Insurance-based Investment, JC/DP/2014/02, p. 17.

  40. 40.

    EIOPA Discussion Paper on Key Information Documents for Packaged Retail and Insurance-based Investment, op.cit., p. 17.

  41. 41.

    EIOPA Discussion Paper on Key Information Documents for Packaged Retail and Insurance-based Investment, op.cit., p. 17.

  42. 42.

    EIOPA Discussion Paper on Key Information Documents for Packaged Retail and Insurance-based Investment, op.cit., p. 17.

  43. 43.

    Consumer Decision-Making in Retail Investment Services: A behavioral Economics Perspective, 2010 (Executive Summary), p. 6.

  44. 44.

    Commission Staff Working Document, Impact Assessment accompanying the document Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products, 2012. para. 2.1.

  45. 45.

    The application of the PRIIPS Regulation (originally provided for 31.12.2016) was postponed to 1. 1.2018 according to the Commission proposal.

  46. 46.

    Commission Staff Working Document, Impact Assessment accompanying the document Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products, op.cit.

  47. 47.

    Commission Staff Working Document, Economic Review of the Financial Regulation Agenda “A reformed financial sector for Europe”, COM (2014) 279 final, p. 146. See also Recitals (10) and (61) of IDD.

  48. 48.

    See art.4(6)(b) of the PRIIPs Regulation.

  49. 49.

    See already art.4(2) of the PRIIPs Regulation.

  50. 50.

    However, life insurance contracts where the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or infirmity, are excluded from the scope of insurance-based investment products as defined in both the IDD and the PRIIPs Regulation.

  51. 51.

    To be noted, here, that for example art.104 of Greek law 4099/2012 on UCITS provides that the insurance benefit (while not the insurance premium) in the case of life insurance may be paid through a transfer of units of UCITS to the insured, instead of cash. There is no similar explicit provision in Greek law as regards the payment of insurance premia through transfer of units, contrary to other jurisdictions such as in Luxembourg where this explicitly permitted. Germany on the other hand, prohibits the payment of premia otherwise than in cash.

  52. 52.

    Financial Conduct Authority.

  53. 53.

    FCA, op.cit., especially: Applying MiFID II rules to insurance-based investment products and pensions, p. 12.

  54. 54.

    Insurance Europe, Insurance-based Investment Products’ Benefits, p. 1 available at: http://www.insuranceeurope.eu/insurance-based-investment-products%E2%80%99-benefits.

  55. 55.

    MiFID II and MiFIR replace MiFID and will apply as of 3.1.2018.

  56. 56.

    To be noted that ESMA, the competent European supervisory authority, does not have any competency on the insurance sector and insurance products. ESMA guidelines are not addressed to insurance undertakings or distributors of insurance products.

  57. 57.

    European Commission MEMO, The Insurance Distribution Directive Frequently Asked Questions, Question 8: How are the rules different for insurance products with investment elements?, Brussels, 23 February 2016.

  58. 58.

    Europe Economics, Study on the Costs and Benefits of Potential Changes to Distribution Rules for Insurance Investments Products and other non-MiFID Packaged Retail Investment Products, Europe Economics, 29.09.2010 available at http://ec.europa.eu/finance/consultations/2010/prips/docs/costs_benefits_study_en.pdf.

  59. 59.

    Europe Economics, op. cit., p. 4.

  60. 60.

    We have already mentioned (note 35) that it is possible and very common for the part of the policy that represents the life insurance sum to be expressed in cash money while the investment part alone is linked to investment and that European law does not prohibit such a structure.

  61. 61.

    Internal Market and Services Commissioner Charlie McCreevy said in Press release IP/07/1615, Brussels 26 October 2007: “A wide range of investment products are now available to help retail investors take responsibility for their long-term financial futures. Today, the EU legislative framework imposes different levels of product and fee disclosure, and different selling rules, depending on the legal form the product takes. I believe that there is a strong case for investigating whether these differences are harming investors and distorting markets”.

  62. 62.

    See Article 2 para 1(17) of IDD: ‘insurance-based investment product’ means an insurance product which offers a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations, and does not include:

    1. i.

      Non-life insurance products, as listed in Annex I to Solvency II Directive (Classes of non-life insurance),

    2. ii.

      Life insurance contracts where the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or disability,

    3. iii.

      Pension products which, under national law, are recognized as having the primary purpose of providing the investor with an income in retirement, and which entitle the investor to certain benefits,

    4. iv.

      Officially recognized occupational pensions schemes falling under the scope of Directive 2003/41or Solvency II Directive,

    5. v.

      Individual pension products for which a financial contribution from the employer is required by national law and where the employer has no choice as to the pension product or provider.

  63. 63.

    Also see EIOPA, “Technical Advice on possible delegated acts concerning the Insurance Distribution Directive”, EIOPA-17/048, 1 February 2017, p. 72 et seq.

  64. 64.

    Also see EIOPA, “Technical Advice on possible delegated acts concerning the Insurance Distribution Directive”, op.cit.

  65. 65.

    EIOPA, “Technical Advice on possible delegated acts concerning the Insurance Distribution Directive”, op. cit., p. 74.

  66. 66.

    EIOPA, “Technical Advice on possible delegated acts concerning the Insurance Distribution Directive”, op. cit., p. 75.

  67. 67.

    Recital (6) of the PRIIPs Regulation. Also, V. Colaert, op.cit. p. 4.

  68. 68.

    V. Colaert, op.cit. p. 5.

  69. 69.

    Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products /* COM/2012/0352 final - 2012/0169 (COD) */, available here: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52012PC0352.

  70. 70.

    According to the initial draft Regulation (art.4), “investment product” means “an investment where regardless of the legal form of the investment, the amount repayable to the investor is exposed to fluctuations in reference values or in the performance of one or more assets which are not directly purchased by the investor”. The draft Regulation also enumerated exceptions for certain cases.

  71. 71.

    See art.4 of the draft Regulation along with Recitals (6) and (7) of its preamble:

    (6) “(…) This should include such investment products as investment funds, life insurance policies with an investment element, and retail structured products. For these products, investments are not of a direct kind achieved when buying or holding assets themselves. Instead these products intercede between the investor and the markets through a process of “packaging”, wrapping or bundling together assets so as to create different exposures, provide different product features, or achieve different cost structures as compared with a direct holding. Such “packaging” can allow retail investors to engage in investment strategies that would otherwise be inaccessible or impractical, but can also require additional information to be made available, in particular to enable comparisons between different ways of packaging investments”.

    (7) “(…) Assets that would be held directly, such as corporate shares or sovereign bonds, are not packaged investment products, and should therefore be excluded. (…) occupational pension schemes which fall under the scope of Directive 2003/41 (…) or Solvency II Directive (…) should not be subject to this Regulation. (…) Investment funds dedicated to institutional investors are not within the scope of this Regulation (…)”.

  72. 72.

    As defined in point (26) of Article 13 of Solvency II Directive.

  73. 73.

    Entities as defined in point (an) of Article 4(1) of the Directive 2011/61.

  74. 74.

    To be noted that Solvency II Directive makes reference, in art.132 para 3, to unit-linked and index-linked insurance policies: “…Where the benefits provided by a contract are directly linked to the value of units in a UCITS as defined in Directive 85/611, or to the value of assets contained in an internal fund held by the insurance undertakings, usually divided into units, the technical provisions in respect of those benefits must be represented as closely as possible by those units or, in case where units are not established by those assets. Where the benefits provided by a contract are directly linked to a share index or some other reference value other than those referred to in the second subparagraph, the technical provisions in respect of those benefits must be represented as closely as possible either by the units deemed to represent the reference value or, in the case where units are not established, by assets of appropriate security and marketability which correspond as closely as possible with those on which the particular reference value is based”.

  75. 75.

    Also see note 30 above.

  76. 76.

    V. Colaert, op.cit. p. 5.

  77. 77.

    Listed in art. 2 of the PRIIPs Regulation.

  78. 78.

    Art.2 para 2 of the PRIIPs Regulation provides that the Regulation shall not apply to the following products: (a) non-life insurance products as listed in Annex I to Directive 2009/138; (b) life insurance contracts where the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or infirmity; (c) deposits other than structured deposits as defined in point (43) of Article 4(1) of Directive 2014/65; (d) securities as referred to in points (b) to (g), (i) and (j) of Article 1(2) of Directive 2003/71; (e) pension products which, under national law, are recognised as having the primary purpose of providing the investor with an income in retirement and which entitle the investor to certain benefits; (f) officially recognised occupational pension schemes within the scope of Directive 2003/41 of the European Parliament and of the Council or Directive 2009/138; individual pension products for which a financial contribution from the employer is required by national law and where the employer or the employee has no choice as to the pension product or provider.

  79. 79.

    See Recital (6) and (7) of the PRIIPs Regulation.

  80. 80.

    See Recital (7) of the PRIIPs Regulation.

  81. 81.

    See Recital (35) and art.32 para 1 of the PRIIPs Regulation.

  82. 82.

    Commission Staff Working Document, Impact Assessment accompanying the document Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products, 2012.

  83. 83.

    Recital (8) of the PRIIPs Regulation.

  84. 84.

    See already Joint Consultation Paper on “PRIIPs with environmental and social objectives”, JC 2017 05, 10 February 2017, available at: https://esas-joint-committee.europa.eu/Publications/Consultations/JC_2017_05_CP_EOS_PRIIPs_final.pdf.

    Further, the European Commission requested the ESAs to consider whether measures are required to ensure PRIIPs manufacturers have appropriate governance systems in place to ensure that disclosed EOS objectives are met.

  85. 85.

    Joint Consultation Paper on “PRIIPs with environmental and social objectives”, op.cit. p. 5.

  86. 86.

    The three ESAs are the European Banking Authority (EBA), the European Securities and Markets Authorities (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) and they are part of the European System of Financial Supervision (ESFS).

  87. 87.

    EIOPA Discussion Paper on Key Information Documents for Packaged Retail and Insurance-based Investment, JC/DP/2014/02, p. 24.

  88. 88.

    EIOPA Discussion Paper on Key Information Documents for Packaged Retail and Insurance-based Investment, JC/DP/2014/02, p. 25.

  89. 89.

    See note 73.

  90. 90.

    EIOPA Discussion Paper op. cit. p. 26.

Abbreviations

AIFMD:

Alternative Investment Fund Managers Directive

AIFs:

Alternative Investment Funds

CEIOPS:

Committee of European Insurance and Occupational Pensions Supervisors (now EIOPA)

CFD:

Contract for Difference

COBS:

Conduct of Business rules

DG:

Directorate-General

EBA:

European Banking Authority

EC:

European Commission

ECB:

European Central Bank

EIOPA:

European Insurance and Occupational Pensions Authority

EMIR:

European Market Infrastructure Regulation

EOS:

Environmental and Social Objectives

ESAs:

European Supervisory Authorities

ESFS:

European System of Financial Supervision

ESMA:

European Securities and Markets Authorities

FCA:

Financial Conduct Authority

FTSE 100:

Financial Times Stock Exchange 100 Index

IDD:

Insurance Distribution Directive

IMD:

Insurance Mediation Directive

KID:

Key Information Document

KII:

Key Investor Information

MiFID:

Markets in Financial Instruments Directive

MiFIR:

Markets in Financial Instruments Regulation

OTC:

Over-the-Counter

PRIIPs:

Packaged Retail and Insurance-Based Investment Products

PRIPs:

Packaged Retail Investment Products

SPV:

Special Purpose Vehicle

UCITS:

Undertakings for the Collective Investment of Transferable Securities

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Authors and Affiliations

  1. Department of Business Administration, Athens University of Economics and Business, Athens, Greece

    Ioannis Rokas

  2. Rokas International Law Firm, Athens, Greece

    Ioannis Rokas

  3. EY, Athens, Greece

    Athina Siafarika

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  1. Ioannis Rokas
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Editors and Affiliations

  1. Law Department, Catholic University of the Sacred Heart, Milan, Milano, Italy

    Pierpaolo Marano

  2. Department of Business Administration, (em.) Athens University of Economics and Business, Athens, Attiki, Greece

    Ioannis Rokas

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Rokas, I., Siafarika, A. (2019). The Notion of Insurance-Based Investment Products. In: Marano, P., Rokas, I. (eds) Distribution of Insurance-Based Investment Products. Springer, Cham. https://doi.org/10.1007/978-3-030-11668-2_1

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