The review, conducted by the European Insurance and Occupational Pensions Authority (Eiopa), will look into 60% of each national market and focus on potential problems in the sector, the organisation said this week.
One the main concerns the watchdog will look into is how payments by asset managers to insurers create a potential conflict of interest by influencing the investments on offer and how this affects policyholders.
“Concerns raised were that some life insurance undertakings were choosing underlying funds to offer on the basis of those which provided the highest remuneration to the insurance undertaking from asset managers,” said Eiopa.
Life companies generally earn higher fees on unit-linked funds than on guaranteed-return funds. Unit-linked life policies provide a combination of life insurance and investment, where insurers invest client premiums and pay out the capital plus investment returns when the policy matures.
Compared to standard funds, which guarantee a certain capital return and are usually invested in low-risk, low yield fixed income assets, unit-linked products state that the risks for the investment part are borne by the policyholder.
Eiopa’s review follows on from its consumer trends report, published last November, which found “significant growth” in unit-linked life insurance products in 2014 driven by the rock-bottom low interest rate environment.
Controversy
Unit-linked life products have been marred by a number of high-profile mis-selling scandals over the years.
The “Woekerpolis” scandal in the Netherlands found insurers guilty of profiteering by mis-selling up to seven million investment-linked policies, dating back to 1995 – many of which were sold on the basis of poor advice that failed to disclose the high fees these policies incurred.
In January last year, Hong Kong’s Insurance Authority (IA) banned commission clawback on Investment Linked Assurance Schemes (Ilas) after there were complaints that the products failed to protect consumers and the high initial fees were unfair.
The clawback, known as indemnity insurance, is where a life company pays commission to an intermediary based on the full value of the policy – which could run for 25 years. Despite the ban, life companies are still entitled to take back some or all of the commission if the policy is cancelled.
Meanwhile, the UK’s Financial Conduct Authority (FCA) published its own set of guidelines to govern the sector in October 2013, after identifying potential conflicts of interest with the unit-linked products.
FCA figures show over £900bn (€1.05bn, $1.16bn) is invested in the UK’s unit-linked funds, approximately 85% of which is pension savings – a proportion which is likely to increase dramtically in line with the take up of auto-enrolment according to the regulator.
