An insurer’s conduct on the market has a considerable influence on its reputation, customer satisfaction and, ultimately, its success. An insurer’s conduct of business manifests itself, for example, in the information it provides to its customers, how it deals with complaints, and how appropriately its coverage is structured.

Risks for consumers

Whenever an insurer’s conduct on the market is not appropriate to the level of risk, it represents a threat to customers. A typical example of this is contracts that do not meet a customer’s needs, either because the customer does not need the contract or because it does not provide sufficient cover. Risks also arise when a customer or group of customers is not offered a contract despite insurance cover being warranted.

Reputational risk for insurers

As an undertaking’s conduct of business is an integral part of its business activities, the conduct of business supervision of an insurance undertaking cannot be viewed in isolation from the solvency supervision.

Breaching rules of conduct towards customers does not just disadvantage the consumers; it also brings operational risk for individual undertakings themselves – for instance if incorrect information provided to the consumer results in the consumer claiming a refund or damages from the insurer. Furthermore, malpractice by a single insurer can damage consumers’ trust not just in that provider but also in the industry as a whole.

While Solvency II means that a broad common foundation for supervisory activities already exists for solvency supervision, the framework for Europe-wide conduct of business supervision of insurers is still in development.

EIOPA’s strategies

EIOPA, the European Insurance and Occupational Pensions Authority, is pursuing a number of strategies to bring the diverse supervisory practices in the member states closer together. In January 2016, for instance, it published its Strategy towards a comprehensive risk-based and preventive framework for conduct of business supervision, which it fine-tuned in April 2018.

EIOPA collects insights into consumer behaviour on the European insurance market that insurers can take into account for their future conduct on the market. This month, for example, already marks the seventh edition of EIOPA’s Consumer Trends report, with each report an improvement on the last. EIOPA’s work and analysis on consumer protection are collated on its website under “Consumer Protection”.

EIOPA requires that undertakings have a clear customer focus. It stipulates that the management bears responsibility for product development and for the incentive structure within the company.

This coincides with the requirements of BaFin, which has a collective consumer protection mandate and the primary aim of protecting the interests of policyholders and beneficiaries.

BaFin’s approach

Insurers’ conduct of business, including over national borders, is an area that BaFin is working on intensively. For example, under the virtual umbrella of EIOPA BaFin uses shared platforms to communicate with the supervisory authorities of other countries about the conduct of business of undertakings that operate on a cross-border basis.

Furthermore, BaFin is a member of an EIOPA Expert Group tasked with ramping up risk-based supervision of undertakings’ conduct of business. This group’s first deliverable is a framework for analysing risks to the customer that might arise during an insurance policy’s life cycle. An insurer’s business model, the general product management, the development of a specific product, the manner of distribution and the digitalisation of individual elements or services in the value chain can all be sources of risk for the consumer. The report takes into account existing legal and supervisory requirements, such as the product approval process (see BaFinJournal Expert Article dated 2 March 2018 ), the pre-contractual product information and disclosure requirements and all conduct of business obligations resulting from distribution activities.

In addition, the Expert Group is concerned with developing standards for consumer protection measures at the European level. These extend to product intervention as the tool of last resort for supervisors – in the insurance industry as in other sectors.

Risk matrix and early warning system

These foundations, which currently exist only conceptually, are to pave the way for a dynamic risk matrix based on data from the national competent authorities, such as BaFin, in order to assess product risk. The objective is a pan-European early warning system for preemptive supervisory action against conduct of business that poses a threat to the consumer.