A. Personal and material scope of application

1 This guidance notice is addressed to German and foreign life insurance companies subject to supervision by BaFin (hereinafter referred to as “life insurers”) that fall within the scope of the Insurance Distribution Directive (IDD) and sell savings products. Pensionskassen do not fall within the scope of this guidance notice. BaFin expects life insurers from other member states of the European Union or other EEA signatory states to observe the statements regarding the product approval process when engaging in cross-border activities in Germany. BaFin will contact the supervisory authority of the home state if necessary.

2 Savings products are defined in this context as life insurance products, both with-profit and unit-linked, that have a savings component. This includes insurance-based investment products as well as other life insurance products with a savings component (in particular, direct insurance policies and retirement provision contracts under section 1 of the German Pension Contracts Certification Act (Altersvorsorgeverträge-Zertifizierungsgesetz – AltZertG) and basic pension contracts under section 2 of the AltZertG are thus also included here under savings products).

B. Legal sources and focus of the guidance notice, proportionality

3 The guidance notice is based on the conduct of business supervisory requirements of the Insurance Distribution Directive (IDD) regarding the product approval process (Article 25 of the IDD) and regarding distribution remuneration and conflicts of interest (in particular Article 17(3), Article 29(2) as well as Articles 27 and 28 of the IDD), the supplementary Delegated Regulations (DR 2017/2358 and DR 2017/2359) and the national regulations issued to implement the corresponding requirements of the IDD (section 23 (1a) to (1c), section 48a of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG)).

4 The focus of the guidance notice is on each insurer’s own determination of appropriate value for money of the products distributed. The product approval process imposes obligations on life insurers before they market new or significantly modified products, in particular that they determine a target market and ascertain that the (new or significantly modified) product meets the needs of the customers constituting the target market. Subsequently, life insurers must monitor the product to ensure that it continues to satisfy the needs of the customers of the target market. The statutory requirements are subject to supervisory review. BaFin reviews the compliance with the requirements regarding the product approval process. This does not result in product regulation. It is also in this context that the content of the guidance notice is to be understood.¹

5 The guidance notice is in line with EIOPA’s “Supervisory Statement on assessment of value for money of unit-linked insurance products under product oversight and governance”, EIOPA (2021)0045739, of 30 November 2021. On 31 October 2023, EIOPA published a “Methodology to assess value for money in the unit-linked market”, providing the national competent authorities of the member states with a set of tools that will enable them to assess the value for money of the products with regard to the needs of the customers of the target market (“value for money”).² The guidance notice describes how BaFin applies the tools developed by EIOPA.

C. Insurers’ own assessment of appropriate value for money provided by the products distributed

I. Product, product features, value for money

1. Product and product features

6 As part of the product approval process for the individual product, manufacturers must define the “product” in question, determine its target market and assess and ascertain the appropriate “value for money” with regard to the needs of the members of the target market. The product encompasses the product features that characterise the product and the value it offers the customer.

7 Particularly the following are to be considered product features that are subject to the assessment of appropriate value for money provided by the product:

• the way in which premiums are calculated,
• the manner in which the profit participation is carried out

and – for unit-linked life insurance (including static and dynamic hybrids) – additionally

• the investment options that policyholders³ can select and
• reimbursements from investment managers to the life insurer and the life insurer’s sales partners.

8 As product manufacturers, life insurers may have to determine additional product features and, as part of testing the product to identify the value for money it provides, assess these features with regard to the needs of the target market. These additional product features can include, for example, portfolio management during the holding period in the case of a unit-linked product (selecting and, if applicable, reallocating the investment options), compliance with sustainability objectives, contractual options and services offered by the life insurer.

9 If a payout is planned that is to follow the savings phase, this too is a product feature and is thus subject to testing in terms of appropriate value for money. The reference point is in particular the ratio of the capital available at the end of the savings phase to the retirement benefits that the customer is expected to receive.

10 Where significant biometric cover is offered as part of the main insurance, it must be tested separately in terms of value for money. If biometric cover is offered by means of a separate rider, a separate product approval process must be carried out for this rider or the value for money of the rider must be tested separately as part of a joint product approval process.

2. Value for money

11 The value for money is based on the target market for the product and is to be assessed from target market’s perspective. Life insurers are, in accordance with the legal requirements, free to determine the target market whose specific needs are to be met by the product.

12 External factors such as the tax framework must be adequately taken into account in the process of determining the target market and likewise in the process of assessing the value for money with regard to the needs of the target market.⁴ The value for money provided by a product follows from the overall assessment of the product and its features. This includes an adequate evaluation of the benefit provided by the features that characterise the product. The overall assessment may take additional characteristics into account, especially of a non-monetary nature, that may be of particular significance with regard to the needs of target market customers, such as consideration of sustainability objectives, contractual options and services provided by the life insurer.

13 When assessing appropriate value for money, life insurers must consider the following:

a) Value for money with regard to the target market – savings component

14 Savings products within the meaning of this guidance notice always involve a savings phase. When a life insurer assesses a product’s value for money, it is of great significance what expectations the target market customers have for the savings phase. If the product includes a significant biometric cover, the related premium and benefit components must be excluded from the assessment of the value for money of the savings component.⁵

15 When assessing the value for money of savings products, life insurers must formulate return targets, taking into account the product features and external factors (such as capital market conditions); these targets must be in line with the expectations of the target market they have determined. In this context, life insurers should also assess whether the members of the target market seek not only a positive return after costs, but also a positive return after costs and inflation.⁶ With such products, the policyholders in the target market would then, as a rule, seek at least a return that is equivalent, for example, to a reasonable inflation expectation (“real investment return”). In the case of long-term contracts, this can mean the medium-term inflation aim of the European Central Bank⁷, for example. It is also possible for a target market determined by a life insurer to have an even higher return expectation. This can be expected in particular for products that are associated with a higher investment risk. Appropriate value for money requires that the products be sufficiently likely to achieve the formulated return target. This must be assessed with suitable stochastic analyses as part of product testing.

16 In contrast, if a life insurer has determined the target market for a product to be security-oriented policyholders, it is also possible for the focus to be on the value of a guarantee. It may then be unnecessary to formulate a return target and assess whether achievement of that target is sufficiently likely.

17 In particular, with-profit life insurance products without unit-linked components may be aimed at security-oriented policyholders. However, purely unit-linked products and hybrid products are regularly advertised as also enabling policyholders to participate in the opportunities associated with return-oriented investments. The increased return expectation this entails must be taken into account in the formulation of the return target for the respective target market. In the case of static hybrids, the traditional component and the unit-linked component can be considered separately.

b) Costs, return (before costs) and scenario analyses

18 As product manufacturers, life insurers are required to assess the interaction of the variables “costs” and “return” (before costs) as part of their product testing.⁸ From the policyholder’s point of view, the higher the costs, the higher the risk of an insufficient (or even negative) return under otherwise similar framework conditions. The costs of the product, on the other hand, are a variable that can be influenced by insurers in the context of product manufacturing more extensively than the return, which essentially depends on exogenous factors. A suitable indicator for assessing the total costs of a savings product is the reduction in yield, which is calculated according to the methodology that life insurers are required to use for products within the meaning of section 2 (1) no. 9 of the Regulation on Information Obligations for Insurance Contracts (Verordnung über Informationspflichten bei Versicherungsverträgen – VVG-InfoV) in conjunction with section 2 (6) of the VVG-InfoV or for product information sheets on AltZertG products. In the case of “net products”, for which the policyholder incurs costs for distribution effort that are not covered by the premiums they pay to the life insurer (and are not incorporated into the reduction in yield), life insurers must adequately take this cost burden into account in their product testing.

19 Due to the uncertainties that exist in particular for unit-linked products with regard to the future return, life insurers must consider different “return scenarios” in the context of scenario analyses when assessing appropriate value for money.⁹ In particular, it must be ensured that the formulated return target is achieved not only in optimistic scenarios, but also where actual market developments are less favourable.

20 In the context of product testing and when conducting scenario analyses, life insurers must ensure that they cover a sufficient number of typical contracts. If appropriate value for money cannot be determined for specific contracts, this must be taken into account in the product design and/or, if applicable, in the target market definition.

21 If, for example, a life insurer makes significant use of unit costs in the form of an absolute annual euro amount in its premium calculation, this may give rise to a significant difference between reduction-in-yield values depending on the amount of the annual premium. In such a case, a sufficiently large number of different annual premium amounts must be considered in the context of product testing.

II. Consideration of selected aspects in premium calculation and in the implementation of profit participation

22 In determining appropriate value for money, life insurers must address the following specific aspects.

1. Value for money

a) Lapse (early surrender)

23 In the assessment of value for money for policyholders, it must be taken into account that not all policyholders keep their contracts until the end of the savings phase. Rather, policyholders sometimes surrender their contracts early. Especially in the case of long-term savings products, often a large proportion of policyholders terminate their contracts before the end of the savings phase. This reflects the fact that during long contract holding periods, a policyholder’s personal circumstances or interests may change in a way that was not foreseeable when the contract was concluded.

24 If it can be expected for the target market of a product – also in accordance with the available data – that a significant proportion of the members of the target market will surrender their contracts prior to the end of the savings phase, this must be taken into account in the assessment of the value for money that the product is to provide for the target market. It will not be sufficient to take only the end of the contractual savings phase as a basis for the value for money. Rather, in the context of the scenario analyses, it is also necessary to consider lapse expectations for an adequate number of typical contracts (e.g. with regard to factors such as holding period and premium amount). It is on this basis that life insurers must determine the stage at which a significant proportion of the members of the target market can be expected to have prematurely surrendered their contract. The product must provide appropriate value for money for all members of the target market that surrender their contract from this stage onwards.¹⁰ The product is otherwise not suitable for the target market. A “significant proportion” as referred to above would in any event be half of the members of the target market to whom the product is sold.

25 If a contract is surrendered early towards the end of the savings phase, appropriate value for money must always have been achieved.

b) Costs and value for money

26 When calculating the premiums to be paid by customers, life insurers must factor in cost components that serve to finance the insurers’ expenses. These costs must be reasonable.¹¹ These costs are made up in part of the acquisition and distribution costs that are designed to cover in particular the companies’ expenses that go to insurance intermediaries for distributing their products. In assessing the appropriateness of the costs, a life insurer must take into account to an appropriate extent those expenses for insurance intermediaries (like the life insurer’s other expenses in general) which cannot be allocated to individual products.

27 The following items are suitable for such an assessment (see also III.2):

• expenses for intermediaries, remunerating successful brokerage (acquisition commissions). These include any remuneration that is linked to the brokerage including the advice provided in this connection and/or the mere continuation of a contract, irrespective of whether payment of the remuneration is not deferred (with the exception of agreed payment terms, e.g. quarterly payment) or deferred (ongoing);

examples:
- purely continuity-based commissions, i.e. payments that are linked solely to the continuation of insurance contracts, for example linked to total premiums brokered in the calendar year; this also applies if (at the same time) such payments may be intended to remunerate services going beyond successful brokerage, such as advisory and support services;
- (quantitatively- and qualitatively-oriented) bonus payments;
- other expenses for remunerating successful brokerage, even if such remuneration is voluntary, such as a trip as a “reward”;

• expenses for intermediaries itemised as “other remuneration” for services going beyond the successful brokerage;

examples:
- portfolio management, advisory and support services including premium collection during the contract holding period; however, a remuneration payment is to be assumed due to successful brokerage if the remuneration of a service does not comply with the arm’s-length principle – i.e. the remuneration is not limited to the amount that a prudent and conscientious business manager would agree on with a non-affiliated company, taking into account the interests of the insured persons – and if the agreed services have not resulted in equivalent savings of expenses for the insurer (plus an appropriate profit margin; see also section 50 (2) of the VAG);
- “non-repayable grants”, “guaranteed commissions” (which the sales partner can keep, i.e. which are not linked to the successful brokerage of contracts); these payments are intended to serve in particular as start-up funding and to enable the sales partner to establish itself on the market;
- “shelf money” paid (solely) for the sales partner’s willingness to take over the distribution of the life insurer’s products without being linked to the successful brokerage of contracts,
- fixed salary of an employed sales force;

• expenses for sales support. These include expenses that directly support the conclusion of the contract and the work of the sales partner – these are personnel or non-personnel expenses which the intermediary, from its viewpoint, can directly claim as a service provided by the insurer.

Examples: provision of promotional material or IT equipment and other resources, support for setting up appointments, telephone hotline for questions during the consultation, involvement of experts, temporary staff for holidays/sick leave, training, training materials.

28 When analysing the expenses for insurance intermediaries, life insurers must also take differences between various products into account, in particular where acquisition commissions are of different amounts, and assess whether these differences are due to differences in value for money. For example, the aforementioned expenses for the sale of insurance-based investment products with unit-linked components are sometimes higher than for insurance-based investment products without unit-linked components. This is largely due to the fact that higher acquisition commissions are paid for products with unit-linked components than for products without unit-linked components. This may reflect the higher level of effort for providing and obtaining information involved in selling products with unit-linked components, for which the respective value for money may be appropriate. This must be assessed by the product manufacturers concerned.

2. Different levels of expenditure for different sales partners/distribution channels

29 Life insurers may work with a number of different sales partners and remunerate their services in different ways. Consequently, policyholders who purchase the product through a sales partner of the life insurer whose remuneration is small may thus co-finance the purchase of the same product by other policyholders who have purchased it through a sales partner of the life insurer who receives a higher remuneration for this sale.

30 With regard to the requirements to avoid conflicts of interest between customers¹², life insurers must ensure that there is no inappropriate spreading of expenses or “cross-subsidisation”; if necessary, they must address this appropriately. To do so, they must take into account the range of different remuneration rates and other sales partner-related/distribution channel-related expenses and their different impact on the cost burden when considering the sales partners/distribution channels separately.

3. Reimbursements from investment managers to the life insurers in unit-linked life insurance

31 In individual cases, product manufacturers of unit-linked life insurance receive reimbursements from investment managers whose funds can be selected by policyholders. These reimbursements are regularly taken from the management fee charged for the fund. A high management fee may cast doubt on the appropriateness of the value for money.

32 As part of the product-specific product approval process, life insurers must assess whether and to what extent reimbursements from investment managers are in line with the needs of the target market. If the funds which policyholders can choose from provide for reimbursements from the investment managers to the life insurers themselves, the life insurers must determine whether this creates inadmissible, inappropriate incentives for them as life insurers. One possibility for an inadmissible, inappropriate incentive could be recommending those funds to the policyholder from which they themselves will receive the highest reimbursement.¹³

33 Life insurers must assess whether they adequately compensate for reimbursements through the product design:

• by reducing the costs included in the premium and/or
• by taking these costs into consideration in the profit participation by means of allocation to the provision for bonuses (Rückstellung für Beitragsrückerstattung – RfB) beyond the minimum requirements of the German Minimum Allocation Regulation (Mindestzuführungsverordnung – MindZV)¹⁴ and/or
• by means of profit participation at the individual contract level

- as part of general cost bonuses for the individual policyholder (the policyholder receives a cost bonus enabling participation in the overall cost result, in which any reimbursements are implicitly taken into account) and/or
- through a special bonus for the refunding of reimbursements (according to the applicable general insurance conditions, products may provide for refunds to be paid out to the policyholder in part or in full via a separate cost bonus for reimbursements).

34 Where reimbursements from investment managers to life insurers are taken into account in order to reduce costs included in the premiums or are paid out as part of general profit participation, the participation of individual policyholders should be based, as far as possible, on the level of the reimbursements of the individual fund they have selected.

III. Further special product features in unit-linked life insurance

35 When determining appropriate value for money, life insurers must additionally address the following special features in unit-linked life insurance.

1. Funds/other underlyings

36 Life insurers must first determine the investment strategy as a product feature in which the policyholder can participate. In doing so, they can link to the investment strategy of the funds (or the return potential of other underlying assets, respectively). In the case of hybrid products, the investment in the general account and any reallocation algorithms must also be taken into account as essential components of the investment strategy. At the same time, life insurers must formulate expectations regarding the level of return and the investment risk (return-risk profile), which they can then also use as a basis for a scenario analysis (see I. and II.1.). As part of product monitoring and the regular review of their products, life insurers must assess whether the investment strategy that they themselves have determined as a product feature and that is implemented with the fund (or funds) and, if applicable, the investments in the general account and any reallocation algorithms, continue to have appropriate value for money. They must assess whether a fund satisfies the investment strategy and the expectation for the risk-return profile. Depending on the result of this review, a life insurer may have to consider no longer providing the fund for the future distribution of the product and – if the investment strategy is to be retained as a product feature – offering a different fund instead.

37 In the event that a life insurer decides to no longer offer a fund for future distribution – whether because the investment strategy as a product feature is to be abandoned or the fund no longer seems suitable for implementing the investment strategy as a product feature – it must examine whether there are “circumstances related to the insurance product” within the meaning of Article 7(3) of Delegated Regulation 2017/2358 “that may adversely affect the customer of that product”. The life insurer must (in the context of its business organisation as part of the product approval process) examine whether this gives rise to obligations under civil law vis-à-vis customers and, if so, fulfil these obligations without the need for the customer to explicitly assert civil claims. In this respect, there may especially be a duty to provide advice (see also section 6 (4) of the VVG). The same applies if a fund is closed by the fund provider.

2. Reimbursements from investment managers to life insurers’ sales partners

38 In addition to product manufacturers of unit-linked life insurance (see II.3. above and D.II. below), there are also individual cases in which their sales partners receive reimbursements from those investment managers whose funds can be selected by policyholders.

39 In their capacity as product manufacturers, life insurers must ascertain whether and to what extent reimbursements are paid by investment managers to sales partners. In cases where reimbursements are paid directly to their sales partners, life insurers must be specially careful to ensure that such reimbursements have a corresponding value for money. They must consider their own remuneration payments to their sales partners and the reimbursements as a whole.

40 These explanations apply accordingly to reimbursements paid directly by other third parties to life insurers’ sales partners, as well as to reimbursements passed on by life insurers to their sales partners, irrespective of the fact that such reimbursements that are passed on constitute part of life insurers’ expenses for their sales partners (see II.1.(b)).

IV. Supplementary guidance on target market, product testing, product monitoring; documentation requirement

1. Target market and effort for providing and obtaining information at the point of sale

41 Unit-linked life insurance policies in particular have a large number of options to offer policyholders, depending on the quantity and the different risk-reward profiles of the funds available (“multi-option product”). A hybrid product design, in particular that of a dynamic hybrid product with reallocation algorithms, may make it even more difficult for a policyholder to understand the product. The same may apply to an offer for investment management to be provided by the life insurer or by third parties it has commissioned.

42 When defining the target market, life insurers may choose a “broad” description because they plan for the product to have “broad” marketability. The aim of selling the policyholder the product that fits their needs may be left largely to the sales pitch at the point of sale. A “broader target market” for the purpose of “broader marketability” thus tends to lead to an increased need for information and increased effort for providing and obtaining information at the point of sale. Increased effort for providing and obtaining information will tend to increase the acquisition costs (acquisition commissions) and also tend to increase the risk of incorrect advice, to the detriment of the policyholder.

43 Therefore, when determining the target market and assessing whether an insurance product is suitable for the target market, life insurers must assess whether the need for information and the effort for providing and obtaining information at the point of sale are proportionate to the needs of the target market. They must assess whether it is preferable to segment a “broad” target market into several target markets – also with regard to policyholders’ risk appetite, particularly in the case of unit-linked life insurance. This does not necessarily mean that insurers must likewise segment the insurance product in the same way. Insofar as a product is to be offered with a large number of investment options, the description of suitable target submarkets for individual investment options or groups of investment options within the superordinate target market definition for the overall product may be a suitable means of dealing with the need for sufficient segmentation of the target market.¹⁵

2. Repeated assessment of value for money as part of product monitoring

44 The general explanations regarding product testing apply accordingly to the assessment of value for money as part of product monitoring. When assessing the value for money as part of product monitoring, life insurers must also make use of knowledge and experience they have gained from their existing business. This applies in particular to the utilisation of return scenarios (see III.1.) and lapse expectations.

3. Documentation requirements

45 Life insurers must sufficiently document their assessment and determination of the appropriate value for money for the target market as part of their product-specific product approval process and ongoing product monitoring; furthermore, they must make this documentation available to BaFin on request (see Article 9 of Delegated Regulation 2017/2358). The documentation must at least include the assessment of value for money for the savings phase, the product features to be taken into consideration as set out in I.1. and the additional product features to be determined by the life insurers themselves.

D. Insurers’ own assessment of inappropriate incentives in the system of distribution remuneration

46 In addition to the requirements concerning the product approval process, the IDD sets out separate requirements as regards distribution remuneration and conflicts of interest (see Circular 11/2018, margin no. 90 et seq.). Life insurers must assess their compliance with these requirements and document the result (see loc. cit., margin no. 101 et seq.).

I. Remuneration by life insurers

47 In accordance with section 7 no. 34b of the VAG, distribution remuneration includes all types of commissions, fees, charges or other payments, including economic benefits of any kind, or financial or non-financial advantages or incentives offered or given in respect of insurance distribution activities (excluding those relating to reinsurance distribution activities).

48 Under section 48a (1) sentence 1 of the VAG, the distribution remuneration of life insurance companies may not conflict with their duty to act in the best interests of their customers. Section 48a (6) of the VAG stipulates in particular that commission payments made to insurance intermediaries must not have a detrimental impact on the customer and must not interfere with the insurance company’s duty to act in the best interest of its customers. In particular, according to this provision, the distribution remuneration must not set any incentives that are unacceptably at odds with the duty of life insurers (their employees in the area of sales)/insurance intermediaries to act in the policyholder’s best interest (see sections 1a and 59(1) sentences 2 and 3 of the VVG). While the insurance intermediary’s interest is in the commission for the conclusion of the contract, the customer’s interest is in obtaining the best possible advice, i.e. without any preconceived expectations and not in terms of a certain outcome or the conclusion of a certain contract.

49 For the purposes of assessing whether an incentive (in particular “commissions”, see Article 2 (2) of Delegated Regulation 2017/2359) has a detrimental impact on the quality of the relevant service to the customer, life insurers must perform an overall analysis taking into account all relevant factors which may increase or decrease the risk of detrimental impact on the quality of the relevant service to the customer, and any organisational measures taken to prevent the risk of detrimental impact. For the assessment of the incentive nature of the distribution remuneration, BaFin considers it appropriate to link to the items of expenses for insurance intermediaries listed under C.II.1.b. as a starting point/point of reference for the assessment of inappropriate incentives, and thus to assess whether a payment or expense remunerates successful brokerage (acquisition commission) or constitutes activity-/effort-related remuneration for another service or an expense for sales support without a specifically incentive nature.

50 In the context of assessing incentives, life insurers must therefore consider the value of the incentive in relation to the value of “the product and the services” as a criterion (Article 8(2) sentence 2(c) of Delegated Regulation 2017/2359). The amount of a commission for the individual contract concluded may thus also give rise to an inappropriate incentive. The amount of an acquisition commission must therefore be assessed in terms of its value from the policyholder’s perspective as well (see C.II.1.b. above). The higher an acquisition commission is compared to its “value”, the more it can be considered an incentive. In this context, a portfolio commission/follow-up commission linked to the mere continuation of an individual contract is also to be deemed part of the relevant acquisition commission (see C.II.1.b. above). Where remuneration paid for a service other than contract brokerage and expenses for sales support is commensurate with the effort required, even if it may be regarded as sales remuneration in individual cases in view of the broad legal definition, it is generally not deemed to be of a specific incentive nature.

51 Life insurers must consider whether the incentive is solely or predominantly based on purely quantitative criteria or whether it also takes into account appropriate qualitative criteria (Article 8(2) sentence 2(b) of Delegated Regulation 2017/2359). According to these criteria, an acquisition commission that is linked to the conclusion of a brokered contract generally has a highly incentive effect. A large acquisition commission must therefore be linked to appropriate qualitative criteria.

52 In particular, life insurers may consider linking to a lapse rate. If applicable, the lapse rate should be defined for the individual product (see C.II.1.a. above) and for the individual sales partner, based on the number of contracts brokered. A large acquisition commission may, for example, be made dependent on whether the sales partner’s individual lapse rate is below the lapse rate for the product as a whole or below a threshold individually defined for that sales partner.

53 As a further assessment criterion, it must be taken into account in particular whether there is any form of variable or contingent threshold or any other kind of value accelerator that is unlocked by the achievement of a target based on volume or value of sales (Article 8(2) sentence 2(f) of Delegated Regulation 2017/2359). Such payments or increased payments, which are based on the number of contracts brokered or on the value of the sum of premiums brokered (or a quantity derived from this value), normally have a highly incentive effect. A similarly highly incentive effect is to be assumed if advance payments are agreed which are similarly linked to certain target values for a brokered premium sum (or a quantity derived from these values).

II. Payments by third parties to sales partners, in particular reimbursements from investment managers in unit-linked life insurance

54 In individual cases, in addition to payments from the life insurers, life insurers’ sales partners also receive payments (reimbursements) from those investment managers whose funds can be selected by policyholders. As described in C.III.2 above, life insurers must ascertain whether and to what extent reimbursements are being paid by investment managers to sales partners. They need to know this also for the assessment of inappropriate incentives in their distribution remuneration system. Such reimbursements can have an incentive effect on sales partners, motivating them to recommend the fund for which they will receive a higher reimbursement.

55 These explanations apply accordingly to reimbursements paid by other third parties directly to life insurers’ sales partners, as well as to reimbursements passed on by life insurers to their sales partners.

Footnotes:

1. ¹ This is also made clear in Recital 8 of Delegated Regulation 2017/2358: “The requirement to assess the product performance should however not be understood as an interference with the manufacturers' freedom to set premiums or as price control in any form.”

2. ² See EIOPA’s “Methodology …”, page 5: “Costs and performance should be always considered jointly, regardless of the tool used, as the focus of this approach is on ensuring value for money […].“

3. ³ The term “policyholder” is furthermore used synonymously with the term “customer” within the meaning of the IDD.

4. ⁴ See EIOPA’s “Methodology …”, page 5: “Moreover additional extrinsic factors may matter when assessing product value for money.”

5. ⁵ In addition, any effects of the risk component on the payment amount of the savings component, e.g. through bonuses on the risk premiums, are not to be taken into account. These are to be incorporated into the determination of the value for money provided by the biometric protection.

6. ⁶ See EIOPA’s “Methodology …”, page 5: “Such a factor could be inflation. Inflation is not part of the costs and performance that at least to a certain degree can be influenced by the manufacturers; nevertheless inflation is a factor of importance as it affects the ‘real’ value of the product’s return and therefore it needs to be taken into account.”

7. ⁷ See Measuring inflation – the Harmonised Index of Consumer Prices (HICP) (europa.eu). Based on actual inflation, it may be possible to take differing inflation expectations appropriately into account. See also EIOPA’s “Methodology …”, page 14.

8. ⁸ See also EIOPA’s “Methodology …”, page 5: “Costs and performance should be always considered jointly, regardless of the tool used, as the focus of this approach is on ensuring value for money and some higher costs may not be undue because of the services offered and/or because of the possibility of seeking higher performance.”

9. ⁹ See also Article 6(1) of Delegated Regulation 2017/2358.

10. ¹⁰ See EIOPA’s Supervisory Statement, point 3.14: “Such product testing, to be performed by manufacturers, should assess whether the unit linked product over its lifetime meets the identified needs, objectives and characteristics of the target market. This includes delivering value for money, whereby value should be assessed taking into account the point in the lifecycle where target market could be reasonably expected to surrender the policy depending on its characteristics.”

11. ¹¹ See EIOPA’s Supervisory Statement, point 3.5: “In particular, due costs are those costs which manufacturers can clearly link to services rendered or expenses made and which are proportional to the efforts and expenses incurred by the (co-)manufacturer or distributors. To this end, NCAs should monitor that the pricing process adopted by the manufacturer allows a clear identification and quantification of all costs charged to customers.“

12. ¹² See section 48a (2) in conjunction with subsection 3 of the VAG.

13. ¹³ See EIOPA’s “Opinion on monetary incentives and remuneration between providers of asset management services and insurance undertakings”, in particular point 5.2.

14. ¹⁴ On the incorporation of reimbursements into the calculation of minimum allocation, see also BaFin’s interpretative decision on minimum allocation in unit-linked life insurance of 22 December 2009 and Point 28 of BaFin’s interpretative decision on investment decisions in the interests of policyholders and beneficiaries and management of conflicts of interest in the context of the prudent person principle (section 124 (1) sentence 2 nos. 3 and 4 of the VAG) of 13 July 2020.

15. ¹⁵ See EIOPA’s Supervisory Statement, point 3.12.