EIOPA Supervisory Statement on Exclusions in Insurance Products Related to Risks Arising from Systemic Events
The European Insurance and Occupational Pensions Authority published a supervisory statement on exclusions related to systemic events.

 

In late August 2022, the European Insurance and Occupational Pensions Authority (EIOPA) published a draft supervisory statement on exclusions related to systemic events and held a public consultation on the draft statement. In late September 2022, they published a feedback statement  summarising the main findings of the consultation and a resolution of comments paper outlining the individual comments they received and their responses to the comments. The supervisory statement is now in final form.

The supervisory statement notes that a systemic event is any severe event that causes broad-based disruption and significant adverse effect on public health, public safety, national security or the economy. This was quite a timely publication given the events of the Covid-19 pandemic and Russia's invasion of Ukraine. EIOPA notes that as the frequency of systemic events increases, there is a risk that insurance products covering them become unaffordable or unavailable. At the same time, products covering such events or products which are silent about the coverage may explicitly exclude them in the future. It notes that these developments have the potential to further widen existing protection gaps, which can have a detrimental effect on consumers and make economies and societies less resilient.

Key Issues

From their review, national competent authorities (NCAs) (such as the Central Bank of Ireland (CBI)) identified three primary issues:

  1. product complexity and unclear policy wording in insurance contracts have led to uncertainty around policy coverage. The statement cites business interruption policy during the Covid-19 pandemic as an example. It also referenced a study on travel insurance which shows that the pandemic negatively impacted how consumers perceive insurance;
  2. following systemic events, insurance manufacturers often review existing products to clarify wording on exclusions or to include new exclusions without a proper application of the product oversight and governance rules (the POG Rules), either as to whether the product review process has been followed or as to whether these changes constitute significant adaptations. Concerns were raised as to whether changes are disclosed to existing and new customers; and
  3. new products being advertised as offering protection for risks arising from systemic events. Potential customers often rely on advertising practices and marketing material which clearly states that the relevant event is covered without fully assessing what is and is not covered by the policy.

Recommendations

Having considered the market monitoring duties and POG Rules under Directive 2016/97 (Insurance Distribution Directive) (the "IDD Directive"), EIPOA is recommending that NCAs focus on assessing existing insurance products, and the extent to which these products have been impacted by the COVID-19 pandemic, the invasion of Ukraine and other systemic events. 

These assessments should determine whether exclusions are clear and provide contract clarity for potential and existing customers. Given this recommendation, it is advisable for insurers and intermediaries to undertake their own reviews and implement the necessary measures to address any ambiguities around exclusion clauses.

Communication with Customers

If risks arising from a systemic event become uninsurable or there is uncertainty as to whether these risks are covered, EIOPA recommends that insurers and intermediaries undertake the following steps:

  1. Ensure that customers benefit from the same level of protection under policies, regardless of the distribution channels.
  2. Communicate with customers in a clear manner and avoid misleading information regarding the actual cover provided.
  3. When drafting exclusions, avoid overly broad exclusions, vague terms or complex wording.
  4. When selling products, ensure they adequately and sufficiently assess the product's exclusions in light of customers’ demands and needs.
  5. Specify if the scope and type of coverage relates to direct and/or indirect losses. 

Developing New Insurance products

When developing new products, EIOPA notes that exclusion-related aspects should be properly dealt with from the product design phase onwards and not solely at the point of sale or claim stage. In particular, EIOPA recommends that Insurers:

  1. Take exclusions into account in the identification and definition of the target market for their product.
  2. Test the exclusions in light of the target market’s needs, objectives and characteristics.
  3. Test product disclosures to ensure that customers make well-informed decisions based on a clear understanding of the exclusions.
  4. Implement monitoring activities to identify issues that customers experience.

Uninsurable Risks

If risks are identified that may become uninsurable due to systemic events, insurers will need to review their policies. EIOPA provides a list of considerations for insurers when undertaking reviews: 

  1. Ensure a balance between the need to limit their losses and the need for the product to be aligned with the target market needs.
  2. Consider whether the distribution strategy is consistent with the changes to the insurance product.
  3. Assess whether the revised product disclosures provided to intermediaries is clear. Any changes to products must be communicated to intermediaries in a timely manner to ensure they understand the changes made to the products.

Conclusion

EIOPA's feedback statement notes that the supervisory statement does not intend to promote new coverages in policies or any retroactive protections to consumers. It is simply a tool to promote clarity in an area that is causing issues for customers and uncertainty for insurance undertakings and intermediaries. EIOPA recommends a more customer-centric approach towards the treatment of exclusions.

EIOPA continuously re-emphasises the importance of clear communication to existing and potential customers and insurance intermediaries. They will continue facilitating discussion and open dialogue on the topic. William Fry will monitor any future developments in the area of exclusions.

Please click here to access the supervisory statement. For further analysis on how the supervisory statement may impact you, please contact John Larkin, Eoin Caulfield, Ian Murray or your usual William Fry contact. 


Contributed by Rory Carbery

 

Key Contacts

John Larkin Consultant

Eoin Caulfield Partner

Ian Murray Partner

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