Value for money of insurance products
A supervisory and consumer protection requirement that an insurance product must offer its target customers benefits proportionate to its costs; the European authority applies it notably to unit-linked contracts.
Product governance, required by the insurance distribution directive, obliges the insurer to define a product's target market and to check that it meets its needs. Value for money pushes the logic further: a product that meets a need may still be too expensive for what it delivers. The European insurance authority published in 2021 a supervisory statement on assessing the value for money of unit-linked and hybrid contracts, followed by a methodology. Insurers must test their products under scenarios, compare expected returns net of fees and costs against benchmarks, justify the layering of fees, entry, management, switching, underlying fund fees, and check that charged guarantees bring real benefit. In non-life, the same concern targets products with very low loss ratios, whose premiums mainly fund distribution, such as some affinity insurance. In the United Kingdom, the conduct authority made fair value a general obligation from 2023. The concept is hard to quantify, since there is no universal fair price, but it shifts the burden of proof: it is for the insurer to show its product is worth what it costs.
Textbook case: a supervisor finds that a phone insurance sold in store has a 12 percent loss ratio, the distributor's commission absorbing more than half the premium. It asks the insurer to demonstrate the product's value for money; the insurer cuts the commission and broadens the cover.
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