Circular no. 9/2025: Self-assessment by manufacturers of insurance products of obligations under Regulation (EU) 2017/2358 on product oversight and governance requirements

27 February 2024
Ref.: 2311007

Circular no.: 9/2025
To insurance companies and insurance brokers

Subject: Self-assessment by manufacturers of insurance products of obligations under Regulation (EU) 2017/2358 on product oversight and governance requirements

On 22 June 2021, Act No. 30/2004 on insurance contracts was amended by Act No. 82/2021, and Commission Delegated Regulation (EU) 2017/2358 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council as regards product oversight and governance requirements (the "POG Regulation") thereby acquired legal effect, cf. point 1 of the first paragraph of Article 3 a. of Act No. 30/2004.

The Regulation sets out requirements for product oversight and governance for the benefit of consumer protection, and the rules apply uniformly to all newly developed insurance products and to significantly modified older insurance products. Thus, the Regulation aims both to ensure that manufacturers of insurance products offer consumers only products they need and to reduce the likelihood of consumers being offered products for which they have little or no need.

The scope of the Regulation covers insurance companies and insurance brokers that manufacture insurance products offered to customers for sale, i.e. as manufacturers, and insurance distributors that advise consumers on the purchase of products they do not manufacture themselves.

The content of the Regulation is twofold, i.e. Chapter II of the Regulation contains requirements for manufacturers regarding product governance, while Chapter III of the Regulation contains requirements on product governance for distributors of insurance products. The self-assessment this time covered only manufacturers but not distributors of insurance products.

The Regulation imposes various obligations on manufacturers of insurance products to maintain, operate and review a product approval process, define a target market, test their insurance products, monitor and review insurance products on a regular basis and carefully select distribution channels. All of this shall be done with a "customer-centric" approach.

In order to examine how manufacturers assess their own compliance with the Regulation, the Financial Supervisory Authority requested that they complete a detailed self-assessment, with a total of 58 questions in six parts. Four insurance companies that hold operating licences from the Financial Supervisory Authority and are considered manufacturers on the Icelandic insurance market submitted responses.

This circular contains a summary of the main findings of the self-assessment and shows that parties on the Icelandic insurance market appear to comply with the requirements of the Regulation for the most part. The summary describes good practice that the Financial Supervisory Authority considers desirable for the parties concerned to take into account when it comes to compliance with the POG Regulation.

Summary

The requirements set out in the POG Regulation aim to ensure that consumer interests are taken into account throughout the life cycle of insurance products, in particular in the design and manufacture of the products along with marketing, but also in the monitoring and review of the products after distribution begins.1

In order to ensure that consumer interests are paramount, manufacturers and distributors of insurance products need to approach their product approval process, distribution and monitoring and review of their products with consumer protection in mind. If this is done, it is likely to result in a good outcome for consumers, i.e. that insurance products are consistent with the needs, objectives and characteristics of a sufficiently defined target market. In other words, insurance products should be designed with the needs of consumers within a specific target market of the product in mind, so that consumers outside the target market are not sold unnecessary products.2

In the Financial Supervisory Authority's self-assessment, manufacturers of insurance products were asked to assess their own performance when it comes to compliance with the Regulation, in addition to answering other incidental questions. There is general consensus that newly developed products and also significantly modified products go through the product approval process, which is important in the view of the Financial Supervisory Authority. Similarly, there is general consensus that a target market is defined for each individual insurance product. However, there is no consensus on whether the companies monitor whether their products are being sold outside the defined target market. Two companies state that they to some extent assess the value of insurance for individual policyholders taking into account the premium paid, which the Financial Supervisory Authority considers positive. At the same time, there was some difference in how regularly the companies review their products.

The aforementioned factors play a major role in consumer protection, and it may be considered that if these basic factors are in order, the likelihood increases that consumers are sold products they genuinely need, while it decreases for products they do not need.

[1] Final Report on Public Consultation and Preparatory Guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors, p. 3.

[2] Final Report on Public Consultation and Preparatory Guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors, p. 3 and EIOPA's approach to the supervision of product oversight and governance, p. 4-5.

Part I: Product approval process

Article 4 of the Regulation states that manufacturers shall maintain, operate and review a product approval process for newly developed insurance products and for significant modifications to older insurance products. A written product approval process shall include measures and procedures for the design, monitoring, review and distribution of insurance products as well as remedial actions for insurance products that are detrimental to customers. Furthermore, there shall be a unit within the company that is responsible for the manufacture of insurance products and bears ultimate responsibility for establishing, implementing and reviewing the product approval process, as well as continuously verifying internal compliance with the process.

Generally speaking, the companies appear to have set out their product approval processes in writing and that a specified unit shall approve it. It varies between parties which unit has the role of approving the process, but the executive committee and business development were mentioned in that context. Generally, central units appear to be involved in the product approval process, but it varies between companies what role they play in the process. Examples that companies mentioned include a terms council, actuary, legal department, risk management and data protection officer.

The Financial Supervisory Authority views the product approval process as an important link in the governance and risk management of companies that are considered manufacturers of insurance products. It must be considered necessary that the unit responsible for product manufacturing has appropriate knowledge of the POG regulatory framework to ensure consumer protection.

The companies report that the products they have developed after the regulation entered into force have generally gone through the product approval process, as well as significantly modified products. However, there seems to be a lack of established criteria for assessing when an insurance product is considered significantly modified. The criteria that the companies mention are used for such an assessment are e.g. all changes other than simple wording changes and corrections to terms if there is a narrowing or widening of the coverage area. Also if there are changes that can have a significant impact on expected premiums or claims of the company, and finally if the change calls for a complete review of terms along with changed pricing and possibly a changed target group.

The Financial Supervisory Authority points out that although it is not possible to set out a precise and universal definition of when a product is considered significantly modified, established and specific criteria can help manufacturers assess whether a product needs to go through the product approval process again or not. Without criteria, there is a possibility that significant changes to a product will not be noticed, which can have adverse effects on customers and their protection. It is possible to look at certain factors whether there is a change in important characteristics of a product, e.g. a change in insurance coverage, a change in costs and fees, a change in target group or a change in customers' right to compensation. In the opinion of the Financial Supervisory Authority, it is therefore always necessary to look with the eyes of the general customer at whether there is a significant change or not.3

[3] EIOPA Q&A, question 2266 – Clarification of „significant adaption of an existing product“.

Finally, it can be mentioned that there is consensus among the companies regarding document retention, i.e. most companies report that documents are stored indefinitely, which is positive in the opinion of the Financial Supervisory Authority.

Part II: Target group

In Article 5 of the regulation, it is stated that the target group shall be defined in the product approval process and the group of customers that matches it for each insurance product. It is also stated that manufacturers shall only design and market insurance products that are compatible with the needs, characteristics, and objectives of customers belonging to the target group.

Generally, the companies define the target group for each insurance product and this appears in the product approval process. Furthermore, the companies have generally set out certain criteria in the product approval process for defining the target group of a product. The criteria that the companies use for defining the target group differ among them, but some companies do not have specific criteria but assess target groups according to the circumstances each time. Other companies mention, among other things, that they rely on general criteria such as age, income, family situation, residence and assets. Still others base it on how complex a product is and whether it is mandatory. It can also be mentioned that one company has defined a negative target group for a product.

Target group analysis is, in the opinion of the Financial Supervisory Authority, an important factor in connecting the insurance products that are compatible with the characteristics, needs and objectives of the customers for whom they are designed, and also to prevent customers from being sold products they do not need.

There is no consensus among the companies that sustainability factors are taken into account when defining the target group of a product, but here the Financial Supervisory Authority points out that according to the second paragraph of Article 1 of the amending regulation (EU) no. 2021/1257, which amended the POG regulation, the target group shall be defined taking into account the sustainability factors of the insurance product as defined in point 24 of Article 2 of regulation (EU) no. 2019/2088, i.e. environmental, social and employee-related matters, respect for human rights and matters relating to the fight against corruption and bribery.

It also varies among companies whether they assess the complexity of a product when defining the target group of a product, as the companies' products have different levels of complexity.

The Financial Supervisory Authority points out that if predetermined criteria are used to determine the complexity of a product, it can contribute to manufacturers defining the target group with greater precision and depth. Too general or broad a definition of the target group, especially when it concerns more complex insurance products such as insurance-based investment products, can lead to customers who do not need the product, and/or do not understand the product, being sold the product. Thus, in certain cases, it may be necessary for manufacturers to define a negative target group for a product.4

Part III: Product testing

[4] EIOPA‘s approach to the supervision of product oversight and governance, p. 10.

In Article 6 of the regulation, it is stated that manufacturers shall test their insurance products appropriately, including with scenario analyses where applicable, before a product is marketed or significantly modified or if the target group has changed significantly. At the same time, it shall be assessed whether the insurance product meets the defined needs, objectives and characteristics of the target group over its lifetime. If an insurance product does not do so, it shall not be placed on the market.

The majority of companies report that according to their product approval process, it is mandatory to test products before they go on the market. This generally has the effect that the product is more likely to meet the defined needs, objectives and characteristics of the target group over the lifetime of the product. In this context, the Financial Supervisory Authority points out that if the target market of a product changes significantly, it will lead to producers needing to test the product again.

The Financial Supervisory Authority points out that in product testing, an assessment of the product's functionality, an assessment of cost and scope, an assessment of the product's performance, an assessment of the product's risk and benefit profile, and an assessment of the information about the product provided to customers should specifically be taken into account. Thus, product testing can include testing of, among other things, wording, how easily understandable the terms are, the implementation of the claims process, the cost and pricing of the product. When assessing whether a product is compatible with the target market, producers shall also consider what information is available to customers within the target market and their financial literacy. It should be noted, however, that testing of a product's performance does not entail a restriction on producers' freedom to determine premiums or pricing for their products.5

There is some discrepancy as to whether companies test their products using qualitative and quantitative methods, but in such a way it is more likely that products meet the requirements and needs of consumers. Similarly, it is important that companies make changes to products if something in the testing process gives reason for it.

Two companies say they assess the value of insurance products to some extent for individual policyholders taking into account the premium paid when testing a product. If this is done, there is less likelihood that consumers are offered products they do not need.

Part IV: Monitoring and review of products

In Article 7 of the regulation, it is stated that producers shall continuously monitor and regularly review insurance products they have marketed in order to identify events that could have a significant impact on the most important features, risk protection, or guarantees of these products. They shall assess whether the insurance products are in accordance with the needs, characteristics and objectives of the defined target market and whether the products in question are sold to the target market or outside it. Furthermore, producers shall take appropriate measures and prevent further harm when they identify during the lifetime of an insurance product circumstances that can have a negative impact on a customer who buys the product.

Generally, companies consider that their product approval process stipulates that products shall be monitored and reviewed at regular intervals. However, it is stated that it varies how regularly they carry out reviews of their products, or all the way from a three-month

[5] EIOPA Q&A, question 1619 – Examples of appropriate product testing.

interval up to a three-year interval. The factors mentioned that may govern how often regular review takes place are the legal environment, market conditions, product performance, claims ratio, product quality and competitiveness of the product. Generally, it can be said that the more regular the review, the greater the likelihood that an insurance product complies with the needs, characteristics and objectives of the target market over its lifetime.

The Financial Supervisory Authority considers that monitoring and review of products should be aligned with the methodology and the processes used in product testing. Thus, it is possible to check whether the product still meets the needs, characteristics and objectives of the target market by comparing, on the one hand, expectations for the product before it went on the market and, on the other hand, experience of the product during the time it has been on the market.

There is no consensus among the companies whether they monitor whether products are sold outside the defined target market of the product. It can be important to monitor such a tendency, as it can provide an indication that the target market was not sufficiently defined at the outset or been reason for a change in the marketing of the product.

In this part of the self-assessment, the companies were also asked a few questions about what impact the Covid-19 pandemic had had on the company's products. Some of the companies mentioned examples that claims frequency had decreased in travel insurance, as foreign travel decreased significantly during the period. Then the Covid-19 virus has had an impact on medical costs domestically and abroad. Some companies also made a change to their terms so that medical costs due to the Covid-19 virus would not be compensated.

Part V: Distribution channels

In Article 8 of the regulation, it is stated that producers shall carefully select distribution channels that are appropriate for the target market and take into account the special characteristics of the relevant insurance products. Producers shall provide insurance distributors with all relevant information about the insurance products, the defined target market and the proposed distribution strategy, including information on the main features and characteristics of the products, risks and costs associated with them, including indirect costs and any circumstances that may cause a conflict of interest that is detrimental to the customer. Producers shall then take appropriate measures to monitor that insurance distributors comply with the objectives of the producer's product approval process.

It varies among companies whether it appears in their product management process how the distribution channel for different policyholders should be chosen. The same applies when asked whether it appears in the product management process how distribution channels are appropriate for the product's target market based on its main characteristics. In this context, it is good to keep in mind that it is important that the information that comes from producers to distributors is clear so that the distributor can understand the target market, including its needs, characteristics and objectives.

The Financial Supervisory Authority points out that in order to satisfy the said requirements, producers need to ensure that when developing distribution channels and when selecting distributors, the complexity of the product is taken into account, as well as the characteristics of the target market. Furthermore, it is necessary to check whether consideration has been given to possible risks that could arise or have already arisen in the product testing, including risks related to commission payments.6

It can also be mentioned here that all the companies say they use agents in the distribution of their insurance products. Two companies report that they use insurance brokers for the distribution of their insurance products, while two companies report that they do not use insurance brokers.

Yours faithfully,
CENTRAL BANK OF ICELAND

Linda Kolbrún Björgvinsdóttir managing director conduct supervision

Gunnar Magnús Bergs lawyer conduct supervision

[6] EIOPA‘s approach to the supervision of product oversight and governance, p. 14.