The Bank of Russia suggests improving investment life insurance regulation

The Bank of Russia has elaborated a concept to improve investment life insurance (ILI) regulation. The changes will help curb the misseling of this product.

Investment life insurance is one the fastest growing segments of the insurance market. During the first six months of 2018, ILI premiums surged by 65% vs. 2017 to 138 billion rubles. The majority of ILI agreements (over 90%) are concluded with the participation of credit institutions acting as agents of insurers. Investment life insurance is a product that allows receiving investment income, which depends on the market situation, in addition to the risk component. The Bank of Russia, however, is concerned about the methods used to sell this product. The observed growth of the ILI segment is accompanied by a substantial increase in the number of consumers’ complaints. In 2018, their proportion in the aggregate number of appeals received by the Bank of Russia grew more than twofold. The monitoring conducted by the regulator demonstrates that agents fail to provide consumers with sufficient information about the specifics and risks of investment life insurance.

When concluding the agreement, the client is often told that purchasing ILI will bring significantly more profit than a simple bank deposit. This, however, is not true: according to Bank of Russia data, the average yield was 3.3% p.a. on completed 3-year and 2.4% p.a. on 5-year agreements.

Also, many clients were sure that they would be able to return the full amount of premiums paid to the insurer in case of early termination of the agreement and that the ILI funds were insured by the Deposit Insurance Agency.

The regulator believes that this ILI selling model forms incorrect consumer expectations. As a consequence, customers may become frustrated with this product leading to this market segment contraction. To avoid this, the Bank of Russia suggests that the regulation of the ILI market be tightened.

In particular, the Bank of Russia has prepared a regulatory act that requires full disclosure of ILI contract specifics and risks. Moreover, the Bank of Russia intends to demand that insurers monitor their agents' compliance with these requirements. For this purpose, it is planning to issue a regulation on tightening the control over the agents’ activity and increasing their qualification along with recommendations on selling this product and customer communications. The Bank of Russia will monitor the process of preparing and concluding ILI transactions to check the compliance with the above requirements. Furthermore, the regulator is considering the possibility to legally prohibit selling ILI products by third parties that are insurers’ agents.

The Bank of Russia also plans to implement a number of mid- and long-term systemic measures. They include, in particular, conducting a retail investor qualification reform, adjusting the regulation of complex financial instruments and introducing higher penalties on insurance companies for requirement violation.

These measures are aimed to raise the responsibility of insurance companies and their agents and increase the awareness of consumers purchasing ILI products.