Insurance-based Investment Products Research Articles

Fair-washing in the market for structured retail products? Voluntary self-regulation versus government regulation

Regulation of the market for structured retail investment products in Germany switched from voluntary self-regulation to government regulation. In 2014, issuers of structured retail products subscribed to the “Fairness Code” as an instrument of self-regulation. A key measure of the Fairness Code was the mandatory disclosure of an “Issuer Estimated Value” (IEV) to provide information about hidden investment costs for the retail customer. In 2018, this measure became obsolete, since the new EU regulation on Packaged Retail and Insurance-Based Investment Products (PRIIPs) prescribed a direct disclosure of investment costs. We compare these instruments of voluntary self-regulation and government regulation and analyze issuers’ disclosure policies under both regimes. The new regulation effectively forces issuers to report actual costs correctly. In contrast, the self-regulated IEV was of limited use for retail investors, because (i) its definition was ambiguous, and (ii) issuers exploited this opaqueness by reporting disproportionately high IEVs. Hence, under voluntary self-regulation issuers professed transparency and fairness, but continued to hide costs in their prices.

Probability Performance Scenarios Are Better: An Efficient Disclosure of Higher Moments Information From No-Arbitrage Market Implied Distributions

The present work proposes a methodology for the representation of performance scenario in Packaged Retail and Insurance-based Investment Products (PRIIPS), by the means of a no-arbitrage probability table easy to understand for the retail investor. A statistical reconstruction via the method of moments allows to capture the main properties of the PRIIP market implied distribution by identifying the minimum number of descriptive moments needed. A reasonable quantile partition that is effective for representing to the retail investor the complex distributions of structured products characterized by non-linear pay-offs is then proposed.

Are Issuer Margins Fairly Stated? Evidence from the Issuer Estimated Value for Retail Structured Products

From 2014 to 2018, issuers of retail structured products in Germany established and calculated the Issuer Estimated Value (IEV), a fair value designed to offer more transparency for retail investors. By reporting the IEV in the product information sheet, banks implicitly make a statement on their expected gross margin and, as one of the first papers, we provide an empirical study of the fairness of these disclosed figures. On a sample of discount and capped bonus certificates, we find that reported issuer margins can be verified using standard option pricing models and we illustrate that hedging costs take on an important role for structured product valuation. Consequently, the answer to the raised question in the title seems to be an (initial) ‘yes’ for our chosen product sample. Even though in 2018 the IEV calculations have been replaced by similar margin and cost statements due to the newly introduced Packaged Retail and Insurance-based Investment Products Regulation, this finding might still be a good guide for future research.

Which is the Correct Discount Rate? Arithmetic Versus Geometric Mean

The paper revisits the two major concepts for average historical returns, i. e., the arithmetic mean and the geometric mean, in order to clarify which approach must be used for which application. Conducting a rigorous derivation with a geometric Brownian motion, we can explain that the appropriate discount rate refers to the mean discrete return and, therefore, to the arithmetic mean rather than the often wrongly applied geometric mean. Likewise, the prominent CAPM relationship between the expected asset return and the expected market return is only valid for the arithmetic mean rather than the geometric mean. Using historical data for the German stock index, we illustrate that an inconsistent application can cause severe deviations from the meaningful ex-ante expected performance of an asset, the true discount rate, the true CAPM risk-adjusted return, and the intended performance scenarios of packaged retail and insurance-based investment products (PRIIPs) within the key information documents (KIDs).

PRIIP-KID: appearances are deceiving or why to expect the unexpected in a generic KID for multiple option products

Providers of so-called packaged-retail and insurance-based investment products (PRIIPs) in the European Union have to draw up a standardized key information document (KID) since 1st of January 2018. In addition to some standard information on the product and its provider, this key information document discloses the product’s riskiness by means of a summary risk indicator, its performance potential by means of performance scenarios and its costs by means of a detailed disclosure of charges including a summary cost indicator. For products with multiple investment options, the regulation requires product providers to disclose a range for the summary cost indicator for the available investment options in the product. For feasibility, in practice often only synthetic investment options instead of the whole available investment portfolio are considered to derive an estimate for the required range. Based on a standard approach used in the German and Austrian insurance market, we analyze those investment options which actually yield the lower and especially upper bound of the required range. By considering different unit-linked products with investment guarantees our results show that those synthetic investment options typically used in practice may provide a false estimation of the range and, in particular, significantly underestimate the real upper bound. Further, we provide guidance how the “worst-case” combination of the investment option’s volatility and its charges can be found such that the summary cost indicator is maximized for the different products considered here.

FINSA/FINIA—new regulation for foreign trustees in Switzerland

Abstract In the light of the international trends to regulate and supervise financial services and their providers (Markets in Financial Instruments Directive (MiFID) II, Prospectus Directive, Packaged Retail and Insurance-based Investment Products (PRIIPs)), the Financial Services Act (FINSA) and the Financial Institutions Act (FINIA) entered into force in Switzerland on 1 January 2020. The new Swiss regulation introduces prudential supervision for asset managers and trustees who have only been subject to Anti-Money Laundering (AML) regulation in Switzerland until now. Foreign trustees will also be affected by the FINSA/FINIA if they engage in activities in Switzerland. This article provides a high-level outline of the new regulatory playing field for foreign trustees in Switzerland.

Market risk assessment

PurposeThis study aims to examine whether the methodology proposed by the European Supervisory Authorities (ESAs) within Delegated Regulation (European Union) 2017/653 for the calculation of market risk of certain packaged retail and insurance-based investment products (PRIIPs) is the most appropriate.Design/methodology/approachRisk models are put into effect to validate the appropriateness of the methodology announced by ESAs. ESAs have announced that the unit-linked (UL) products, labeled as Category II PRIIPs, will be subject to the Cornish–Fisher value-at-risk (CFVaR) methodology for their market risk assessment. We test CFVaR at 97.5% confidence level on 70 UL products, and we test Cornish–Fisher expected shortfall (CFES) at the same confidence level, which acts as a counter methodology for CFVaR.FindingsThe paper provides empirical insights about the Cornish-Fisher (CF) expansion being a method that incorporates the possibility of financial instability. When CFVaR by ESAs is calculated, it is shown that CF is in general a more robust risk model than the simpler historical ones. However, when CFES is applied, important points are derived. First, only in half of the occasions the CF expansion can be considered as a reliable method. Second, the CFES is a more coherent risk measure than CFVaR. We conclude that the CF expansion is unable to accurately estimate the market risk of UL products when excessive fat-tailed or non-symmetrical distributions are present. Hence, we suggest that a different methodology could also be considered by the regulatory bodies which will capture the excessive values of products in financial distress.Originality/valueLiterature, both theoretical and applied, regarding PRIIPs, is not extended. Although business and regulators research has begun to intensify in the last two years, to our knowledge this is one of the first studies that uses the CFES methodology for market risk assessment of Category II PRIIPs. In addition, we use a unique data set from a country in the headwinds of the recent financial crisis. This research contributes both to the academic and business community by enriching the existing literature and aiding risk managers in assessing the market risk of certain Category II PRIIPs. Considering the recent efforts of the regulatory authorities at the beginning of 2020 to implement certain amendments to the PRIIPs, we indicate relative risks related with the calculation of the market risk of the aforementioned products. Our findings could contribute to regulatory authorities’ persistent efforts in wrapping up this ongoing project.

Osvrt na dva pitanja u vezi sa investicionim uslugama osiguranja

This article deals with insurance-based investment products, more precisely, with two key (legal) issues that may be raised in connection with this type of insurance. The first issue concerns the legal nature of the insurance lines that has been addressed in the practice of the European Court of Justice, whereas the second issue concerns regulatory requirements for the distribution of such products, depending on their legal form and qualification. The second issue is all the more important because the difference in regulatory requirements was the impetus and one of the main reasons for a comprehensive reform of the rules of market conduct in the field of insurance and the adoption of Directive 2016/97 (EU) on insurance distribution.

PRIIP-KID: providing retail investors with inappropriate product information?

Providers of so-called packaged-retail and insurance-based investment products (“PRIIPs”) have to draw up a standardized key-information document (“KID”) since 1st of January 2018 when they offer such products in the European Union. In addition to some standard information on the product and its provider, this key information document discloses the product’s riskiness by means of a summary risk indicator, its performance potential by means of so-called performance scenarios and its included costs by means of a summary cost indicator. The European Commission has issued regulatory technical standards stating how the risk indicator, the performance scenarios and the cost indicator shall be calculated. This paper analyzes these “calculation recipes”, focusing on the risk indicator and the performance scenarios. Since, the European Commission issues these formulae without providing the assumed methodologies, our analyses on the one side shed light on the (presumed) underlying ideas and on the other side detect methodical and technical errors. We show that the risk indicator’s formula can be derived in a Black–Scholes setting considering a single premium investment. Since insurance companies are generally required to produce key information documents for regular premium payments as well, we show that an application of this formula to regular premium payments overestimates the products’ “true” risk. Therefore, we propose amended formulae for the risk indicator for regular premium payments which perform much better than the current specification. Further, we identify methodical and technical errors prevailing in the requirement regarding the (presumed) performance scenarios’ calculation. Taking into account the revision of the PRIIPs-directive at the end of 2018, this paper provides a good starting point for fixing current methodical and technical issues when risk indicator and performance scenarios are assessed.

Do Callable Corporate Bonds Constitute PRIPs? The Application of Regulation (EU) No 1286/2014 of the European Parliament and of the Council 'on Key Information Documents for Packaged Retail and Insurance-based Investment Products (PRIIPs)' in Relation to Callable Corporate Bonds

This article addresses the issue concerning the application of Regulation (EU) 1286/2014 of the European Parliament and of the Council of 26 November 2014 “on key information documents for packaged retail and insurance based investment products (PRIIPs)” in relation to callable corporate bonds. On the basis of a literal interpretation of the relevant articles and recitals of that Regulation and taking also into account all other related official documents published before its adoption, the author comes to the conclusion that callable corporate bonds do not constitute packaged retail investment products (PRIPs) and hence the Regulation does not apply to them. The article is structured in five Sections: (a) Section 1 presents the objective of the PRIIPs Regulation and its relationship to other legal acts constituting sources of EU financial law. (b) The definition of the term PRIIPs and the scope of application of the PRIIPs Regulation are discussed in Section 2. (c) Section 3 focuses on the three (3) conditions for a product to be considered as a packaged retail investment product (PRIP) under the Regulation. (d) The specific issue relating to the treatment of ‘complex products’ under the new Markets in Financial Instruments Directive (MiFID II) and the PRIIPs Regulation is the subject matter of Section 4. (e) Finally, Section 5 contains the author’s conclusions.

How transparency affects investment-linked insurance products

Investment-linked insurance products exhibit a series of advantages versus direct investments, such as accumulation of retirement funds, tax benefits, and waiver of premiums in the case of disability. However, they are perceived as more complex and difficult compared to plain investments. Consequently, there is a need for disclosures, so that retail investors - insured can make well-informed decisions. Such disclosures have so far been uncoordinated. The EU has identified the need for uniform transparency rules in the packaged retail and insurance-based investment products market. The EU made an effort to enhance protection for investors - insured via a regulation effective in 2017. Such an effort is expected to restore retail investor confidence lost in the aftermath of the crisis. In this paper we attempt to quantify the effect of the existing transparency rules in the various member states to have an indication of what to expect as soon as the new uniform rules are implemented. We use customer satisfaction and trust so as to measure the effect of transparency. We find that increased transparency positively affects both measures.

Die Haftung für verpackte Anlageprodukte und Versicherungsanlageprodukte nach der PRIIP-Verordnung

A new EU-Regulation provides standardized investor information for packaged retail and insurance-based investment products. Manufacturers as well as distributors of such products face severe penalties. Especial a provision on the manufacturer’s civil liability, which is directly applicable in the member states, is of particular interest, as this provision leaves many questions unanswered.

The Regulation of PRIIPs: Great Ambitions, Insurmountable Challenges?

The Regulation on key information documents for packaged retail and insurance-based investment products (‘PRIIPs Regulation’) purports to deal with two important concerns in the field of investor protection: (i) investors do not read, understand, or digest extensive and/or technical information; and (ii) they hardly compare the products and services of different financial institutions. The first concern relates to the long-established problems of information overload and rational ignorance. The PRIIPs Regulation tackles those problems by introducing a short information document, which uses clear, succinct and understandable language and visual indicators supporting the content of the document. The second concern relates to the fact that information documents are often hard to compare in view of their different formats. Standardization is an obvious answer to this problem. The use of standardization, however, depends on the question whether its scope of application is sufficiently wide to cover all comparable products. The PRIIPs Regulation is innovative in this respect, being the first piece of ‘horizontal’ or ‘cross-sectoral’ legislation in the history of EU financial regulation—covering banking, investment, and insurance products, instead of limiting its scope of application to one of these sectors. Although the PRIIPs Regulation deals with very concrete investor protection concerns and should therefore be supported as a significant improvement, it also raises a number of important concerns, challenges, and criticisms. This contribution situates the PRIIPs Regulation in its law and economics and behavioural finance context and offers a critical analysis of its benefits, drawbacks, and—seemingly insurmountable—challenges.

The Regulation of PRIIPs: Great Ambitions, Insurmountable Challenges?

The Regulation on key information documents for packaged retail and insurance-based investment products ("PRIIPs Regulation") purports to deal with two important concerns in the field of investor protection: (i) investors do not read, understand or digest extensive and/or technical information; and(ii) they hardly compare the products and services of different financial institutions.The first concern relates to the long established problems of information overload and rational ignorance. The PRIIPs Regulation tackles this problem by introducing a short information document, which uses easy to understand language and visual indicators supporting the content of the document.The second concern relates to the fact that information documents are often hard to compare in view of their different formats. Standardization of the information document is one obvious answer to this problem. It is however only useful, in as far as the scope of the Regulation is sufficiently wide and covers all comparable products. The PRIIPs Regulation is innovative in this respect, being the first piece of "horizontal" or "cross-sectoral" legislation in the history of EU financial regulation, covering banking, investment and insurance products, instead of limiting its scope of application to one of these sectors.Although the PRIIPs Regulation deals with very concrete investor protection concerns and should therefore be supported as an important improvement, it also raises important concerns, challenges and criticisms. This contribution situates the PRIIPs Regulation in its law and economics and behavioral finance context and offers a critical analysis of its benefits, drawbacks and – seemingly insurmountable – challenges.