The Malta Financial Services Authority (MFSA) has published two Dear CEO Letters outlining the findings of its thematic reviews on the Value for Money (VFM) of insurance products. The reviews focused on unit-linked life insurance products and non-life insurance products distributed on a cross-border basis.
The reviews form part of the MFSA's ongoing supervisory focus on consumer protection and align with the European Insurance and Occupational Pensions Authority's (EIOPA) supervisory priorities.
While the reviews covered different insurance products and distribution models, they highlighted common areas for improvement, particularly in Product Oversight and Governance (POG), cost transparency, product monitoring and the assessment of customer outcomes.
For insurance undertakings operating in Malta, the findings reinforce the importance of demonstrating that products continue to deliver appropriate value to customers throughout their lifecycle, rather than assessing compliance only at the product approval stage.
Value for money goes beyond product pricing
A central message emerging from both reviews is that value for money cannot be assessed solely by reference to the premium or price charged to customers.Insurance undertakings should consider whether the costs and charges associated with a product are proportionate to the benefits provided, taking into account the needs, characteristics and objectives of the identified target market.
For unit-linked life insurance products, this includes assessing investment performance, underlying fund charges, insurance benefits and the impact of costs on policyholder returns.
For non-life insurance products, the assessment should consider the scope of coverage, exclusions, claims experience, distribution costs and whether customers receive the protection they reasonably expect.
The findings highlight the importance of having a structured and documented methodology for assessing value for money, supported by relevant quantitative and qualitative information.
Strengthening Product Oversight and Governance
The MFSA identified weaknesses in how certain undertakings implemented their POG frameworks.In the cross-border review, some products had not undergone the required product approval processes, while ongoing product reviews were not always conducted or sufficiently documented.
Similarly, the unit-linked insurance review identified opportunities to strengthen target market assessments, particularly where product complexity and investment risks were not adequately reflected in the identified customer profiles.
These findings reinforce the need for POG arrangements to operate as an ongoing governance process rather than a one-off regulatory exercise.
Insurance undertakings should ensure that product approval, testing and review processes are appropriately documented and that assessments consider whether products remain aligned with their intended target markets.
Understanding the impact of costs and charges
Both reviews highlighted the importance of understanding how product costs affect customer outcomes.For unit-linked products, the MFSA identified complex charging structures and instances where disclosures did not sufficiently demonstrate the cumulative impact of costs on investment returns.
The review also highlighted the importance of assessing policyholder outcomes, including break-even periods, surrender values and the performance of underlying investment funds.
For cross-border non-life insurance products, particular attention was given to distribution costs and commission structures.
The MFSA identified instances where commission levels were relatively high and where undertakings had not adequately documented the rationale for the charges imposed.
These findings suggest that insurers should be able to demonstrate not only how products are priced, but also why their costs are justified in relation to the benefits delivered to customers.
Monitoring customer outcomes throughout the product lifecycle
Another important theme concerns the effectiveness of ongoing product monitoring.In the unit-linked insurance review, the MFSA identified instances where the performance of underlying investments was not subject to sufficiently structured monitoring. Certain undertakings also lacked comprehensive information on break-even points and policyholder returns.
For cross-border non-life insurance products, the review highlighted the importance of monitoring claims experience, claims rejection rates, settlement timeframes and customer complaints.
These indicators can provide valuable insights into whether products are meeting customer expectations and whether aspects of their design, distribution or administration require improvement.
Importantly, collecting such information is only one part of the process. Insurance undertakings should also demonstrate how the results influence product reviews and lead to appropriate corrective actions where necessary.
Effective oversight of cross-border distribution arrangements
The review of cross-border insurance products also highlighted the importance of effective oversight of distribution arrangements involving Managing General Agents (MGAs), intermediaries and other third-party service providers.Although certain activities may be delegated, insurance undertakings remain responsible for ensuring that their products meet applicable regulatory requirements and continue to deliver value to customers.
The MFSA identified instances where undertakings relied heavily on intermediaries for product monitoring and distribution activities without demonstrating sufficient oversight.
This reinforces the importance of clearly defined responsibilities, appropriate management information and effective monitoring arrangements across distribution channels.
What should insurance undertakings consider next?
The two Dear CEO Letters provide an opportunity for insurance undertakings to benchmark their existing arrangements against the MFSA's findings and supervisory expectations.Key areas for consideration include:
- The adequacy and effectiveness of POG frameworks and product review processes.
- The approach taken to evaluate value for money and demonstrate that product costs are justified.
- The alignment of products with their identified target markets.
- The effectiveness of monitoring investment performance, claims experience and customer outcomes.
- The adequacy of governance and oversight over distribution arrangements.
- The completeness of documentation supporting product assessments and management decisions.
By strengthening these arrangements, insurance undertakings can better demonstrate compliance with regulatory expectations while supporting fair customer outcomes and greater consumer confidence.
How BDO Malta Can Help
BDO Malta can support insurance and reinsurance undertakings in assessing and strengthening their Product Oversight and Governance frameworks, including compliance with applicable Insurance Distribution Directive (IDD) requirements and related MFSA supervisory expectations.To discuss how your organisation can strengthen its product governance and value-for-money assessment arrangements, get in touch with our team.