The Malta Financial Services Authority has launched its Consumer Education 2022 programme with an information campaign on Insurance-Based Investment Products (IBIPs).
As these financial instruments gain more popularity, the aim of the campaign is to raise awareness among the general public on their main features, what consumers should look out for before investing in IBIPs and the importance of the Key Information Document (KID).
An Insurance-Based Investment Product is a financial product whose value is exposed, wholly or partially, to market fluctuations. Since an IBIP has both an insurance and an investment component, this product offers a life cover, and at the same time, part of the premium is invested in the financial markets. This means that the amount of money that the investor receives at maturity, or upon surrendering the policy, is not predetermined and will depend on the prevailing market conditions.
IBIPs are classified into two types mainly, and it is essential for investors to understand the opportunities and risks associated with each before making the decision to purchase these products. The first type, which is called a With Profit Product, offers participation in an investment made via the insurance company in an investment fund. In With Profit Products, annual bonuses are calculated on the investment value and are also based on the performance of the fund. Through this campaign, consumers are being made aware that the initial amount invested as well as the bonuses may be guaranteed. Furthermore, consumers should always obtain all the product details prior to investing and ask the service provider for any clarifications or explanations required.
Unit-linked products are the second type of IBIPs, through which money is invested in investment funds usually offered by third parties such as fund managers. The value of the units directly depends on the underlying performance of the funds which, unlike in the case of With Profit Products, clients are asked to choose when purchasing the policy. Even though Unit-Linked Products can offer higher returns than With Profit Products, consumers must understand that they pose higher risks during periods of poor market returns. Since this type of IBIP is directly exposed to market fluctuations, it also requires a deeper know how and constant monitoring by the investor – a consideration which is not to be overlooked by consumers when determining whether they are willing to invest in such products.
Among the risks highlighted in the campaign is the need for consumers to realise that when buying an IBIP they are accepting that their maturity value may not be as high as anticipated, as a result of market fluctuations during the period of the policy. In addition to making the risks linked to IBIPs known, with this educational campaign the MFSA is taking the opportunity to make consumers aware of the tools which they can use to find out more about a specific product before investing in it. Emphasis is placed on the importance of the Key Information Document (KID), which is a 3-page, consumer-friendly document that contains essential information for understanding how the IBIP works, including the main risks and costs related to the product. The KID can also be used to compare different products offered by different providers, due to its standard format.
This consumer education campaign is only one of a series of similar initiatives which the MFSA undertakes on an ongoing basis to raise the public’s awareness and safeguard the interests of financial services consumers, so they can be in a position to make more informed financial choices.
These consumer awareness initiatives also complement the MFSA’s supervisory efforts which assess how service providers manufacture and distribute such products.
In fact, during 2021, the Authority conducted several onsite inspections among licensed entities selling IBIPs in order to assess whether these were meeting policyholders’ expectations. Through these inspections, which covered several insurance undertakings, insurance intermediaries and insurance brokers, the MFSA looked at the sales processes more closely to verify whether these were in line with the applicable regulatory requirements. The Authority also carried out inspections at insurance companies which manufacture IBIPs, focusing on their product oversight and governance arrangements, particularly when it comes to the establishment of the target market for each of their products and their monitoring.
More information on insurance-based investment products is available on the MFSA’s website at www.mfsa.mt/ibips.