FI Supervision 27: Non-life insurance undertakings’ product approval processes

The Swedish financial market regulator, Finansinspektionen (FI) has published the findings from a review of product approval processes of supervised insurance undertakings. The review thereby examined
– the determination and assessment of the target group,
– the performance of product testing to ensure that a product meets the needs of the defined target group, and
– the continuous oversight over launched insurance products.
In its corresponding report, FI also outlines the key expectations in any of those areas and presents its views on the observed performance of supervised entities. The following section briefly describes the most notable findings from the review.
#### Key findings from the review
Determination and assessment of the target group:
FI observed that undertakings establish target groups for their products using specific criteria, and many of them include these criteria in their product oversight and governance policies. These criteria include factors such as the product type and its perceived complexity, the risks covered by the product, consumer requirements, consumer characteristics like age, financial situation, employment, and domicile, and consumer knowledge and competence. Additionally, some undertakings use criteria to determine the complexity of an insurance product when defining the target group, considering aspects like the product’s area of use, the number of insurance aspects it covers, and its significance to the consumer’s finances. In this context, it is worth noting that FI found that virtually all undertakings define target groups not only for new products but also for existing ones, demonstrating their commitment to aligning insurance products with customer needs.
Performance of product testing to ensure that a product meets the needs of the defined target group:
FI found that all undertakings conduct some form of qualitative or quantitative testing. Moreover, a large number of firms perform an evaluation of insurance value relative to consumer premiums to ensure good value for customers. This is done by calculating how much of their premium payments goes back to the consumer through claim and other payments and comparing product changes, including new benefits, to potential premium increases. Also, over half of the undertakings have defined criteria for significant changes in the target group, including changes in product contents, customer complaints, claims trends, knowledge level of consumers, and external circumstances like legislation changes.
Oversight over launched insurance products:
FI saw that insurance undertakings review their insurance products with varying regularity, with close to half conducting annual reviews, while others do so at longer intervals or based on the type of insurance product. To ensure that their products align with the needs, characteristics, and objectives of their target audience, they consider factors such as customer complaints, denied claims, sales within and outside the target group, suitability for the target audience, value for consumers, claims percentage, and events affecting distribution strategy. Many of these undertakings also evaluate the value relative to the premium paid by individual consumers, employing methods like customer satisfaction surveys, internal data from distribution and claims units, competitive comparisons, and analyzing claims costs in relation to premiums paid. Additionally, most undertakings incorporate claims percentages and combined variables into their monitoring and oversight processes. About half of them reported selling insurance products outside their established target group. In this context, FI notes that any such sale should be evaluated to explore the reasons for such „outside target sale“.
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Overall, FI was quite satisfied with the findings, but maintains that – as the product approval process is central to the insurance function and crucial for customers – it will continue to closely monitor „the undertakings‘ work with and application of the process as part of our ongoing supervision“.