Mis-selling

  • ...customers may be satisfied with companies because they provide inexpensive products, but the customers may be misinformed about what is being sold. (p3)

2015 0501 - AAA to IAIS - Committee Comments To IAIS On Conduct Of Business Risk Draft Paper

  • Mis-selling and market conduct issues in the United States obviously have been important features of the U.S. markets in recent years, and again, some of that ties back to corporate governance.
  • SarbanesOxley obviously will have an impact.

--  TONY DARDIS

2004 - Integrated Risk Management, Society of Actuaries - 22p

7.4 MISSELLING - Misselling of insurance and investment products has not been confined to unit-linked products.

  • Misselling in general falls under three categories:
    1. The sale of an inappropriate product
    2. The use of unrealistic assumptions to illustrate the benefits under the product
    3. Failure to explain the way the product works, including an explanation of policy factors that are and are not guaranteed or subject to review.

2000 - Unit-linked insurance: A general report, Münchener Rück - Munich Re Group - 51p

9.2.6 Operational risk
9.2.6.1 Background and proposed approach

342. This covers risks associated with the operations of the IAIG.

  • Examples of operational risk include losses due to fraud, failures in computer systems and administrative processes, legal risk (excluding strategic risk and reputation risk), mis-selling of products and external events causing damage to the IAIG’s premises,  equipment or people.  (Page 96 of 159)

2014/2015 - IAIS - Risk-based Global Insurance Capital Standard - Public Consultation - 17 December 2014 – 16 February 2015 - 159p

  • Lincoln UK Maintains reserves established in 1997 and 1999 for mis-selling activities.  (p82)

Lincoln National Corporation - 2006 Annual Report to Shareholders - 228p

2. Heard a Presentation from the Operational Risk Consortium John Simone (Operational Risk Consortium—ORIC)

  • The definition of operation risk management would include any issues regarding people or governance as it pertains to oversight, technology, infrastructure, business continuity management, outsourcing, mis-selling, data protection, or transaction processing and products.
  • He explained that this is a broad definition, which makes it difficult to quantify because of the vast amount of variables involved, and is people-driven with a large amount of technology included, which makes it difficult to measure.
  • Operational risk also includes legal risks.  (10-596)

2012-3, NAIC Proceedings 

7.4 MISSELLING - Misselling of insurance and investment products has not been confined to unit-linked products.

  • Misselling in general falls under three categories:
    1. The sale of an inappropriate product
    2. The use of unrealistic assumptions to illustrate the benefits under the product
    3. Failure to explain the way the product works, including an explanation of policy factors that are and are not guaranteed or subject to review.

In relation to unit-linked products, the potential client should be fully aware that its contract does not guarantee returns (unless otherwise stated) and that point-of-sale illustrations are used only to demonstrate how benefits would be affected under hypothetical investment scenarios.

However, intermediaries may be tempted to use unrealistic return assumptions for these illustrations in order to facilitate the sale, especially in a competitive environment.

In unregulated markets with no illustration guidelines, some purchasers may be misled into believing that the rates were guaranteed or that there were some minimum guarantees.

  • Widespread misselling of investment products can result in the local regulator imposing remedial action on the insurers (for example the pensions review in the UK) or in class action lawsuits against them (for example the “vanishing premium” class action in the USA).
  • The UK pensions review arose from sales of inappropriate products.
  • The “vanishing premium” class action arose from sales of universal-life policies where the high interest rates of the early 1980s were assumed to continue far into the future.
    • As interest rates actually fell, clients were notified that they would have to pay premiums for a longer period of time than illustrated in order to maintain their benefits or achieve their cash-surrender value objectives.
    • In the end, the insurance companies paid heavy fines and illustration guidelines were created.

2000- Unit-linked insurance: A general report, Münchener Rück - Munich Re Group - 51p