The European Insurance and Occupational Pensions Authority (EIOPA) released a new study today highlighting the importance of clearer, and more consumer-friendly information disclosures regarding the natural catastrophe coverage of home insurance policies. EIOPA’s analysis of Insurance Product Information Documents (IPIDs) shows that while many insurers demonstrate good practices in disclosing essential information, there is still room for improvement in ensuring that consumers can make more informed decisions. As a result of some of the issues identified, consumers may be left in the dark about whether or not they are protected against certain natural disasters, such as floods, fires or landslides.
Natural catastrophes across Europe are becoming more frequent and damaging due to climate change, putting uninsured households at risk of significant losses from extreme weather events. At the same time, EIOPA’s statistics show that only about a quarter of the losses stemming from natural catastrophes have been insured on the continent in recent decades.
This large protection gap is in part due to some businesses and households opting not to take out natural catastrophe insurance, even when available, as explored in EIOPA’s Staff Paper on demand-side factors. Nevertheless, unclear and vague information disclosures also contribute to this gap by leading consumers to mistakenly assume that they are covered against NatCat risks – a phenomenon known as the ‘insurance illusion’.
Against this background and given the importance of accurate information about the scope of coverage, EIOPA set out to analyse the IPIDs and terms and conditions of home insurance policies across eight European countries.
Findings show a number of good practices, but also room for improvement on language and exclusions
The findings confirm that well-implemented IPIDs can be useful in helping consumers better understand the features of insurance policies. In particular, some good practices were observed that ensured consumers were given sufficient and accurate information, without overloading them. These include undertakings providing a detailed taxonomy of NatCat perils in the terms and conditions to facilitate consumers’ understanding.
Nevertheless, EIOPA also found that some of the IPIDs analysed used unclear, vague and inconsistent language or relied too heavily on separate policy documents, making it difficult for consumers to understand the full scope of coverage and the exclusions that apply. Definitions of NatCat events across insurers also varied greatly or were only partially explained. Some IPIDs, for instance, indicated general coverage for “flood”, but excluded all precipitation-related floods without explicitly pointing this out. Add-on coverage options – which is how coverage for NatCat risks is often marketed – were sometimes not clearly presented as optional, giving consumers the false impression that NatCat risks were automatically included.
Coverage limitations – whether geographical, frequency-related or connected to the type of hazard or the magnitude of the damage – were not always disclosed clearly either. For example, some policies only offered payouts for hail damage once every five years without specifying this condition in the IPIDs.
Petra Hielkema, Chair of EIOPAsaid: “The increasing number of natural catastrophes in the EU over the past few years underscores how important it is for consumers to understand whether they have adequate insurance coverage. EIOPA has been consistently advocating for disclosure documents that are easy to understand and that provide a clear overview to consumers — ideally supported by visual prompts. Our analysis confirms that IPIDs, when designed properly, can be a useful tool in explaining the core elements of products and services. I am glad we found evidence of good practice. However, there is still room for improvement. When consumers struggle to understand what is—and isn’t—included in the home insurance policies they purchase, we are, at best, creating unnecessary barriers. At worst, we risk fostering false expectations that may lead to potentially significant financial harm when catastrophes hit. I believe the positive examples in our report will encourage insurers to make even better use of IPIDs and empower consumers to make well-informed decisions.”
Notes
Insurance Product Information Documents, or IPIDs, are standardized documents that provide consumers with key information about an insurance product in a clear and concise manner. It is a requirement under the Insurance Distribution Directive (IDD) for insurance companies in the European Union (EU) to provide an IPID for non-life insurance products, such as home, motor and travel insurance.