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CHALLENGES OF FINANCIAL EDUCATION IN CHALLENGES OF FINANCIAL EDUCATION IN THE INSURANCE SECTORTHE INSURANCE SECTOR

VII Conference on Insurance Regulation and Supervision in Latin America

Lisbon, Portugal, April 24-26 2006

Flore-Anne Messy Insurance Administator

Directorate for Financial Affairs

OECD

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What is Financial Education?

OECD definition:

Financial education is the process by which financial Financial education is the process by which financial consumers/investors improve their understanding of consumers/investors improve their understanding of financial/insurance products and concepts through financial/insurance products and concepts through information, instruction and/or objective advice information, instruction and/or objective advice and and develop the skills and confidence to become more develop the skills and confidence to become more aware of (financial) risks and opportunities to make aware of (financial) risks and opportunities to make informed choices, to know where to go for help, and informed choices, to know where to go for help, and take other effective actions to improve their financial take other effective actions to improve their financial well-being and protectionwell-being and protection

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Overview

I. Why Financial education is important

II. Challenges of Financial education in the insurance sector

III. Adverse effects of a lack of financial/insurance litteracy

IV. What can be done? Financial education Objectives and main insurance stakeholders

V. Experiences to enhance financial education in the insurance sector: various means and initatives

VI. OECD unique international project on Financial Education

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I. Why is Financial Education needed in both OECD and emerging economies? (1)

Increasing importance of financial/insurance products in consumers’ life : Social protection and coverage (health, retirement, income

replacement) provided by governments and other forms of solidarity is shrinking.

Large range of traditional and emerging risks: catastrophic, terrorism, pandemics, demographic (increasing life expectancy), health, etc.

Individual choice and responsibility in financial management is conversely inflating (e.g. development of DC schemes, importance of private financial products (PHI, life insurance to replace public coverage)

In most countries, incomes per capita are growing: insurance products are thus taking a more important proportion of individuals income notably to protect more wide scope of assets.

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I.Why is Financial Education needed in both OECD and emerging economies? (2)

Varying consumers’ needs for insurance and protection

Increasing number of complex financial and insurance products and providers

Appropriate regulatory and supervisory responses are necessary but not entirely satisfactory and sometimes counterproductive

Financial education is a useful and increasingly crucial complement to insurance prudential regulation and supervision

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II.Particular Challenges of Financial Education in the Insurance Sector (1)

In both OECD and non-OECD countries, consumers’ lack of insurance literacy means :

General lack awareness of their risk-exposure and needs and of a wide variety of risks, which are difficult to prioritise

Lack of understanding of the protection offered by insurance providers (information asymmetry ). Little experience of some of these new and long-term products

Lack of willingness to subscribe insurance policies (consumers ‘myopia’)

Lack of trust and confidence in insurance market players (Equitable in the UK, Spitzer’s investigations into the insurance sector)

Lack of an ‘insurance culture’ especially in emerging economies More worrying, the weakest segments of the population are particularly

affected (e.g. poorest, women, children, unemployed, elderly population, etc.)

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II.Particular Challenges of Financial Education in the Insurance Sector (2)

The insurance sector’s specific complexity :

Increasing complexity and variety of insurance products– A wide range of products to cover different risks– Scope of the cover needed and provided is often difficult to define

and understand (contracts’ conditions, ceilings, deductibles, exclusion, trigger for coverage, etc.)

Complexity of the market and heterogeneity of the various providers: insurers (non profit/non-for-profit, from abroad), intermediaries, new selling channels (phone, cell, internet), non- traditional providers (banks, supermarkets, car-dealers, etc.)

Complex and heterogeneous regulation

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II.Particular Challenges of Financial Education in the Insurance Sector (3)

Approaches to FE in the insurance sector need to be strengthened:

Awareness of the potential importance and role of Financial Education in the insurance sector is slowly getting higher on political and industry agenda and priorities

Lack of a pro-active and coordinated approach: generally, if any, FE projects bring together a wide and disparate range of initiatives from various actors often following various aims

Lack of an overall assessment of the needs in Insurance Education of citizens/consumers and of the specific needs of particularly affected segments of the population

Difficulties in assessing the impacts of FE programs

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III. Adverse effects of this lack of insurance awareness and literacy

in OECD and emerging economies (1)

For consumers : Lack of coverage : uninsured individuals to basic risks (health,

retirement, income replacement, liability) and large-scale risks (low level of property and damage insurance) may face dramatic situations on the long run in case of losses

Inappropriate coverage ( underestimation/inappropriate or useless coverage) may also entails unexpected costs which may harm to various extents households‘ budgets.

The most fragile are the less covered/insured and potentially the most affected (poorest, women, children, elderly, etc)

Costs and length of litigation and redress

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III. Adverse effects of this lack of insurance awareness and literacy

in OECD and emerging economies (2)

For Insurers/Intermediaries: Less developed and competitive insurance markets Costs of litigation/complaints of claims arising from

badly understood products

For Governments and citizens Costs of non-insured in case of damages Costs of tighten regulation and supervision Costs of complaints’ handling and litigation

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IV. What can be done?

Objectives of Financial Education in the insurance sector

1. Enhancing individual awareness, accountability and literacy relative to insurance products and markets and the protection against different types of risks they offer – Mostly but not solely governments’ role

2. Improving the quality, relevance and timeliness of the information disclosed to consumers in the insurance sector -Mainly the role of the insurance market players (e.g. insurers and intermediaries) within an appropriate regulatory framework

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IV. Role of main insurance stakeholders in financial education

The industry: traditional insurance providers- insurers and intermediaries

Governments : various ministries and agencies involved in educating and informing consumers and in coordinating other stakeholders’ initiatives

A wide range of non-governmental associations: consumer/investor associations involved in both information and on-going education of consumers

Corporations: in particular for group health insurance or retirement products

Consumers’ responsibility and involvement in the learning process should be enhanced as well.

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V. Experiences to enhance financial litteracy:Means and stakeholders (1)

Assessing consumers’ need in financial education What risks/products (large-scale, recurrent, complex/poorly known,

new) What population (all citizens + targeted audience) What type of information (products, conditions, insurance market

players,etc) What means, stakeholders and initiatives to meet these needs Efficiency of programs?

Enhancing Insurance awareness, education and instruction Educating teachers (Japan) and the media (Poland) Integrating basic insurance notions in the general education programmes On-going training/personalsed advices (association of consumers/insurers)

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V. Experiences to enhance financial litteracy:Means and stakeholders (2)

Improving the level, quality and accessibility of information on insurance

Internet/Website : developed by Insurance supervisory authorities, association of insurers/intermediaries/consumers

Paper materials : guides, brochures Media Campaigns, conference, events

Encouraging the industry to provide quality synthetic information and “objective” advices

Role of disclosure requirements for particularly complex (life, saving for retirement, disability) or current (motor TPL) products and in precising the advisory role of intermediaries and insurers

Industry voluntary good practices and standards (Canada, UK, US)

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V. A few emblematic experiences

Korea- Korean Insurance development insitute: assessing the extent of awareness and the existnece of an insurance culture among potentail consumers

Mexico-CNSF/FONDEN: Enhancing of catastrophic risk-exposure awareness, CONDUSEF: developping a comprehensive website (information on contracts, coverage, insurance companies’situation, redress mechanisms, etc)

Poland-Polish insurance chamber : Assessing and strenghtening media’s awareness and sensitise them to insurance issues -Making insurance more attractive and visible

Italy- ISVAP : Reaching the largest target audience (comprehensive-userfriendly website / national newspapers)

US-NAIC “Get smart about insurance” week : Assessing knowledge, level and relevance of consumers’ insurance coverage

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VI. What is the OECD doing?

OECD Financial education project: Started in 2003 in order to study financial education

and literacy in OECD countries and emerging economies

Purpose: to describe existing financial education programmes, analyse effectiveness and develop good practices

Activities: established a website, set up an electronic discussion group, created a research database and inventory of more than 350 studies

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VI. Main achievements of the OECD Financial Education Project

Development of a Recommendation on Principles and Good practices for Financial Education and Awareness approved by the OECD Council in June 2005

Published the first major international study of financial education , Improving Financial Literacy: Analysis of Issues and Policies, in November 2005.

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VI. Future OECD work on Financial Education

Establish the OECD as clearinghouse for financial education information by expanding the database making it public

Encourage communication and cooperation among countries on financial education by expanding the EDG, establishing a newsletter, hosting and organizing conferences and other events (Conferences related to FE in LA, Asia scheduled in 2006)

Pursue the analysis and elaboration of major studies on financial education in the area of pensions, insurance, financial education in schools, in OECD and emerging economies).

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VI. OECD Financial Education project related to insurance

Initial overview of policy to improve financial awareness in the insurance sector in OECD countries - covering programmes and initatives by governments/Insurance regulatory and supervisory authorities; associations of consumers/investors; the insurance industry; other insurance stakeholders such as employers

Developments of good practices and guidelines on financial education in the insurance sector

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Preliminary conclusions:Ongoing work

Financial education (particularly for the insurance sector) has only fairly recently raised on OECD and non-OECD political agenda

Lack of general awareness of the lack of awareness! General Lack of assessment of the efficiency of the

very few programmes that were implemented on FE related to the insurance sector

You are very much welcome to share with us sucessful experiences, initiatives and projects relating to Financial education and insurance in your countries.

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THANK YOU FOR YOUR ATTENTION!

Flore-Anne.Messy@oecd.org