Regarding Article 16, Non-complex insurance-based investment products, we would like to submit the following comments.

INTRODUCTION Insurance Sweden is the industry organisation for insurance companies in Sweden. About 50 insurance companies are members of Insurance Sweden and together they account for more than 90 per cent of the Swedish insurance market. Regarding Article 16, Non-complex insurance-based investment products, we would like to submit the following comments. We believe that the draft delegated regulation regarding what should be deemed as an other non-complex products is too detailed and will exclude safe, consumer friendly products from being looked upon as non-complex. Especially, the demand in Article 16 (a) for a contractually guaranteed minimum maturity values which is at least the amount paid by the customer after deduction of legitimate costs a Money-back guarantee does not only hinder a flexible distribution of local insurance products but is also an inappropriate criteria in it self. Therefore, the European Commission should only prescribe a high-level criteria that indicate whether the product is complex or not and rather leave the judgement of whether a product is to be deemed-complex or non-complex, to the member states. Otherwise there is a risk that IBIPs that are simple for the customer to understand and give the customer a high level of protection are classified as complex IBIPs, while other IBIPs, such as deposit insurance, are classified as non-complex despite the fact that the level of protection for the customer is much lower (the customer risks losing the entire initial investment). Such an effect at the national level would be to the detriment of the customer. CONSUMER-FRIENDLY AND SAFE INSURANCE PRODUCTS WILL BE STOPPED Easy to understand and safe products Many individuals look for a type of safe and simple saving product. Insurance contracts with traditional asset management is a product that is developed to secure a safe and sound development of the customers savings. When the policy is offered by a mutual life insurance company (which often is the case) that is owned by its policy holders, which aims at providing long term asset management and solid return on assets, it provides a safety for the saver which is not found in many other forms of savings. In Sweden, one of the best IBIPs from a customer point of view is endowment insurance with traditional asset management (also called with-profits life insurance, livförsäkring med traditionell förvaltning in Swedish). This type of insurance normally uses different guarantees, i.e. between 80-100% of the customer s initial investment is guaranteed and the customer is also guaranteed a certain return on the investment (generally 1,5-3% of the investment). The structure of endowment insurance with traditional asset management is easy to understand for the customer allowing the customer to understand the risks involved. The customer is guaranteed a certain percentage of the investment (up to 100%) and

a certain turn-over. In addition, the customer is entitled to a share in the return on capital generated by the management of asset. The guarantee is presented to the costumer as a fixed amount so there really is no room for misinterpretation. The share is proportional to the investment of the customer. In contrast to unit-linked insurance, the customer does not have to take any investment decisions regarding the management of assets. The customer trusts instead the insurance company to manage the assets carefully and properly. How the insurance company manages the assets is rigorously regulated by Solvency II. A sign of the unique position that traditional life insurance has, is that the parties of Swedish collective agreements have decided that their employees have to place at least 50 % of their occupational pension plan in traditional life insurance. This is in order not to expose the employees occupational pension plan to too much risk and it is done irrespective of if the employee understands the traditional life insurance or not. It is also used as a default solution in many cases for occupational pensions. The guarantee is straight forward, which is easy to understand for the insured. It is not surrounded by conditions, triggers etc. which could make it difficult to comprehend. The guarantee cannot be changed during the growth face. To conclude, insurance contracts with traditional asset management are safe, consumer-friendly and appropriate products, not least when selling to customers who do not have enough knowledge of the financial market to make the investments on their own or, for that matter, are interested in dealing with financial instruments and products. However, this product would most likely be looked upon as complex if the draft delegated regulation would remain unchanged beacause of the demand for a money-back guarantee which will in turn have have big negative consequences for the customers as well as local insurance markets and structures as explained further below. To add on, a money-back guarantee should also, in the current financial climate, not be put out by an insurance company. The reasons for this will be developed in the following. Guarantees for Traditional Life Insurance Up until mid 1980s the Swedish financial markets in general including both fixed income market and life insurance market were heavily regulated and had been so for many decades. The conditions and levels of the guarantee were centrally determined and were set as a flat guarantee rate for all durations and also for future premium payments. This was at a time when the financial markets were less developed and before the insurance liability was valued market consistently. Deregulation came progressively with unit-linked insurance and unregulated fixed income market at first and then later decentralisation of guarantee conditions and levels from the late 1990s. Ever since then Swedish insurers has made continuous improvements to the traditional guarantee conditions and levels which have been adjusted in line with market interest rates of the fixed income market. According to Swedish law and regulations, the guaranteed rates need to maintain a spread to fixed income market rates, and since the mid 1990:s guaranteed rates have been reduced in line with the fall of fixed income market rates in 1998, 1999,

2005 and 2012. In the mid 1990 some Swedish insurer stopped writing new business that had fixed guarantee rates on future regular premium payments (instead guarantee rates are set for each premium payment separately). Without this change many insurers would probably have been insolvent today as interest rates have fallen dramatically since mid 1990:s. Problems regarding Money-back guarantees Article 16 (a) states that a product can only be deemed non-complex if: the contractually guaranteed minimum maturity value is at least the amount of premiums paid by the customer after deduction of legitimate costs. As stated above the majority of the Traditional Life Insurance savings is made for pension purposes, with regular premium payments before retirement and regular payouts after retirement. Guarantees are the ultimate reassurance of stability of pensions much in the same sense that wages usually are very stable, a well-known economic fact called sticky wage theory. Guarantee rates have therefore been designed to have guaranteed payouts (the time where they have a value for the client) and not guaranteed surrender values. EIOPAs criterion/definition of non-complex guarantees may have the impression of simplicity as it is relatively easy to express. However it is a type of guarantee that is inherently complex to value and handle. When we refer to these guarantees as Money-back guarantee we mean that this expression is synonymous to the expression the amount of premiums paid. The main problems with the Money-back guarantee stems from the fact that nominal guarantees are equal to fixed-income instrument in line with market consistency. Money-back guarantee thus actually means a specific guarantee rate level, more precisely the guaranteed interest rate of 0 %. The problems that arise are the following: Money-back guarantee is not possible to offer customers without some sort of implicit or explicit economic transfer, as long as market interest rates are negative. Money-back guarantee is an optional guarantee if it is offered customers for future premiums (which will be the case for our regular premium business). This is due to the fact that nobody can predict with certainty that future market interest rates will be positive. The value of Money-back guarantee is under normal circumstances inequitable, as for short durations the value is material whereas for long durations the value is negligible. Money-back guarantees in times of negative interest rates and for future premiums Negative interest rates were considered an intellectual curiosity not that long ago. However recent economic development has challenged all that and negative interest rates are now more of a norm in developed economies. For example, a Swedish government bond yields -0.60% in two years. This means that an investor of 100.00 SEK in guaranteed by the Swedish state to get 98.80 SEK

in two year time, which is less than Money-back. For an insurance company to be able to guarantee 100.00 SEK instead of 98.80 SEK someone else must, most likely implicitly, transfer 1.20 SEK to cover up for the cost of the guarantee. German market interest rates (purple line) are more negative for longer durations. To be able to provide guarantees for future premiums the corresponding future market interest rates need to be positive. There are currently no government guarantees that future interest rate levels will be positive. The historic trend of the market interest rates have fallen continuously since mid 1990:s, and no one knows if the market rates will continue to fall or not. Money-back guarantees are inequitable Market interest rates are in normal times upward sloping. This means the investors of longer durations and with longer horizons get a higher interest rate than the investors of short durations. Money-back guarantee maintains the same guarantee rate level (0%) for all horizons and thus discriminate between short and long durations to the advantage of short durations over long. CONSEQUENCES OF BEING DEEMED COMPLEX Appropriateness test If a traditional life insurance were to be regarded as complex according to IDD, the customer would have to take an appropriateness test (execution only). There is a major risk that the customer in that case would not pass the test if he does not have any financial knowledge or experience. This is totally contrary to the objective of the product which is to be a safe and simple solution for those very people who do not have any knowledge or experience of financial markets. Instead, they will be able to buy non-complex products such as unit-link products where the individual can take risks that they don t understand and where they risk their entire savings. We believe this is totally contradictory to the aim and ambition of IDD. Unit-link products fall under article 30(3)(a)(i) which only addresses products which only provide investment exposure to the financial instruments deemed noncomplex under Directive 2014/65/EU. These are assets where consumers directly bear the risks themselves. There is good reason to treat products like traditional life insurance where the customer does not make an investment selection and the investment is subject to a very strong prudent person principle and Solvency II regulation, in the same manner. Comprehension alert in PRIIPS KID Also, if the mere existence of a guarantee makes a product complex in the eyes of IDD, this will have an effect on the PRIIPS regulation as well since the Key Information Document (KID) for traditional life insurance would have to contain a comprehension alert. This would be sending a completely wrong message to potential buyers of the product. On the contrary, this is a safe, easy to understand product.

Customers will be led away from the safe product. Traditional life insurance normally include guarantees that range from approx. 80-97% (depending on the product) of the customer s initial investment. The product therefore will not meet the requirements under Article 16 (a) which demands a money-back guarantee to pass as a non-complex product. It is also a very safe product for customers. From our point of view the ultimate goal with the IDD in this regard has to be to make sure that customers are not mislead into unsafe or risky products. In the case of endowment insurance with traditional asset management the result of the requirement in Article 16 will be the exact opposite. Customers will be led away from the safe product. The traditional life insurance is mainly sold together with advice but there is also execution-only sales and there has been absolutely no problems at all from a consumer perspective as far as we know. From our point of view it does not make sense to say that a product that fulfills all other criteria and has for instance a 96 % guarantee per se is complex regardless of how easy it is for the consumer to understand the risks involved. We understand of course that the 100 % line has advantages from the legislator-perspective but the consequence unfortunately will be misleading for consumers. The additional questions on appropriateness (on top of the demands and needs test) will give the consumer the misleading impression that the product is complex. It would of course also - without good reason - prevent or impede execution only sales. Flexibility for national supervisors is necessary to cater for local demands There is a lot to gain from a consumer perspective if the delegated acts could leave some flexibility when it comes to guarantees as criteria for the classification of products as complex or non-complex. We do not think that it is possible to fairly judge complexity in all products in all the different markets from the level of the guarantee without looking at the presentation of the guarantee and how easy it is for consumers to understand the risks involved in the product. The level of the guarantee is of course an important criteria in that regard. But we think that national supervisors can make good judgements regarding which level of guarantees that should make a product complex and that the delegated acts should provide them with the tools to make that judgement. To us a strict requirement in the delegated acts that guarantees need to be money-back guarantees (100 %) would lead to misleading results for consumers that national supervisors can prevent if given the opportunity. One way to provide this needed flexibility is to delete the requirement in Article 16 (a). Another very strong argument from the perspective of the Swedish market is that the definition of IBIPs excludes different products which are officially recognized as pension products (article 2 item 17 in IDD). This has from information receivedbeen done due to the fact that pension products and pension markets are extremely local and unique and differ from country to country. For those reasons, it is better left

to the different member states to regulate its pension market. Accordingly, EU regulation which would have an impact on local pension products is not desirable. In Sweden, the possibility to set up a private pensions saving scheme with tax incentives, was abolished in 2015. However, the need for individuals to save privately for their retirement has increased. This is because the level of pension benefits from Pillar I and II has substantially decreased in the past ten years. For individuals, the only existing possibility today to save long-term for pension thru an insurance solution is to sign a capital endowment insurance ( kapitalförsäkring ). Capital endowment insurance may be managed as unit-link or a traditional life insurance. The product is not officially recognized as a pension product which means that it is not excluded from the provisions in Chapter VI in IDD. Our conclusion is, that even though the ambition from the European legislator clearly is not to regulate local pension markets and local pension products, but rather leave this to the Member States, the provisions in IDD and the Technical Advice does indeed have this effect in Sweden. Insurance markets in Europe are in many cases unique for every country and cross border sales are unusual. To us this is another strong argument that there should be an option for local supervisory authorities to determine whether a certain product is to be deemed complex or not without causing unlevel playing field within in the EU. Conclusions One of the central goals of IDD is to safeguard the interests of policy holders and secure that the customer does not take financial decisions and face financial risks which he or she does not have the knowledge or experience of handling. Guarantee conditions for traditional life business in Sweden have over recent years been modernized in order to be more in line with market interest rates. This is also in line with Solvency II and IFRS regulations where liabilities should be valued market consistently. A money-back guarantee, would however take us back in time and would not be in the best interest of our customers. To put it simple, it is not possible today for a serious insurance company to offer money-back guarantees and at the same time follow Solvency II and other regulations. This leads to the conclusion that the criterion a) in Article 16 (a) is a provision which cannot be fulfilled and should therefore not be part of the Delegated Regulation. As the traditional life product is mainly aimed for pension purposes guarantees it has been designed to guarantee a maturity value. A guaranteed surrender value is less meaningful for the customer and since it also can have a negative effect on which assets to invest in there is no guaranteed surrender value. The non-complex product criteria regarding the guarantees would severely impact the Swedish Tradition Life Insurance products which and this clearly is not the intention behind IDD. Alternatively, if we continue with the current guarantee methodology where guarantee rates are set in line with market interest rates, the traditional life product would in certain market conditions (higher market interest rates) be seen as a noncomplex product and in other market conditions (lower market interest rates) be seen as a complex product which does not make sense. The complexity criteria should in

other words not be determined on if the guarantee is above a certain level (0%) or not. We strongly urge the Commission to take this into consideration and make certain that there is an understanding among European legislators that it is important to be able to set guarantee rates in line with the development of market interest rates (no fixed guaranteed levels). Solution Against this background we suggest that criterion a) regarding money-back guarantees should be deleted and that it is left to local supervisory authorities to decide whether a certain local product with a guarantee is to be considered complex or not. If criterion a) is not deleted the consequences in our market will clearly be to the detriment for the consumers and would thus lead to misleading results that national supervisors can prevent if given the opportunity. As an alternative, if the existence of a guarantee should still be considered as a factor which could make a product complex, we suggest that guarantees irrespective of the level of guarantee (100 % or 50 % for example), who do not contain any complex triggers or is conditioned in a difficult way, also should be looked upon as non-complex. Both these suggestions calls for alterations of the draft Delegated Regulation.