Improving Financial Education and Awareness on Insurance and Private Pensions

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Author(s):
OECD
Publication Date :
28 July 2008
Pages :
158
ISBN :
9789264046399 (PDF) ; 9789264046382 (print)
DOI :
10.1787/9789264046399-en

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Individuals face an increasing variety of financial risks, including those linked to their retirement. At the same time, public funding has been reduced or is strictly limited in most countries. Private insurance and pensions products therefore play an essential role in social and financial protection. Yet the public might have a low level of awareness of the risks they are exposed to, and lack literacy, knowledge and skills in insurance and private pensions questions and products.

This volume addresses these topical and unexplored issues as part of the ongoing OECD project on financial education. After a comprehensive analysis of the main challenges and presentation of practical solutions, the book highlights good practices, endorsed by OECD governments, to enhance awareness and education on risk, insurance and private pensions issues.

 

 

Also available in: French

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    Foreword
    According to most surveys, individuals lack the awareness, literacy and skills to adequately assess their needs for financial and social protection and to choose appropriate insurance and pensions services. Raising awareness and educating individuals on insurance and pensions issues are both critical and challenging priorities for OECD and non-OECD countries. Critical, because of trends towards increased responsibility of individuals for the management of risks and their coverage, as well as the consequences of wrong or inappropriate decisions. Challenging, because of the complexity and sophistication of insurance and private pensions products, providers and markets.
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  • Expand / Collapse Hide / Show all Abstracts Financial Education in the Insurance Sector Risk Awareness and Education on Insurance Issues: Comparative and Analytical Report

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      Overview
      In OECD member and non-member countries, education in the insurance area has to address particular challenges linked, on the one hand, to the needs for enhanced awareness of households on their risk exposures and on the importance of choosing protection through private insurance vehicles against such risks and, on the other hand, to the complexity and diversity of insurance products and policies, as well as to the heterogeneity of insurance providers and distribution channels.
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      Introduction
      The importance of insurance products is undoubtedly expanding. In OECD countries1, they feature at all stages in the lives of individuals, their immediate families and relatives (e.g. birth, education, healthcare, income replacement, incapacity, invalidity, risk of dependency, third party liability, major risks, property damage, pensions, savings, annuities, and so on).
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      Increasing Need for Awareness and Education on Risks and Insurance Issues
      The growing and urgent need for awareness and education in the insurance area stem from two core social and economic evolutions: first, requirements to cover an increased diversity of severe risks by individuals/households are escalating; second, insurance markets tend to be ever more complex and sophisticated. In addition, increasing awareness and education on risk and insurance issues may also produce positive impacts on the market and the global economy and society.
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      Evaluation of Individuals' Risks and Insurance Awareness, Education and Capability
      National evaluation surveys to assess consumer level of literacy about insurance products or financial products at large have been carried out in a limited number of OECD countries. In this respect, results of the few studies that have been conducted reveal that even though households increasingly need and are responsible for their own protection against a wide range of risks, at the same time, they are relatively unaware of their most significant risk-exposure and the way to address these needs through insurance solutions.
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      Main Stakeholders' Roles and Governments' Involvement
      Surveys conducted in OECD countries reveal that governments and the public are gradually becoming more aware of the need to improve individuals’ assumptions about their responsibility for the coverage and protection for a range of risks – including through insurance policies – as well as their, knowledge and skills relevant to insurance issues. This trend is reflected in a large number of mostly separate initiatives undertaken by different stakeholders, both public (e.g. governments, various public agencies and bodies) and private, whether insurance undertakings (e.g. companies, mutual or provident societies, etc.), industry and consumers associations, intermediaries, businesses, rating agencies, consumers and policyholders. These different players endeavour in various ways to improve consumer education on risks and insurance issues. Respective roles of this wide range of stakeholders largely depend on jurisdictions’ circumstances and assessments of the particular needs, if any, of households and individuals.
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      Programmes and Tools to Enhance Risk Awareness and Education on Insurance Issues
      Information designed to raise awareness on risks and on the importance of protection against severe risks – including through insurance – is often a matter for governments, at least for catastrophic risk and long-term risks (e.g. life insurance for retirement, long-term care and invalidity) that people are generally unable to understand and manage in a sensible and sustainable way. In Mexico, the National Natural Disaster Fund (FONDEN) organises disaster risk prevention and security campaigns. In Israel, some awareness campaigns on prevention measures and coverage against earthquakes and more importantly terrorism risks are encouraged. Recently, the Israeli government appointed a Committee to advise the government and the public on how to better cope with natural disasters. One of the core issues is the importance of appropriate insurance and how to achieve this goal. In Spain, the Consorcio de Compensacion de Seguros (CCS) is committed to providing compensation for losses incurred as a result of extraordinary risks. In this context, it is currently considering programmes aimed to better prevent and reduce losses. This project would include the launch of preventive measures and campaigns. In the US, especially after the last series of hurricanes and consecutive floods, media campaign and coverage has been intensive notably to enhance population awareness of the needs for an appropriate coverage against catastrophic risks including floods.
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      Conclusion
      In most OECD and non-OECD member countries, current generations are faced or will have to face increased needs for coverage and saving to cope with new and increasing large-scale risks and risks (related to pension, health and savings) that are no longer or less covered by public, collective, corporate or family schemes and solidarity. Against this backdrop, solutions and possibilities offered by insurance market players are attractive. Yet, they require a higher level of awareness, knowledge, understanding and capacity from individuals as they often involve the subscription of sophisticated products from various distributors and may also imply a greater risk-transfer on households. Actually, consumers are often insufficiently literate and ill equipped to be able to properly bear these new responsibilities and make appropriate choices. This relatively poor capability on insurance issues is reflected in surveys’ outcomes, in the case of mis-selling and more worrisome in the potential dramatic consequences of lack or inappropriate coverage when adverse events occur.
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      References
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      Annex I.1
      The UK Financial Services Authority1 (FSA) initiative entitled "Treating Consumers Fairly"2 should first be mentioned. At the address of the insurance industry, this project includes a strategy for assessing problems of the market arising from information asymmetry and introduces processes including selfassessment by companies, with the extensive involvement of the various stakeholders. Furthermore, within a more global and long-term approach, the FSA has also launched in November 2003, a programme called "Building Financial Capability",3 headed by a steering committee – comprised of the government, the financial services industry, corporate representatives, trade unions, media, consumers associations as well as the associative sector. This project is designed to improve overall financial education including making individuals aware of the role of insurance in protecting against sudden and unforeseeable accidents. The programme has started with a survey of 5 300 adults across the UK to create a comprehensive picture of UK citizens’ financial literacy level.
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      Annex I.2
      Mediator and ombudsman have been established in Austria, Finland, Germany, Greece, Poland and the United Kingdom. In Poland, the insurance ombudsman has a particular responsibility for protecting consumers in a market where competition alone was considered insufficient to develop customer service. The ombudsman's function is to consider complaints and appeals and provide advice on relations between insurers (or pension funds) and their clients.
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      Annex I.3
      Most regulations in OECD countries stipulate the information that insurers are required to provide – including through their intermediaries – to consumers concerning policies and their terms and conditions before and after the subscription of the contract.
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      Annex I.4
      In several countries, intermediaries and distributors of insurance products alike are subject to obligations relating to competence, professionalism and continuous training. Under the Insurance Mediation Directive (Directive 2002/92/EC), which should have been transposed into the domestic legislation of the 25 EU Member States by 2005, only qualified staff may have direct contact with potential consumers and customers. Before the Directive was transposed, in Italy, for example, national circulars containing similar obligations were issued. The distribution agreements also stated that operators in other sectors should ensure that practices complied with the obligations imposed by the ISVAP (and now the directive). In addition, such operators may sell only basic insurance policies. The Swedish law on financial advice and the Dutch law on financial services also state that financial advisors must have the necessary skills and experience.
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      Appendix
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  • Expand / Collapse Hide / Show all Abstracts Financial Education in the Private Pensions Sector Financial Education and Saving for Retirement: Analytical and Comparative Report

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      Overview
      Financial education is particularly important for retirement savings and in particular pensions due to the unique nature of these financial products. These are exceptionally long-term contracts with a wide social coverage – involving those with low education and income levels who may display a low risk-tolerance. At the same time private pensions are particularly complex products (involving tax issues, assumptions over future salaries, longevity and interest rates, etc.) and are increasingly important as a source of retirement income, which enlarges their potential impact on financial markets worldwide. In addition, various demographic and social factors – including increasing life-expectancy and the rise of defined contribution pensions involving individual choice – are making the risks individuals face in relation to private pensions increasingly severe.
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      Financial Education and Saving for Retirement
      The need for financial education is increasing being recognized in relation to all financial products. This paper focuses on the growing need for financial education in relation to retirement savings, and in particular pensions. For the purposes of this paper, the definition of a pension plan is taken from the OECD taxonomy as: "a legally binding contract having an explicit retirement objective (or – in order to satisfy tax-related conditions or contract provisions – the benefits cannot be paid at all or without a significant penalty unless the beneficiary is older than a legally defined retirement age). This contract may be part of a broader employment contract; it may be set forth in the plan rules or documents, or may be required by law. In addition to having an explicit retirement objective, pension plans may offer additional benefits, such as disability, sickness, and survivors’ benefits". Both defined benefit and defined contribution schemes are considered as pension plans. Retirement savings is used to describe other, non pension, retirement products, such as insurance products and tax-incentivised savings. As the report will explain, financial education is particularly important for defined contribution type pension plans – which will be the focus of the paper. However, financial education cannot be ignored even within the context of defined benefit pensions or other retirement savings products involving guarantees. Issues relating to these products will be touched upon, but not considered in detail. Further, this paper does not advocate one type of pension plan or retirement savings product or another, but merely aims to point out the increasing importance of financial education within all types of pension systems.
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      Current Financial Education Programmes, Related Approaches and Evaluations
      Surveys and experience therefore show how financial education is urgently needed, and can play an important role in helping workers achieve an adequate retirement income. However, financial education should be seen as only part of a broader strategy for achieving this goal. The following diagram illustrates tools which have and can be used in combination by different countries to achieve the goal of helping to ensure adequate retirement incomes for their populations.
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      Conclusions and Lessons Learnt
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      References
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      Appendix
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