As part of the standardisation of the format of information being given to retail investors across the EU single market, new regulations were introduced on 3 January 2018. The aim of the Regulations is to create a uniform, easy to understand “Key Information Document” (KID) which facilitates comparison between different products, in different countries.
The KID regulations apply to all regulated investment products, including Packaged Retail Insurance-Based Investment Products [PRIIPS]. The Central Bank of Ireland published an amendment to the Life Assurance (Provision of Information) Regulations 2001 (the Life Regulations). This amendment came into force on the 1st of January 2018 and it means Life Companies must provide both types of disclosure documents to consumers at the point of sale.
Each type of disclosure documents has a different focus, especially when it comes to assessing and classifying risk. The risk scales used on the KID are not based on the ESMA risk scale, now widely used by Product Producers and Intermediaries in Ireland for assessing risk.
KID must give a description of the risk-reward profile of the investment including a summary risk indicator (SRI). When calculating RSI, the risk scale must be based on both market risk and credit risk. RSI does not take account of other risks such as liquidity risk, inflation risk, interest rate risk, currency risk and political and economic risks (depending on the investment strategy of the fund).
PRIIPs do not include credit risk in their assessment of risk. This means that the Product Provider literature used for the risk scales may or may not be in line with the risk scales on the KID.
Credit Risk measures the risk that the product producer might not be able to pay back your investment. Historically, life insurance companies have been among the most solvent of entities. Because of that, investors and regulators did not have concerns about the risk to the actual return of the investment.
KID covers every investment, irrespective of the financial condition of the product producer, which is why it is deemed prudent to include credit risk in the KID.