Consumer risk dashboard – main risks to insurance services users in 2024

In early 2023, the Croatian Financial Services Supervisory Agency (Hanfa) published its first overview of the main sources of risks to which insurance services users may be exposed during that year. With the intention of further informing consumers and the general public about the characteristics of insurance services, but also of informing insurance companies and other stakeholders (for example consumer protection associations) about trends and risks to which insurance service users may be exposed, Hanfa published again this year such an overview of the main risks for insurance service users in 2024. For reasons of comparability of results and consistency of presentation and methodology used, risk sources as well as certain risks are presented on the basis of two criteria: the probability of the occurrence of a particular risk, i.e. its materialisation, and the significance of the impact of that materialisation on consumers.

Risks to insurance consumers may arise from various sources grouped into several categories (behaviour of insurance companies and insurance distributors, expectations and financial literacy of consumers, various external factors and sustainable financing), without taking into account market or financial risks that may affect the financial position and well-being of consumers. In the previous year, the risks to which insurance users could be exposed were assessed on the basis of the perception of the risks given by insurance companies in the Republic of Croatia and Hanfa as the insurance market regulator. This year, the perspective of the consumers who contract and use insurance products was also taken into account, in order to obtain a more balanced and realistic assessment. Three sources of information were used: questionnaire replies provided by all insurance companies1, expert assessment by Hanfa staff2 and responses collected from a consumer survey3. Responses from all sources were treated as equally important and integrated for the purpose of producing aggregated results (unambiguous scores) for each risk. Risks were not assessed for individual insurance companies or insurance products, but for the entire insurance market, i.e. all users of insurance services.

No risk was identified that would have a very high probability of occurrence and/or a very high impact on insurance service users in 2024. This may indicate that in the insurance market, and this is a financial service used or connected with a broad segment of the population, there are currently no difficulties that could pose significant threats to the interests of users, and in particular not of such systemic importance that would require urgent and comprehensive action. It also follows indirectly that the regulation of the insurance market is proportionately adequate and its operations are stable.

External factors and behavioural aspects have been identified as the main sources of risk for insurance service users. At a time of unforeseeable geopolitical developments, which also have an impact on financial market developments, the development of digitalisation, which brings and enhances the risks of personal data misuse, the possibility of cyber attacks, digital exclusion and fraud, and prolonged high inflation, which reduces real incomes, it is not surprising that external factors continue to be recognised as one of the main sources of risk, although the score of their potential for occurrence and impact is slightly reduced compared to the previous year. However, the insurance market is not alone in being affected by these risks, as they affect not only the entire financial services sector but also the economy as a whole. It is understandable, therefore, that macroeconomic developments, general uncertainty and digitalisation, which has accelerated with a more intensive wider use of artificial intelligence, pose a challenge for insurance companies in their day-to-day operations. Consumers also perceive them as primary risks given that they significantly influence their disposable incomes, and thus their willingness to contract insurance services, and exposure to uninsured risks, digital availability and ease of contracting insurance, but also a possible lower level of information and understanding of digital financial services, as well as digital personal protection. For external factors, it should be noted that they also include the legal protection of users of insurance services / consumers. This aspect is particularly relevant for consumers who currently find the available mechanisms and options of dispute resolution with insurance companies to be insufficient, either in terms of speed or efficiency, which further underscores the legal uncertainty. It was precisely this risk that was recognised last year as the main risk for insurance services users, both in the probability of its occurrence and in the possible impact on users. In addition to the already mandatory pre-contractual provision of information on possibilities and bodies for dispute resolution and handling of complaints from users of insurance services, any further active provision of information on available legal options and remedies by the insurance industry, regulators as well as alternative dispute resolution organisations and bodies would have an impact on reducing this risk for consumers. Recent amendments to the Mediation Act recognise the alternative extra-judiciary amicable dispute resolution as a necessary step before the initiation of litigation proceedings for damages, which is the most common reason for disputes between policyholders and insurance companies.

Compared to 2023, the score of the probability of materialisation as well as the impact of risks arising from the behavioural characteristics of financial services users has increased. Behavioural aspects relate to an insufficient and inadequate level of financial literacy (e.g. lack of knowledge of insurance products, lack of knowledge of rights and options in case of disputes), but also to consumer distrust of financial service providers, insufficient level of contractual liability and underestimation of the probability of certain risks occurring, and thus low insurance coverage. These risks cannot be quickly or easily mitigated, and given the degree of digitalisation and innovation of insurance products, behavioural aspects (in particular those related to the lack of knowledge of insurance products and entering into a contractual relationship without adequate information on insurance products and conditions, including insurance coverage and exclusions) are likely to be more pronounced in the future, in particular for some insurance products (e.g. property or crop insurance in the context of climate change, travel insurance in the context of mobility and more frequent travel by users, etc.). It is therefore necessary that, in the case of such products, insurance companies pay particular attention to the clarity of the insurance terms and conditions, the comprehensibility of the conditions and the product itself for the target group and the training of sales personnel / distributors. In order to minimise disputes related to this risk, consumers should collect as much information as possible in relation to initial product information and pre-contractual information (in particular as regards insurance terms and conditions, with an emphasis on coverage and exclusions, possibilities of contract termination and the resolution of potential disputes). This result indicates that initiatives and efforts of various stakeholders to strengthen financial literacy in the Republic of Croatia are justified. Although financial literacy in Croatia is increasing slightly (particularly when it comes to financial knowledge)4, challenges remain when it comes to improving financial behaviour. All of the above is particularly pronounced in view of the strengthening of the digital insurance distribution channel, and in view of the additional challenges and risks brought about by this distribution channel (e.g. cyber risks, lack of direct communication, etc.), along with undeniable benefits.

Another risk identified relative to the previous year as being considerably more significant, both in terms of materialisation and impact is linked to the behaviour of the distribution network. The distribution network is a customer's first (and often only) contact with the insurance company, so it is not surprising that stakeholders perceive it as important. In practice, situations occur that result in negative outcomes for consumers, when distributors are insufficiently familiar with the product they offer (especially when it comes to products that are less frequently contracted, or for which there is less demand and which are related to certain market niches) or offer inappropriate products or products that users do not need (often driven by a commission they can earn), but also with digital distribution, when it is difficult for consumers to receive necessary pre-contractual information or to withdraw from such a contract. It is therefore necessary that insurance companies, as insurance producers of insurance products and one of the contracting parties, irrespective of the distribution strategy chosen, pay further attention to their relationship with distributors, in particular with regard to their education, in order to inform clients in a transparent and fair manner and to act in their best interest.

Business processes and behaviour of insurance companies have been recognised again this year as a risk with a relatively moderate probability of materialisation and the level of impact on beneficiaries relative to the aforementioned risks. This risk includes, among other things: premium trends, corporate culture, clarity and transparency of insurance conditions, deadlines for claims handling, communication with beneficiaries (including during claims handling), and offering inappropriate as well as linked products. It is understandable that in some situations insurance companies cannot influence certain aspects and segments of this risk (e.g. modification of the amount of insurance premiums due to the impact of macroeconomic developments, or increase in the price of services due to higher costs of services of their business partners and other stakeholders, etc.), however, strategic improvement of the organisational culture of the company with the increased importance of customer orientation, improvement of the claims handling process with respect to ensuring adequate speed or communication with users during the process, and modification of insurance conditions to make them more understandable and clear contribute to strengthening the reputation of the company, reduce the probability of disputes and complaints and can indirectly contribute to strengthening public confidence in insurance companies and the financial sector.

Same as in the previous year, the risk associated with sustainable finance has been recognised as a risk of relatively the lowest degree, both in terms of probability of materialisation and impact. Although the topic of sustainable finance is becoming increasingly present in the domestic financial sector5 (and in the economy in general), due to a low presence of insurance products related to sustainable financing in the domestic market, this risk is not particularly recognised at this time. This may partly be due to the fact that sustainable/green insurance is not brought into context with trends that already exist in the domestic market, such as changes in insurance coverages or increase in premiums for certain crop or property insurance products, or a change in the method of determining the occurrence of an insured event for such products. However, it is realistic to expect that this trend will soon change and that both supply and demand for, for example, "green" insurance products that encourage green economic transformation or products that directly protect against climate change-related risks, such as drought, flood or storm insurance, will lead to an increase of this risk.

1. Individual responses from insurance companies are aggregated at the level of the entire industry.
2. The expert assessment by Hanfa employees is based on the analysis of supervisory activities and received inquiries and complaints, as well as the observation of trends in the insurance market.
3. The survey was conducted by telephone in December 2023 on a sample of 1000 adult citizens of the Republic of Croatia. When defining the sample (in order to ensure its representativeness), the gender, age and educational structure of the respondents and the territorial representation by selected regions were taken into account.
4. Financial literacy survey by Hanfa and the Croatian National Bank, 2023
5. https://www.hanfa.hr/core-functions/strategic-topics/sustainable-finance/