PRIIP-KID: providing retail investors with inappropriate product information?
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Providers of so-called packaged-retail and insurance-based investment products (“PRIIPs”) have to draw up a standardized key-information document (“KID”) since 1st of January 2018 when they offer such products in the European Union. In addition to some standard information on the product and its provider, this key information document discloses the product’s riskiness by means of a summary risk indicator, its performance potential by means of so-called performance scenarios and its included costs by means of a summary cost indicator. The European Commission has issued regulatory technical standards stating how the risk indicator, the performance scenarios and the cost indicator shall be calculated. This paper analyzes these “calculation recipes”, focusing on the risk indicator and the performance scenarios. Since, the European Commission issues these formulae without providing the assumed methodologies, our analyses on the one side shed light on the (presumed) underlying ideas and on the other side detect methodical and technical errors. We show that the risk indicator’s formula can be derived in a Black–Scholes setting considering a single premium investment. Since insurance companies are generally required to produce key information documents for regular premium payments as well, we show that an application of this formula to regular premium payments overestimates the products’ “true” risk. Therefore, we propose amended formulae for the risk indicator for regular premium payments which perform much better than the current specification. Further, we identify methodical and technical errors prevailing in the requirement regarding the (presumed) performance scenarios’ calculation. Taking into account the revision of the PRIIPs-directive at the end of 2018, this paper provides a good starting point for fixing current methodical and technical issues when risk indicator and performance scenarios are assessed.
KeywordsPRIIP Regulation Insurance-based investment products Financial modelling
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