Advertisement

European Actuarial Journal

, Volume 9, Issue 2, pp 361–385 | Cite as

PRIIP-KID: providing retail investors with inappropriate product information?

  • Stefan GrafEmail author
Original Research Paper
  • 75 Downloads

Abstract

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.

Keywords

PRIIP Regulation Insurance-based investment products Financial modelling 

Notes

References

  1. 1.
    Black F, Scholes M (1973) The pricing of options and corporate liabilities. J Polit Econ 81(3):637–654MathSciNetCrossRefGoogle Scholar
  2. 2.
    Cornish EA, Fisher Ronald A (1938) Moments and cumulants in the specification of distributions. Rev Int Stat Inst 5:307–320CrossRefGoogle Scholar
  3. 3.
    EFAMA (2017a) Updated European PRIIPs Information Exchange Templates (EPT and CEPT version 1.1). Press release available via https://www.efama.org/Publications/Public/PRIPS/UpdatedEPTandCEPTIntro.pdf. Accessed 7 Nov 2018
  4. 4.
    EFAMA (2017b) Comfort European PRIIPs Template (CEPT), version 1.1. Spreadsheet available via http://www.efama.org/documents/20171006-CEPT-V1.1.xls. Accessed 7 Nov 2018
  5. 5.
    European Commission (2014) REGULATION (EU) No 1286/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs). http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1490733841056&uri=CELEX:32014R1286. Accessed 8 Mar 2018
  6. 6.
    European Commission (2017) COMMISSION DELEGATED REGULATION (EU)…/… of 8.3.2017 supplementing Regulation (EU) No 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance based investment products (PRIIPs) by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents AND corresponding annexes. Available via http://ec.europa.eu/finance/docs/level-2-measures/priips-delegated-regulation-2017-1473_en.pdf and http://ec.europa.eu/finance/docs/level-2-measures/priips-delegated-regulation-2017-1473-annex_en.pdf. Accessed 8 Mar 2018
  7. 7.
    Institut des Actuaires (2017) Position du groupe de travail sur le Règlement PRIIPs. Available via https://www.institutdesactuaires.com/global/gene/link.php?doc%20id=11185&fg=1. Accessed 7 Nov 2018

Copyright information

© EAJ Association 2019

Authors and Affiliations

  1. 1.Institut für Finanz- und Aktuarwissenschaften (ifa)UlmGermany

Personalised recommendations