PRIIP-KID: appearances are deceiving or why to expect the unexpected in a generic KID for multiple option products
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PRIIP‑KID: appearances are deceiving or why to expect the unexpected in a generic KID for multiple option products Stefan Graf1 · Alexander Kling1 Received: 11 October 2019 / Revised: 13 July 2020 / Accepted: 22 July 2020 © EAJ Association 2020
Abstract Providers of so-called packaged-retail and insurance-based investment products (PRIIPs) in the European Union have to draw up a standardized key information document (KID) since 1st of January 2018. 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 performance scenarios and its costs by means of a detailed disclosure of charges including a summary cost indicator. For products with multiple investment options, the regulation requires product providers to disclose a range for the summary cost indicator for the available investment options in the product. For feasibility, in practice often only synthetic investment options instead of the whole available investment portfolio are considered to derive an estimate for the required range. Based on a standard approach used in the German and Austrian insurance market, we analyze those investment options which actually yield the lower and especially upper bound of the required range. By considering different unit-linked products with investment guarantees our results show that those synthetic investment options typically used in practice may provide a false estimation of the range and, in particular, significantly underestimate the real upper bound. Further, we provide guidance how the “worst-case” combination of the investment option’s volatility and its charges can be found such that the summary cost indicator is maximized for the different products considered here. Keywords PRIIP-KID · Insurance-based investment product · Multiple option product · Option-based-portfolio insurance (OBPI) · Constant-proportion-portfolio insurance (CPPI)
* Stefan Graf s.graf@ifa‑ulm.de 1
Institut für Finanz-und Aktuarwissenschaften, Ulm, Germany
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S. Graf, A. Kling
1 Introduction Since 1st of January 2018 providers of packaged retail and insurance-based investment products (so-called “PRIIPs“) have to provide a key information document (so-called “KID“) following regulation EU 1286/2014 issued by the European Commission (cf. [5]). PRIIPs contain pretty much any (packaged) investment product sold by insurance companies, banks and asset managers within the European Union and hence this regulation practically affects the whole Pan-European financial market. Only old age provision products offered within occupational pensions or state subsidized pension products are exempt from this regulation. The PRIIP regulation was initiated in the aftermath of the financial crisis in 2008 where retail investors suffered tremendous losses. Citing the recitals of [5] highlights the motivation of the European legislator to protect the retail investor from similar (u
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