PRIIP-kid: Providing retail Investors with inappropriate product information?

PRIIP-kid: Providing retail Investors with inappropriate product information?


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Speaker(s): Stefan Graf (Institut fuer Finanz- und Aktuarwissenschaften)

The PRIIPs-regulation (EU regulation 1286/2014) requires manufacturers of so-called packaged-retail and insurance-based products ("PRIIPs") to draw up a pan-European standardized key-information document ("KID") as of 1st of January 2018. This key information document discloses the product's risk by means of a summary risk indicator, its potential performance by means of so-called performance-scenarios and its charges by means of a cost indicator. The European Commission has issued regulatory technical standards on how the risk indicator, the performance scenarios and the cost indicator shall actually be derived. This paper analyses the calculation recipes provided by the European Commission, especially considering the risk indicator and the performance scenarios. Our analyses on the one side shed light on the underlying ideas behind European Commission's formulae and on the other side detect methodical and technical errors.

Since the European Commission (accidentally?) only provides formulae for single premium products, but requires insurance companies to produce key information documents based on regular premium payments as well, we show how especially the risk indicator's derivation applying European Commission's calculation recipe may yield to significantly wrong results when regular premium payments are considered. Then, we propose and analyze different amendments to the currently stated formulae which provide much more accurate results for regular premiums.

Further, we critically investigate European Commission's calculation recipe regarding the derivation of performance scenarios and detect technical errors in the currently proposed approach.

Taking into account the planned revision of the PRIIPs-regulation during 2018, our paper provides a good starting point for fixing current methodical and technical issues when the risk indicator and the performance scenarios are assessed.

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