3 October, 2015
On 30 July 2015, the OCI issued the Guidance Note on Underwriting Long-Term Insurance Business (Other Than Class C Business) (the GN 16), which sets out high-level principles on the fair treatment of customers in accordance with Insurance Core Principle 19 (the ICP 19) promulgated by the International Association of Insurance Supervisors. ICP 19 generally provides that the conduct of the business of insurance should ensure that customers are treated fairly, both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied.
GN 16 applies to all authorized insurers underwriting long term business (other than Class C business, i.e., commonly known as Investment-Linked Assurance Schemes business).
Regulatory Approach
In assessing whether the requirements under GN 16 have been duly followed by insurers, the Insurance Authority will consider the substance and nature of the matters involved. The name or form of the arrangements adopted by individual insurers would be irrelevant. Any attempt to circumvent the requirements prescribed in GN 16 would be regarded as acting in bad faith. In the case of controllers of insurers (e.g., managing directors and chief executives) (the Controllers), this may affect their "fitness and properness." In the case of Appointed Actuaries, this may constitute non-compliance with the relevant professional standards.
Duties of the Board, the Controller and the Appointed Actuary
Controllers are required to ensure that requirements set out in GN 16 and the relevant ICPs are observed throughout the life cycle of all relevant long-term insurance policies. It is also the duty of the Board to maintain general oversight over the implementation of measures in compliance with GN 16 and is ultimately responsible for ensuring fair treatment of customers.
GN 16 provides that it is a reasonable expectation for policyholders to expect to receive at least a fair proportion, if not all, of the non-guaranteed part of the illustrated benefits. It is the duty of the Controller, the Appointed Actuary and the Board to ensure that such policyholders' reasonable expectation is met.
It is a continuing duty of the Appointed Actuary to advise the Board of his or her interpretation of policyholders' reasonable expectations. The Appointed Actuary should also take all reasonable steps to ensure that the Board appreciates the implications for the reasonable expectations of the policyholders when a significant change of the underlying assumptions of benefits expectation is likely to take place.
Major Requirements Under GN 16
Product Design
During the product design stage, the insurer should carry out a diligent review to ensure that the product meets the "fair treatment of customers" principle, including sustainability of the product, needs and affordability of the target customers, etc.Insurers are required to look at all relevant factors in their totality, including the product features, insurance elements, added value/services to customers, fees/charges, surrender penalties (where applicable), remuneration structure, etc.
Provision of Adequate and Clear Information
Product information (e.g., product brochure, benefit illustration) should be bilingual, clear and succinct, with the use of plain language and legible font size, and should be easily understandable by average customers. Key product risks should be included in the product brochure and marketing materials and insurers should communicate the relevant product risks to their potential customers. These include areas such as key exclusions, premium adjustment features, premium term, termination conditions, market value adjustment and inflation risk, etc.
Suitability Assessment and Sales Process
Insurance policies should not be marketed to customers before their needs are properly analyzed. Customers who have indicated their insurance needs should be presented with different insurance options that are available to meet their specific needs and financial circumstances. The suitability assessment should be carried out whenever there are relevant changes to the circumstances of the customer. Insurers have the duty to verify all available information and assess whether a particular product is suitable for their needs during the underwriting process. GN 16 has also set out a flowchart describing the proper sales process flow of the relevant products.
Appropriate Remuneration Structure
Insurers have the duty to ensure that the remuneration structure for their intermediaries do not create misaligned incentives for the intermediaries to engage in mis-selling activities. Indemnity commission, or any standing arrangement that offers advance payment of commission, is strictly prohibited. Insurers should only pay commission on an earned basis. Insurers should also put in place a clawback mechanism to fully recover all commission paid in proven fraud/money laundering/miss-selling cases.
Ongoing Monitoring
Ongoing communication with policyholders should be maintained at least annually as an integral part of expectation management (e.g., projections for non-guaranteed benefits in anniversary statements).
Post-sale Control
Insurers are required to make audio-recorded post-sale confirmation calls to all vulnerable customers (i.e., over 65 years of age, whose education level is "primary level" or below, or having no regular source of income) procuring life insurance products (except term insurance) or products involving investment risks. The post-sale confirmation calls are required to be conducted within five working days of the date of policy issue to reaffirm customers' understanding of the policy.
Additional Specific Requirements for Participating Policies and Universal Life Policies
GN 16 also contains detailed requirements for participating policies and universal life policies.
In relation to participating policies, an insurer should have a corporate policy covering allocation of surplus/profits between shareholders and the participating pool, as well as declaration of policyholder dividends/bonuses and other discretionary benefits. This should be clearly documented, approved by the Board and made available to the Insurance Authority on request. There are also specific requirements for disclosures of non-guaranteed benefits at the point of sale and during policy life.
Similar requirements are also applicable to universal life policies.
Implementation Timeframe
GN 16 shall come into effect on 1 April 2016 (for new products) and 1 January 2017 (for new and existing policies of current products).
For further information, please contact:
Martin Tam, Partner, Baker & McKenzie
martin.tam@bakermckenzie.com
