Following the OCI's issuance of GN 16 (Guidance Note on Underwriting Long Term Insurance Business (Other Than Class C Business) in July 2015, the OCI published a set of Q&A on 24 February 2016, providing clarifications on a number of provisions of GN 16.
GN 16 sets out the requirements for insurers underwriting long-term insurance business (other than linked long-term business), and its main objective is to ensure there is fair treatment of customers.
Some of the main clarifications provided by the OCI are set out below:
- Product Design:
Section 5.3 of GN 16 requires insurers to monitor the products after launch to ensure that they continue to meet the needs of the "target customers." The OCI clarified that such requirement applies to products available for sale only. That said, the OCI expects the insurers to put in place mechanism to perform regular review on shelved products, which still have in-force policies, because "target customers" include both existing and new customers.
For current products that may not have gone through a structured product design process (and therefore have not identified any "target customers"), such requirement is expected to be followed on a "best effort basis."
- Provision of Adequate and Clear Information:
Section 6.6 of GN 16 specifies that 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. The OCI clarified that this requirement applies to new business sales only. However, in cases where a risk factor is not disclosed at point of sale but becomes relevant after policy issuance, insurers should determine whether policyholders should be informed or not with due regard to the situation and materiality of the risk involved.
- Appropriate Remuneration Structure:
Section 9 of GN 16 provides that indemnity commission, or any standing arrangement that offers advance payment of commission, is strictly prohibited, and insurers should only pay commission on an "earned basis." Section 9 also provides that, for deterring cases of mis-selling, aggressive selling, fraud and money laundering (which often surface after the expiry of the clawback period), insurers should put in place a clawback mechanism to fully recover all commission paid in proven fraud/money laundering/mis-selling cases.
The OCI clarified in the Q&A that indemnity commission is banned after 1 April 2016. After that date, any commission payable (excluding those payable for contracts concluded before that date) should be paid on earned basis (i.e., at the time of payment, the cumulative commission paid cannot be higher than the cumulative premiums received). The OCI also clarified that the clawback mechanism requirement applies to all policies, and is not only limited to new products launched after GN16 is effective.
- Commencement date of GN 16:
Under section 12 of GN 16, it is stated that (i) for new products, GN 16 shall take effect from 1 April 2016; and (ii) for new and existing policies of current products, GN 16 shall take effect from 1 January 2017. The OCI clarified that "current" products refer to products that exist prior to 1 April 2016. For changes in pricing information only (e.g., guaranteed and non-guaranteed benefit, premium rate, etc), it would be considered as a revamped version of current product (rather than a new product), and only change in product feature (e.g., premium term and/or frequency of coupon/bonus) would be considered as new product.
That said, it does not necessarily mean that the requirements of GN16 for current products are not applicable until 1 January 2017. For certain requirements under GN16 (e.g., ban on indemnity commission, appropriate clawback mechanism on commission), the OCI expects that additional preparatory efforts should be minimal (as insurers are required to put in place the relevant mechanism for new products anyway by 1 April 2016).
To allow for preparatory work on post-sale calls for vulnerable customers, the OCI has extended the effective date to 1 July 2016 for current products.
In February 2016, the HKFI also issued a set of FAQs on the Guidance Notes on Illustration Documents for Participating Policies and Universal Life (Non-Linked) Policies. This set of FAQs clarified on a number of disclosure and projection requirements in the template illustration documents for these two types of policies.
Among other things, the FAQs clarified on matters such as whether policy loan projection should be included in the illustration for policies with policy loan facility, whether insurers can customize the illustration templates to fit different product features, and whether insurers are allowed to show supplementary illustrations for withdrawal or premium offset, etc. To avoid confusion to policyholders, the HKFI expects the insurance terminology in other product documents (e.g., product brochure, policy provision) to be consistent with benefit illustration. In that connection, the FAQs set out a list of alternative admissible and inadmissible insurance terminologies in relation to the template illustration documents.
To allow insurers to have additional preparation time to make changes to their system, the OCI agreed to have a no-action period in respect of provision of point of sale illustration for new policies of current products and enforce re-projection of current products until 1 July 2017.