This legal update briefly summarises the recent guidelines issued by the OCI and HKMA: OCI Guidance Note 16 on Underwriting Long Term Insurance Business (“GN16”) and HKMA Circulars: (i) Selling of Life Insurance Products dated 4 August 2015 and (ii) Selling of Non-Linked Long Term Insurance Products dated 8 December 2014.
GN16 is issued by the Office of the Commissioner of Insurance in Hong Kong (“OCI”) to promote transparency and fair customer treatment. The Guidance Note applies to all long term insurance other than investment-linked insurance (Class C) and adopts various Insurance Core Principles, Standards, Guidance and Assessment Methodology (“ICP”) promulgated by the International Association of Insurance Supervisors. GN16 applies to all new products from 1 April 2016 and current products from 1 January 2017.
HKMA has issued two Circulars recently on the sale of life insurance products by authorized institutions (“AI”). These Circulars were issued after consulting OCI and seek to achieve the common objective of customer protection.
The key requirements specified in GN16 are summarised below.
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Insurers should also pay attention to the specific requirements applicable to participating policies and universal life policies as set out in the appendices to GN16. For participating policies (insurance policies that pay dividends or bonuses), insurers will need to provide a benefit illustration and disclose non-guaranteed benefits. Insurers are also required to disclose investment policies, objectives and strategies so that customers can better understand risk and volatility of the non-guaranteed benefits.
The HKMA Circulars put particular focus on sale of life insurance products by AIs. The requirements and principles set out in these Circulars are consistent with those set out in GN16. HKMA also requires the management of an AI to supervise and regularly review the sale of life insurance products by its business units, in particular, high risk areas and exceptions involving vulnerable customers, inadequate FNA, mismatch, affordability issues or policy replacement. Apart from reinforcing the requirements in GN16, the HKMA Circulars place particular emphasis on AI’s FNA and customer suitability assessment, and the importance of AI working closely with the insurers to understand the products and ensure appropriate training of AI’s frontline staff and sales representatives.
Joining forces, OCI and HKMA seek to fundamentally change the way insurers and AIs sell long term insurance products. Evidently the focus is on treating customers fairly and managing their reasonable expectations, particularly for non- guaranteed benefits. GN16 forces insurers to look at the remuneration structure and to inform customers of investment strategies so that customers understand better the uncertain nature of non- guaranteed benefits. Echoing GN15, indemnity commissions are now a thing of the past. The requirement in GN16 for policies to be written in plain language is also a game changer and is consistent with the ongoing efforts of HKMA and Securities and Futures Commission in driving use of plain language in product documents and sales materials.