The Monetary Authority of Singapore (“MAS”) has issued a consultation paper on 26 June 2015 proposing various enhancements to improve the clarity of existing disclosure documents, including available information on fees and charges, for investment-linked policies (“ILPs”). ILPs are life insurance policies that provide both protection and investment benefits by allowing premiums to be invested in various underlying ILP sub-funds. As policyholders tend to find the structure of ILPs complex, the proposals aim to enable policyholders to make informed decisions through clearer and more adequate product disclosures.
2. Enhanced Disclosure on Fees and Charges
Fees and charges for ILPs can be categorised broadly into:
- product level fees covering distribution costs (e.g. entry charge and surrender charge);
- product level fees covering administration/underwriting costs (e.g. insurance fees and administration fees);
- sub-fund level fees incurred from the ILP sub - -funds’ investments in underlying collective investment schemes ( "CIS") (e.g. the fund managers’ Annual Management Charge ("AMV"), trustee fees and custodian fees); and
- additional fees charged by insurers at the ILP sub- fund level (e.g. additional AMC/rebate, custodian fees, and valuation and accounting fees).
While insurers are presently required under MAS Notice 307 to provide prospective ILP policyholders with product summaries disclosing all fees and charges, there are no prescribed or standardised formats in which to do so. MAS has said that it is also concerned that policyholders might not understand what the fees and charges relate to, and might be unaware of additional charges or savings that could arise from purchasing ILPs (as compared with purchasing a term life insurance policy and a CIS separately).
To enhance disclosure and provide greater clarity on ILP charges, MAS has proposed to require that disclosure and categorisation of all ILP fees and charges be made in a standardised product level Product Highlights Sheet (“PHS”). The Chief Executive of an insurer will also be required to confirm that the proposed requirements have been adhered to in the insurer’s product submission to MAS. The requirement for the proposed product level PHS will apply in addition to the existing PHS requirement for ILP sub-funds and must include:
- a summary of the main features and risks of the ILP at the product level;
- information on valuations and policy withdrawal; and
- a statement emphasising that an ILP is suitable only for investors seeking both protection and investment.
3. Simplification of Upfront Deductions to Entry Charges
Insurers usually deduct a portion of premiums paid for ILPs upfront before investment, reducing the premiums invested in units of the ILP sub-funds and the surrender value. Such deductions may be levied in two stages, first via the premium allocation rate and subsequently, the sales charge or bid-offer spread (where applicable) (collectively, the “Upfront Deductions”). However, MAS has expressed concerned that policyholders might be unaware of the latter or might find the different calculation methods for the Upfront Deductions confusing.
To minimise potential confusion for policyholders, MAS has proposed that all upfront deductions be simplified into a single “entry charge”, which shall be calculated as a percentage of the premium amount and will be deducted from the premiums before subscription of units in the IPL sub-funds.
4. Insurance Terms and Pricing Basis
Following from the above proposal to introduce the concept of an “entry charge”, MAS has also proposed to disallow the use of the term “premium allocation rate” in order to minimise potential confusion for policyholders.
Further, the proposed changes by MAS will require the use of Net Asset Value (“NAV”) pricing in determining the number of units held in a sub-fund. MAS has observed that sub-funds are currently priced either on a NAV basis or on a bid-offer spread basis. While NAV pricing may be helpful to policyholders as it is more easily understood, bid-offer pricing could result in marginally better financial outcomes for policyholders though policyholders may need to incur the bid-offer spread when they switch between sub-funds. MAS has therefore sought views on whether a single pricing basis using NAV should be adopted to help policyholders’ understanding.
5. Monthly Statements for ILPs with Minimal Insurance Cover
Insurers are currently required under the MAS Notice 307 to provide policyholders with annual statements on their ILPs. These set out, among other things, information on the number and value of units held in the ILP sub-fund(s), death benefit, and net cash surrender value. In contrast, monthly statements and regular updates are issued to investors in CIS, allowing them to make adjustments to their investments following changes in market conditions.
MAS has recognised that policyholders may purchase ILPs primarily for either investment or protection purposes. Regular Premium ILPs (“RP ILPs”) provide substantive insurance cover and are typically bought by policyholders for protection purposes with a longer term horizon in mind. As such, monthly statements would unlikely be necessary for this group of policyholders. In contrast, Single Premium ILPs (“SP ILPs”) are similar to investments in CIS and are usually purchased by consumers for investment purposes rather than for protection purposes, given the minimal insurance cover.
MAS has proposed to require insurers to furnish policyholders of SP ILPs with monthly statements containing the prescribed information set out in Appendix C of MAS Notice 307, so as to better enable these policyholders to make informed decisions with respect to their investments.
6. Transitional Period
The proposals set out in paragraphs two, three, and four above is proposed to apply to new ILPs issued after the enactment of relevant legislation, while the proposal in paragraph five is proposed to apply to existing and new policyholders of SP ILPs under the current legislation. MAS has proposed to provide insurers with a transitional period of six months (after the relevant legislation is effected) to implement all proposals in this consultation paper.
7. Consultation period
The consultation period ends on 31 July 2015.