On 26 June 2015, the Monetary Authority of Singapore (the “MAS”) issued a consultation paper and sought comments on proposed enhancements to disclosure requirements for the sale of investment-linked policies (“ILPs”). The consultation closed on 31 July 2015.
An ILP is a relatively complex form of insurance policy, providing both protection and investment benefits. In effect, an ILP operates much like a combination of a life insurance policy and a collective investment scheme (“CIS”). Protection comes in the form of benefits paid upon death, permanent disability and/or critical illnesses (i.e. like other life insurance policies). The investment benefits come in the form of the policy’s surrender value, which is in turn based on the value of the ILP’s underlying sub-fund(s) (the “ILP Sub-Fund”). An ILP Sub-Fund operates like a CIS in that it pools together the premiums of various policyholders and invests in a portfolio of assets (e.g. equities, bonds and CIS).
The proposed enhancements to disclosure requirements for the sale of ILPs aim to provide more information and better guidance for the public as to their investment decisions. A summary of each proposal is set out below.
Proposal 1: Enhanced disclosure on fees and charges in a new product-level Product Highlights Sheet (“PHS”)
Currently, insurers are required to disclose all fees and charges arising from the purchase of an ILP in a product summary provided to policyholders. However, the presentation format of such summaries is not standardised, and may be inadequate to clearly communicate to policyholders the additional charges or savings involved in the purchase of an ILP as compared to purchasing a term life insurance policy and a CIS separately.
The MAS proposes that insurers disclose all fees and charges for an ILP in a new product level PHS (set out in Annex A of the Consultation Paper). This product level PHS must be issued in addition to the PHS which are already required and will continue to be required for ILP Sub-Funds.
The new product level PHS must, among other requirements, disclose all fees and charges in a standardised format that will categorise the same as follows:
- Entry charge and surrender charge;
- Insurance and administration fees (for the administering/underwriting of the ILP);
- Fees from the ILP Sub-Fund’s investments in an underlying CIS; and
- Additional fees charged by insurers at the ILP Sub-Fund level (e.g. for valuation and accounting).
These enhancements should allow policyholders to make more informed comparisons of the various insurance products on the market.
Proposal 2: Single entry charge
When policyholders purchase an ILP, only a portion of their premiums will go towards investment in units of the ILP Sub-Fund(s). The rest of the premiums will cover other fees and charges associated with the ILP. What policyholders might not realise is that the portion of premiums used for investment will be further subject to (a) a sales charge, or (b) a bid-offer spread, which will be levied upfront on the purchase of any units of the ILP Sub-Fund(s).
The MAS proposes that insurers set out a single “entry charge”, which represents the amount of premium deducted upfront, before the purchase of any units of the ILP Sub-Fund(s). This will be calculated as a percentage of the premium amount, and deducted prior to the purchase of units in the ILP Sub-Fund(s).
Proposal 3: Disallow use of the terms “premium allocation rate” and “bid-offer spread”
Currently, the portion of premiums applied towards investment in units of the ILP Sub-Fund(s) is known as the premium allocation rate (the “PA Rate”). This PA Rate does not take into account the deductions made for any (a) sales charge, or (b) bid-offer spread.
With the introduction of the single “entry charge” concept, the PA Rate may no longer be relevant. Insurers and policyholders wishing to calculate the proportion of premiums used to purchase units of the ILP Sub-Fund(s) can simply deduct the entry charge levied from the total premiums paid. Accordingly, the MAS proposes to disallow the use of the term “PA Rate”.
The units of any ILP Sub-Fund(s) are currently priced on a Net Asset Value (“NAV”) basis or a “bid-offer spread” basis. While pricing on a bid-offer spread basis may bring about slightly better outcomes for policyholders, pricing on an NAV basis is much more easily understood. The MAS proposes to move towards a single pricing using the NAV basis.
Proposal 4: Monthly statements for ILPs with minimal insurance cover
At present, insurers are required to provide policyholders with annual statements on their ILPs. Such statements may not be adequate for Single Premium ILPs (“SP ILPs”), which are purchased primarily for investment purposes.
Investors in CIS currently receive monthly statements, which provide regular updates of their portfolio (e.g. the number and value of units held in the CIS) and allow them to make timely adjustments to their investments. SP ILPs are functionally similar to CIS, and policyholders should be able to receive similar updates by way of such monthly statements. Accordingly, the MAS proposes that insurers be required to provide to policyholders with monthly statements.
The MAS proposes that Proposals 1 to 3 apply to new ILPs issued after the relevant legislation is effected, while Proposal 4 apply to existing and new policyholders of SP ILPs. The MAS proposes to provide insurers with a transitional period of six months (after the relevant legislation is effected) to implement the proposals in the Consultation Paper.