Hong Kong's financial regulators have introduced a number of measures to enhance the disclosure, product design and sale process of ILAS products to protect policyholders.

Disclosure

  • A Product Key Facts Statement (KFS) is part of the offering document which will disclose key features and risks of the ILAS product prominently to help the public better understand the product. The KFS of an ILAS must comply with the disclosure requirements set out in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (including the Code on Investment-Linked Assurance Schemes) and the KFS template published by the Securities and Futures Commission (SFC) in order to be marketed to the Hong Kong public.
  • An Important Facts Statement (IFS) must be provided by the intermediary to clients who apply for an ILAS policy or apply for top-up premium. Through the IFS, the intermediary can:
      • confirm (Note) the client's reasons/considerations for procuring an ILAS product as set out in the "Statement of Purpose" paragraph of the IFS for assessing whether a particular ILAS product is suitable for the client; and
      • disclose and explain to the client some important facts of the ILAS product to increase the client's awareness of these facts such as the long-term nature of ILAS policies, fees and charges, early termination penalties etc. and disclose the remuneration receivable by the intermediary in selling the product.

        For the remuneration disclosure in the IFS, all intermediaries (including insurance agents, brokers and banks) selling ILAS products are required to provide a standardised statement to disclose the remuneration receivable by the intermediary using “all-year-average” methodology (i.e. all remuneration receivable by the intermediary directly attributable to the sale of the ILAS policy as a percentage of the total premiums payable over the entire premium payment period).

Product design

  • The Securities and Futures Commission (SFC) introduced the Guidance on Internal Product Approval Processapplicable to providers of various products including ILAS. The guidance explains the requirements for a robust internal product approval process for product providers, covers the entire chain from inception of the product to post-sale, and reminds product providers their duty to consider investors' interests as part of the product-design process.
  • On 1 November 2021, the SFC issued the Additional Guidance on Internal Product Approval Process to provide further guidance to ILAS issuers, in particular on product design and fees, as well as the requirements on accountability throughout the product life-cycle:
      • ILAS products should be designed fairly and deliver a fair outcome to the target market in terms of, but not limit to, the level of life insurance protection, fee charging model and structure, investment options available for selection, premium payment structure & level, and product liquidity.
      • The fees of ILAS products should be fair, proportionate and commensurate with the insurance protection offered by the ILAS products (when compared with other alternative products) throughout the whole policy term, in particular the cost of insurance protection, platform fees and surrender charge.
  • The Insurance Authority (IA) issued the Guideline on Underwriting Class C Business which sets out proper standard of conduct and business practices for authorized insurers underwriting ILAS business, including duty of the board and the controller, product design, clarity of information, suitability, advice, disclosures, post-sale control etc.
  • With effect from 1 January 2015, insurance companies should provide a minimum death benefit of 105% of the account value for all ILAS products, and ensure that fees and charges paid by the customers should be fair and commensurate with the insurance protection offered by the ILAS product concerned.
  • On 28 December 2021, the IA ushered in Protection Linked Plans (PLP), a new category of ILAS with an embedded high level of insurance protection, i.e. a death benefit of at least 150% of the total premium payable before the insured reaches age 65. The purpose of PLP is to introduce a product with higher mortality protection element, simple and transparent fee structure and confined investment options so as to narrow the protection gap and facilitate financial inclusion.

Sales process

  • The IA issued the Guideline on Sale of Investment-Linked Assurance Scheme (ILAS) Products to formulate the requirements on the sales process for ILAS products and set out the minimum standards and practices that should be implemented and adopted by authorized insurers and licensed insurance intermediaries in the sales process, including the requirements on Financial Needs Analysis, Risk Profile Questionnaire, Important Facts Statement, and Post-sale controls.
  • Generally speaking, intermediaries selling ILAS products, whether they are banks, insurance agents or brokers, should, among other things, have sufficient understanding of the products' nature and structure, conduct financial needs analysis and risk profile assessment for client to ensure product suitability for the client, and explain product risks and features to clients.

 

Note: Before recommending any ILAS product to the client, banks and other insurance intermediaries are required to (i) request the client to set out his/her reasons/considerations for procuring an ILAS product in the “Statement of purpose” paragraph in the IFS; and (ii) take due account of the reasons/considerations set out by the client, together with other relevant information, in assessing whether or not the ILAS product is suitable for the client.