Illustration Document for Investment-Linked Assurance Schemes

31 Oct 1996

The Securities and Futures Commission ("SFC") today announces that the Code on Investment-Linked Assurance and Pooled Retirement Funds ("the Code") will be amended to ensure greater disclosure for Investment-Linked Assurance Schemes ("ILAS").

A simple Illustration Document will be required to set out the surrender values of the schemes, with an emphasis on the first five years of the policy.

The amendment, which will come into effect on 1 January 1997, represents the second phase of regulatory response to earlier reports by investors that they were unaware of the high penalties for encashing their investment products before maturity.

A Cooling-off Period which allows investors to withdraw from a scheme without penalty was already introduced on 1 July this year in conjunction with the Life Insurance Council ("LIC").

ILAS are essentially investment products offered through a contract of insurance. A typical scheme may have a term of 10 to 25 years, with charges concentrated over the first one or two years. The Code sets out the policy which is applied by the SFC for the authorisation of ILAS.

Although charges are already required to be disclosed in the authorised scheme documents of ILAS, their effect may not be obvious without careful scrutiny.

Deborah Glass, SFC's Senior Director of Investment Products, said: "The problems usually did not surface for several years until the investor sought to cash in the policy, and found that the early surrender penalties and charges had rendered the value of the policy negligible."

"The basic problem identified was that investors were not fully aware of the long term nature of the product, the extent of their contractual commitment, and its effect on surrender values," she added.

The SFC, after a series of tripartite meetings with the LIC and the Insurance Authority, decided to amend the Code by requiring insurance companies to prepare an Illustration Document in relation to each proposed investment.

The document must be provided to the investor for review and signature prior to signing of the investment application form. The minimum disclosure requirements include an illustration of surrender values and prescribed warning statements.

The insurance company is required to state the amount the investor would be expected to receive net of all charges upon redemption at the end of each of the first five years of the contract, and for every fifth year thereafter until maturity.

The values should be based on two different assumed annual rates of investment return - set at a low of not more than five per cent and a high of not more than 11 per cent. These rates were set in consultation with the LIC.

The prescribed warnings include the following statement: "You should only invest in this product if you intend to pay the premium for the whole of your chosen premium payment term. Should you terminate this product early, you may suffer a loss as illustrated above."

Commenting on the amendment, Ms Glass said: "We trust that the combination of the new disclosure requirements and the Cooling-off Period would address the problems that were experienced in the past. These requirements should greatly enhance investor protection, and strengthen investors' confidence in investing in unit-linked insurance products. We would like to pay tribute to the efforts of the LIC in helping to bring about these initiatives."

The Commissioner for Insurance, Mr Alan Wong, said: "We welcome these new disclosure requirements as a significant enhancement of investor protection in respect of unit-linked insurance products. The efforts of the LIC have been invaluable in the introduction of these measures and we look forward to a continuation of those efforts in helping to achieve equivalent requirements in respect of non-linked insurance products, to which the Cooling-off provisions already apply."

Mr Frank Chan, Chairman of the Life Insurance Council of the Hong Kong Federation of Insurers, said: "The LIC is pleased to be actively involved in and promoting the implementation of Illustration Document for investment-linked assurance products. All member companies support this new endeavour which complements the Cooling-off initiative, offering investors more protection through better disclosure."

A sample of an Illustration Document is available upon request.

For further information, please contact Bill Weeks or Chan Chi Keung at 2840-9287.

Page last updated : 1 Aug 2012