Indexed Universal Life (“IUL”) products are a unique type of life insurance product linked to the performance of a financial index or indices selected by the customer, such as a stock market index.
In a recent joint circular (“Circular”) issued by the Insurance Authority (IA) and the Hong Kong Monetary Authority (HKMA), the regulators have now clarified the regulatory framework for IUL products – in particular, some relaxation where they are sold to professional investors (“PIs”), as defined under the Securities and Futures Ordinance Cap. 571 (“SFO”).
The Circular can be accessed here.
What is an IUL product?
IUL products are a type of insurance product with a cash value component as well as a death benefit. The cash value component of IUL products is linked to the performance of a financial index or indices, such as a stock market index. The IUL product may therefore earn interest depending on the performance of the financial index or indices selected, and its cash value may fluctuate. The insurer will usually offer a floor rate and a cap rate on the interest.
How do the insurance regulations apply to IUL products?
IUL products are classified as Class C (linked long term) business under the Insurance Ordinance Cap. 41, i.e. an investment-linked assurance scheme (ILAS). ILAS products are strictly regulated and must comply with various guidelines issued by the IA – including GL15 (Guideline on Underwriting Class C Business) and GL26 (Guideline on Sale of Investment-Linked Assurance Scheme).
Most of the regulations applicable to ILAS products will continue to apply to IUL products but certain provisions may not be strictly relevant or need to be amended given the nature of IUL products. Since they have features of universal life insurance products, certain provisions of GL16 (Guideline on Underwriting Long Term Insurance Business (Other Than Class C Business) apply, even if this guideline does not generally apply to ILAS products.
The Annex to the Circular (“Annex”) sets out the specific requirements for IUL products, which can be accessed here. These include:
- Fair treatment of customers: Ensuring design, fees and charges meet the “fair treatment of customers” principle. This principle may not be met if the IUL product is linked to an index only recognised or constructed by the insurer, or if fees and charges are embedded in the index.
- Minimum death benefit not applicable: For ILAS products, there is a minimum requirement for death benefit to be 105% of account value. This is not applicable to IUL products.
- Adequate and clear information: Insurers must provide adequate and clear product information, including (where relevant) information on policy loan facility and collateral assignment, and non-guaranteed benefits.
- How performance is determined: At the point of sale, insurers should highlight account(s) available to the policy holder, transfer options and mechanisms for determining crediting rate based on performance of underlying indices, as well as how the components (such as floor, cap, participating rate) are determined. .
- Remuneration: In addition to the requirements on remuneration in GL15, insurers should prorate the commission for regular payment IUL products in a way that aligns with the interests of the policy holders.
- Post-sale controls: The requirements on post-sale controls do not apply except for vulnerable customers.
- IA’s green light process: There is no requirement to follow the IA’s green light process for ILAS, including submitting product documents to IA (except the above-mentioned requirement in Remuneration).
PI exemption
Where an IUL product is sold to a PI:
- A financial needs analysis (“FNA”) and a risk profile questionnaire (“RPQ”) is not required. The insurer must have controls and processes to ascertain whether a customer satisfies the definition of PI before introducing the product to the customer and take steps to ascertain the investment knowledge and experience of a PI customer who is an individual.
- Insurance intermediaries will need to ensure that the IUL product meets the customer’s needs and objectives and there are no concerns about affordability.
- For any change in policy owner, the insurer must ascertain that the new owner satisfies the definition of PI in the SFO, and the IUL product is suitable for the new owner.
- The requirement to perform FNA and RPQ for top-up investment is not applicable but the customer must continue to be qualified as a PI.
- A Key Facts Statement is not required. Other requirements on disclosure of information still apply. An Important Facts Statement (“IFS”) is still required. A template IFS with Applicant’s Declarations is set out in the Appendix to the Annex. A copy can be accessed here.
Where the insurance intermediary does conduct FNA – namely, for a non-PI customer – the IUL product should not be introduced if the customer does not wish to link his/her policy benefit to a market index, or if the customer has no experience or knowledge in investment. Insurers and insurance intermediaries must not opt out of FNA or RPQ for vulnerable customers.
Takeaway
Given the complexity of IUL products, the Circular is useful in clarifying how the insurance regulations and IA guidelines apply to IUL products – and in particular, enabling a more streamlined process when dealing with PIs.
This gives clarity and efficiency to insurers, insurance intermediaries and customers. It is a welcome step in driving the demand for IUL products in Hong Kong, as well as promoting Hong Kong as an insurance hub and wealth management centre.
