IIQE Paper 3 English Quiz 15

Agency training and control: the majority of individual life insurance plans are sold through insurance agents. They at one and the same time represent almost the “lifeblood” of the company, and a major responsibility regarding their appointment, training and discipline. Details of requirements are given elsewhere in these and other Study Notes, but very important matters in this area include: (i) Training programmes: arranging, organising and administering, with all the logistics and personnel details involved. (ii) Examinations: both with regard to their being accepted as insurance intermediaries (this Insurance Intermediaries Quality Assurance Scheme, for example) and other professional qualifications. (iii) Resources and facilities: the provision of suitable materials, premises and opportunities for training and career development has obvious applications.

APPLICATION
Some insurers might refer to an application as a proposal. Either term may be found in the Hong Kong market, although “application” is perhaps more widely used. Both refer to the request for insurance cover from an intending policyowner. A number of significant issues and considerations are involved with this important matter, made more important by the fact that a life insurance contract cannot be cancelled by the insurer once it becomes operative

General rules for application procedures:
the application/proposal is the main, and sometimes virtually the only, source of information for underwriting purposes. The insurance intermediary should therefore take great care in his advice and general assistance to the client when the form is being completed, noting the following:
(i) All material facts should be given. “Yes” answers in response to enquiries on health and other matters must be accompanied by full explanations, including any relevant dates (see: 1.2.2).
(ii) Normally the applicant should complete the form personally. Sometimes the insurance intermediary is asked to assist by writing things at the client’s dictation. Great care must be taken with this, to ensure that the client realises that the form is his statement and the answers are his.
(iii) Alterations and amendments should be avoided, if possible. If not, they must be very clear. Anything incorrect must be clearly crossed through or deleted and the alteration should be signed and dated by the applicant. (A replacement form may be advisable in many cases.)
(iv) All questions should be answered, as fully as required. Failure to observe this rule can only result in delay. Information with life insurance is too important to be waived.

Key points to be considered: Some areas requiring special attention include:
(i) The desired commencement date should be clearly indicated. It is normal for insurers to allow a policy to be back-dated for a certain period (which may vary with the insurer concerned).
(ii) The identity of the applicant and life to be insured is important to establish. Any available Identity Card (or equivalent document of identification) should be inspected by the agent (some insurers require a copy to be attached to the application).
(iii) Age next (or sometimes last) birthday is an important element affecting the premium. Sometimes in Hong Kong this may not be easy to establish. It is not uncommon to find that only the year of birth is known. In that event, cautious insurers are very likely to regard the birthday as being the 1st January that year.
(iv) Other personal details, including occupation, residential address and family medical history all have a significance which is selfexplanatory.
(v) Signature of both the applicant and the life to be insured (if different) must be obtained. If an intended signatory cannot write, an appropriate mark or chop is acceptable, but this must be witnessed by two persons (one of whom may be the insurance intermediary).

Receipts and Policy Effectiveness The fact that a life insurance policy cannot be cancelled by the insurer once it has commenced is a matter of recurring importance. In connection with receipts issued by insurers, for example, in Non-Life insurance a receipt is merely an acknowledgement that some money has been received. This is not inevitably connected with the inception date of the insurance, which could have already commenced some time ago, or could be intended to commence in the future. Moreover, even if the (Non-Life) policy has commenced, there is usually a policy condition allowing cancellation if need be. Not so with Life Insurance. In life insurance, a premium receipt is a written acknowledgment that an insurer has received the initial premium submitted with an application for insurance.

There are two types of premium receipt which are in common use:
I.Conditional premium receipt
II.Binding premium receipt

Conditional premium receipt: with this type of receipt, the insurer agrees that the insurance will commence at the time of application. BUT this is true only provided that the applicant is subsequently found to have been insurable on standard terms at the time of application. Two things follow from this:
(i) if the applicant is found to be insurable, but only for a different plan, premium or amount of cover, then the insurance is not effective from the date of application. Technically, we may say that the offer has not been accepted on its exact terms, so the contract does not commence until any revised terms have been agreed;
(ii) if the applicant, subsequent to the application becomes uninsurable or even dies he is covered provided he is found to have been insurable at the time of application.

Binding premium receipt: this may be known by other names, such as a Temporary Insurance Agreement (TIA) or an Unconditional Premium Receipt. Whatever the title used, the basic features surrounding such a receipt are:
(i) this represents a contract, separate from any subsequent insurance policy that may be issued;
(ii) cover begins from the date the application was signed and the date that the premium was paid;
(iii) cover is not conditional upon the applicant subsequently proving to be, or to have been, insurable; but
(iv) cover is limited to a maximum specified number of days (say 60 or 90 days);
(v) the cover may terminate earlier than the final day of the period specified: (1) from the date the insurer returns the premium; (2) a specified number of days after mailing a notice of termination to the applicant; (3) from the date when coverage begins under the issued policy.

The Importance of Client Service This may have a number of considerations, including the following:
(a) Customer loyalty: the customer who is happy with you tends to stay with you. Continuity and the conservation of business are very important in life insurance, where the most of the costs and expenses are “up front” (when the policy is first arranged).
(b) Customer “prospecting”: “prospecting” may be described as the search for new customers. If existing customers are happy with you, they immediately become your “unpaid prospectors” with their friends and families.
(c) Productivity/Profitability: quality service leads to fewer mistakes and fewer complaints. That in itself means that effort can be directed to more productive activity, with its consequent impact on profitability.

How to Achieve Quality Client Service There is no simple answer to this, but certainly the following will greatly assist in achieving desired goals in this area:
(a) Corporate culture: this should always be customer-orientated.
(b) Delegation: of adequate and appropriate authority and accountability to front-line employees.
(c) Systems: should be created to monitor customer satisfaction.
(d) Training: and technology appropriate to these goals should be available. Note: The above recommendations apply primarily to the insurer, but the underlying principles are easily adapted and applicable to insurance intermediaries.

To counteract this perceived possibility, the Hong Kong Federation of Insurers (HKFI) has issued a code of practice called the “Cooling-off Initiative” for compliance by its life insurance members (LIMs), with the following major provisions :
(a) Policyholders are given a period (called a “Cooling-off Period”) during which they may reflect and if they wish change their mind about a life insurance policy that they have purchased or applied for.
(b) Such rights apply to purchases of new individual life insurance policies, whether linked or non-linked. To avoid possible doubt, certain transactions are stated to be beyond the scope of application, e.g. new riders added to existing life policies and conversions of life insurance plans.
(c) The Cooling-off Period is 21 days after the delivery of the policy or issue of a Notice (see (d) below) to the policyholder or the policyholder’s representative, whichever is the earlier.
(d) The Notice is to inform the policyholder of the availability of the policy and the expiry date of the Cooling-off Period. It reminds the policyholder that he has the right to re-think his decision to purchase the life insurance product and to obtain a refund of the premiums paid if the policy is cancelled within the Cooling-off Period. It also reminds the policyholder to contact the Customer Service Department of the insurer directly (service hotline number should be provided) if he does not receive the policy within 9 days from the issue date of the Notice.
(e) LIMs have to keep a copy of the Notice or acknowledgement of receipt of policy delivery. In case of a reasonable complaint or dispute, they will be required to produce evidence to show that the Notice or policy has been delivered.

Subject to the provisions below, policyholders have the rights to cancel new policies within the Cooling-off Period and obtain a refund of the premium(s) paid:
a. For all non-linked policies other than non-linked single premium policies, the refund is 100% of the premiums paid.
b. For all linked policies and all non-linked single premium life insurance policies, the insurer has the right to apply a “market value adjustment” (MVA) to the refund of premiums.
c. Any such MVA has to be calculated solely with reference to the loss the insurer might make in realising the value of any assets acquired through investment of the premiums made under the life policy. It should therefore not include any allowance for expenses or commissions in connection with the issuance of the contract.
d. In the case of a linked policy, the insurer’s right to apply an MVA has to be disclosed in the Principal Brochure, and the basis of calculation must be available for disclosure to the potential policyholder prior to the completion of the application form.

e. For non-linked single premium policies, potential policyholders have to be made aware that the insurer has the right to apply an MVA before they sign the application. This may be done by letter, or within the product brochure.

Customer Protection Declaration (CPD) Form: This is a very important document which an insurance intermediary must help an applicant complete before the applicant agrees or makes a decision in relation to the purchase of a New Policy. Prepared in conjunction with the CPD Form, the “Explanatory Notes to Customer Protection Declaration Form” explains in detail the duties of the insurance intermediary regarding the completion of the CPD Form and how to complete it (see Appendix A). The Code requires LIMs to provide training to help their insurance agents to get familiar with the contents of the CPD Form, of which the most important features can be found below: (i) the form is designed to discover any replacement being recommended. (ii) the insurance intermediary is required to explain and discuss with the applicant the full implications of his replacement, if any, in the following areas. Unless otherwise indicated, the insurance intermediary has to give reasons and/or justifications wherever required in the CPD Form in writing as fully as possible.

“Twisting” defined: The Code defines twisting as: “the making of inaccurate or misleading statements or comparisons to induce a policyholder to replace Existing Policy with other life insurance policy to the policyholder’s disadvantage.”

LIMs are advised to: (i) specify in their training materials for insurance intermediaries and internal guidelines that insurance intermediaries have to: a. inform prospective policyholders of their Coolingoff rights and the expiry date of the Cooling-off Period when they sign their policy application forms; and b. make all reasonable endeavour to deliver policies to the policyholders within a period of time consistent with (d) above and (f)(ii) below after the policies are issued if they are obliged to deliver policies on behalf of the insurers. (ii) devise internal control measures which will ensure and prove that: a. policies are delivered no later than 9 days after the policy issue date; or b. a Notice to inform policyholders of the availability of the policies and the expiry date of the Cooling-off Period is issued no later than 9 days from the policy issue date; and (iii) maintain records in respect of complaints or disputes for cases where clients seek refunds outside the Cooling-off Period but are refused by the insurer and to provide these records to the HKFI upon request.

“Replacement”: Unlike ‘twisting’, ‘replacement’ is a neutral term defined in the Code in the following manner: “Any transaction involving the purchase of life insurance is construed as a replacement if within 12 months before or after a new life insurance policy# (“New Policy”) is effected: (a) an existing life insurance policy# (“Existing Policy”) or a substantial part* of the sum insured of its basic life coverage: (i) has lapsed/will lapse; or (ii) was/will be surrendered; or (iii) was/will be converted to reduced paid-up or extended-term insurance under the non-forfeiture provision of the policy; or (b) a substantial part* of the guaranteed cash value of the Existing Policy was reduced/will be reduced including where a policy loan was/will be taken out against a substantial part* of the guaranteed cash value.

The Code requires LIMs to provide training to help their insurance agents to get familiar with the contents of the CPD Form, of which the most important features can be found below:
(i) the form is designed to discover any replacement being recommended.
(ii) the insurance intermediary is required to explain and discuss with the applicant the full implications of his replacement, if any, in the following areas. Unless otherwise indicated, the insurance intermediary has to give reasons and/or justifications wherever required in the CPD Form in writing as fully as possible.
(iii) the original of the CPD Form shall be kept by the selling office, with a copy for the client – a Hong Kong resident or otherwise – attached to the policy, and another copy for the non-selling office (i.e. the authorised long term insurer whose policy is being replaced) within 7 business days of the issue date of the New Policy

the insurance intermediary is required to explain and discuss with the applicant the full implications of his replacement, if any, in the following areas. Unless otherwise indicated, the insurance intermediary has to give reasons and/or justifications wherever required in the CPD Form in writing as fully as possible:
(1) Financial implications
(2) Insurability implications
(3) Claims eligibility implications
(4) Other considerations

Customer Protection Declaration (CPD) Form: This is a very important document which an insurance intermediary must help an applicant complete before the applicant agrees or makes a decision in relation to the purchase of a New Policy. Prepared in conjunction with the CPD Form, the “Explanatory Notes to Customer Protection Declaration Form” explains in detail the duties of the insurance intermediary regarding the completion of the CPD Form and how to complete it (see Appendix A). The Code requires LIMs to provide training to help their insurance agents to get familiar with the contents of the CPD Form

Identifying twisting: This may be initiated from a number of sources:
(i) Client initiated
(ii) Selling office initiated
(iii) Non-selling office initiated

Client initiated: if a client complains about suspected twisting, (1) the complaint, received by the HKFI or other party, has to be forwarded to the selling office; (2) then the selling office has to investigate and follow the same process as if it had itself discovered a suspected or actual incident of twisting (see (ii) below). It also has to write to the client to acknowledge receipt of the complaint and commit to notify the client, within 30 days of the receipt, of its findings and any suggested arrangements

If it is agreed that twisting has occurred, the selling office must immediately:
(1) report the insurance agent to the Insurance Agents Registration Board (IARB), or the insurance broker to the relevant broker body or the Insurance Authority as appropriate;
(2) suspend the insurance agent from selling any further new life insurance, or suspend accepting any further new life insurance sold by the insurance broker’s chief executive/technical representative who did the twisting; (3) claw back the commission paid on the case(s) in question; and
(4) write to the client, explaining that he may have been sold policy(ies) unprofessionally, and giving him the option to end the arrangements, request the return of all the premiums paid on the New Policy, and reinstate the Existing Policy(ies). The client will have 30 days to make a decision. He also has to be told that the selling agent has been suspended and has no further authority to represent the selling office to sell new life insurance, or that the selling office has suspended accepting any further new life insurance business sold by the insurance broker’s chief executive/technical representative who did the twisting.

Once twisting is identified as likely to have occurred, the offices concerned should attempt to reach agreement. This imposes an obligation on the offices to keep the client’s interest foremost. The client has to be kept informed of any material facts or arrangements which may affect his interest. Agreement must be reached speedily within a period of 30 days after the identification of the twisting and any follow up actions or arrangements affecting the interest of the policyholder has to be completed within 45 days, i.e. the next 15 days.

In the event that the Life Insurance Council finds that an insurer has failed to comply with the above process, it will: (1) seek cooperation from the office(s) concerned; (2) endeavour to mediate among all parties concerned; and /or (3) refer the case to the IA where there is concrete evidence of non-compliance.

The non-selling office has to arrange terms for reinstatement of the Existing Policy(ies), if the client so wishes, to allow the client, to the maximum extent possible, to return to the same position as if the twisting had not taken place. As stated in 5.2.5(c)(ii)(3)(b) above, where the client opts for reinstatement of the Existing Policy, it is the selling office, rather than the nonselling office, who will be responsible for paying any claims, subject to the terms and conditions of the New Policy, that may have occurred on a date when the existing policy had been surrendered or lapsed in the course of the policy replacement.
If it cannot be agreed that twisting has taken place, the complaining client or office may refer the complaint to the IARB, the relevant broker body or the IA as appropriate, which will give a ruling. Where twisting is established, it will decide on the appropriate disciplinary action against the insurance agent or insurance broker and inform the client of his rights to a reinstated Existing Policy and to a return of all the premiums paid on the New Policy

5.2.6a Linked Policy Illustration Document The Securities and Futures Commission (SFC) requires that all authorised investment-linked assurance schemes must issue to each of their prospective participants an up-to-date Principal Brochure, which should contain the information necessary for the participants to be able to make an informed judgment of the investment proposed to them. In addition, an ‘Illustration Document’ is required to be issued in accordance with the guidelines set out in the SFC’s “Code on Investment-Linked Assurance Schemes”.

Minimum requirements for the information to be included in the illustration document are: (i) Surrender values and death benefits & Prescribed statements.

Surrender values and death benefits: the insurance company must indicate what the policyholder would be expected to receive if he redeems at the end of each of the first 5 years of the contract, and for every fifth year thereafter until maturity or the end of the policy whichever is applicable, after deduction of all relevant charges. In a similar manner, the insurance company should also illustrate the projected death benefits in the event that the life insured dies on those alternative dates without the policy being redeemed. The projected surrender values and death benefits should be based on either 4 different assumed rates of return of 0%, 3%, 6% and 9% per annum respectively (Version 1 Template) or 3 different assumed rates of return of 0%, 3% and 6% per annum respectively (Version 2 Template). For both options, other than the 0% assumed rate of return, all rates of return are maximum rates and insurers may choose to illustrate lower rates. The illustration should include all policy level charges but not fund management charges levied by fund managers. In addition, a statement worded as follows should be made about the relationship between rate of return and policy termination and about the consequence of an automatic early termination: [Under the assumed rate of return at 0% [and b%] p.a., your policy will remain in force up to an attained age of x [and y] of the individual insured respectively. The policy will terminate afterwards. Your policy may also terminate under other adverse investment scenarios. If the actual investment return is below the above assumed rate of return, the policy may terminate earlier than above attained age(s). You could lose all your premiums paid and benefits accrued if any condition of automatic early termination is triggered.]

Prescribed statements: the following statements should appear in the Illustration Document: ‘THE ASSUMED RATES USED BELOW ARE FOR ILLUSTRATIVE PURPOSES. THEY ARE NEITHER GUARANTEED NOR BASED ON PAST PERFORMANCE. THE ACTUAL RETURN MAY BE DIFFERENT! IMPORTANT: THIS IS A SUMMARY ILLUSTRATION OF THE SURRENDER VALUES AND DEATH BENEFITS (VERSION 1: SHOWN ON THE FOLLOWING PAGE) OF (NAME OF PRODUCT). IT IS INTENDED TO SHOW THE IMPACT OF FEES AND CHARGES ON SURRENDER VALUES AND DEATH BENEFITS BASED ON THE ASSUMPTIONS STATED BELOW AND IN NO WAY AFFECTS THE TERMS OF CONDITIONS STATED IN THE POLICY DOCUMENT.’
The following statements should be clearly disclosed before the scheme participant’s signature:
“Warning: 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 or cease paying premiums early, you may suffer a significant loss.
Declaration: I confirm having read and understood the information provided in this illustration and received the principal brochure.”

b) Company customisation: subject to the approval of the SFC, the insurance company may customise the document to include additional information, provided that such additional information is not misleading and does not otherwise detract from the information disclosed in the minimum requirements. (c) Illustration preparation: the insurance company has to prepare an illustration document in conjunction with each proposed investment by each prospective scheme participant, and provide the document to the latter for his review and signature prior to signing of the application form.