IIQE Paper 3 English Quiz 26

Dividend amounts
In general, dividend amounts feel the largest impact from the pooled fund’s investment returns, which may or may not be consistent with the overall business performance of the insurer. A good dividend yield will vary with interest rates and general market conditions, but typically a yield of 4 to 6 percent is considered quite good.

The appointed actuary should submit a report to the board of directors, recommending policy dividends/bonuses and other non-guaranteed benefits annually or more frequently, and the report should be made available to the IA upon request.

By “pooled fund”, it means the whole of the assets which the relevant insurer has created on its balance sheet as a result of granting the participating policies and which it then manages on behalf of such policies. The pooled investment account lets the investors be treated as a single account holder, enabling them to buy more shares collectively than they could individually, and often for better—discounted—prices.

The actuaries, in making recommendations, will consider the experience of the pooled funds, the economic outlook and the equity between different classes and generations of policyholders within a single pooled fund.

Boards of directors
It is the board of directors who are ultimately responsible for interpreting the policyholders’ reasonable expectations and deciding on dividends/bonuses declaration, taking into account the principle of fair treatment of customers and the issue of equity between the shareholders and the policyholders.

The Insurance Authority has issued a Guideline on Underwriting Long Term Insurance Business to impose requirements applicable to participating policies on relevant insurers, the actuaries they have appointed, and their boards of directors.

A dividend policy is a policy a company uses to structure its dividend payout to shareholders. They can either retain the profits in the company (retained earnings on the balance sheet), or they can distribute the money to shareholders in the form of dividends. In Hong Kong, policy dividends are generally distributed in three ways. It includes cash dividends, reversionary bonuses, and terminal bonuses.

As a cash dividend, many policyholders choose to leave cash dividends on deposit with their insurers. It is the distribution of funds or money paid to stockholders generally as part of the corporation’s current earnings or accumulated profits. Cash dividends are paid directly in money, as opposed to being paid as a stock dividend or other form of value.

As a reversionary bonus, where policy benefits are permanently increased by the declared amounts. It adds value to the total amount payable to the policyholder or nominee. It is usually declared at the end of every financial year and it is payable at the time of a claim.

Terminal bonus (final bonus) is declared and added only for policies, which attain maturity. This bonus is offered to the policyholders for keeping the policy till its maturity date. These are paid at the discretion of the life office and usually take the form of a percentage of the sum assured.

Cash dividends and reversionary bonuses are usually declared on an annual basis while terminal bonuses are usually declared at policy maturity or when the policy has been in force for a given number of years.

The main advantage of participating policies is that apart from the availability of cash values and death benefits guarantees, the policyholder can participate in any favorable experience of the pooled fund in the form of dividends.

A second advantage is that the risk of return to the policyholder is lower than with investment-linked policies, owing to the said guarantees. With investment-linked policies, the policyholder selects the underlying investments and will have the full upside if they perform well but also the full downside if they perform badly because such policies generally make no guarantees.

Investment-linked Policies
With investment-linked policies, the policyholder selects the underlying investments and will have the full upside if they perform well but also the full downside if they perform badly because such policies generally make no guarantees. The fact that returns on participating policies are generally smoothed is another advantage.

The major areas covered by GL16 are:
• Product design
• Provision of adequate and clear information
• Suitability assessment
• Advice to customers
• Appropriate remuneration structure
• Ongoing monitoring
• Post-sale control

Every application for a new life insurance policy (including a rider and top-up) must be accompanied by a financial need analysis (FNA) form, if that is a policy of the nature specified in Class C under the Insurance Ordinance, or in Class A under the Insurance Ordinance except:
• Term insurance policies
• Refundable insurance
• Yearly renewable insurance policies
• Group policies

Member Companies
Member Companies must require the insurance intermediaries to carry out an FNA (including the comparison of different insurance options) with the customers before recommending to them any life insurance products and signing the application.

The FNA form should include the following:
• Personal particulars (name, date of birth, marital status, occupation, education level, etc.)
• Financial outgoings (monthly living expenses, rent/mortgage redemption, etc.)
• Disposable assets (savings, stock/securities/bonds, etc.)
• Liabilities (mortgage loan, debts, etc.)
• Family commitments

The IFS-MP needs only be conducted once for one policy. There is no need for Mainland customers to sign the IFS-MP for top-up or rider addition if the basic plan was taken out after the implementation of the IFS-MP.

The major contents of Guidance Note on Conducting “Know Your Client” Procedures for Long Term Insurance Business includes:
• Record-keeping and Verification
• Identification
• Needs Analysis

In CIB-GN, identification includes:
• Examples of personal particulars of clients that should be recorded and verified are given in CIB-GN(4).
• Where a client is seeking insurance in the capacity of a trustee, the procedures of client identification and needs analysis should be conducted on the prospective beneficial owner of the policy.
• The IA’s Guideline on Anti-Money Laundering and Counter-Terrorist Financing (GL3) should be followed in obtaining and verifying the particulars of corporate clients.

“Needs Analysis” includes
• In assessing clients’ needs, CIB Members should understand such circumstances of the clients as include their existing and potential financial commitments, their income streams, and their various financial needs and priorities.
• CIB Members should ensure that the financial information of the client to be collected would enable them to assess and advise the client on his capability to commit to any new or additional long-term insurance policy.
• CIB Members should specifically ask for details of the client’s long-term insurance policies that are in force, paid-up, suspended, or under premium holiday.
• Where a CIB Member is allowed by an insurer to use its own Financial Needs Analysis form instead of that of the insurer, it should comply with the requirements as set out in the latest version of the Initiative on Financial Needs Analysis of the HKFI.

Physical hazard concerns largely objective factors that are likely to increase the risk of the insured event (death) happening. These will include obvious features such as known health dangers, including:
• Significantly overweight
• Heavy smoker
• Substance abuse (alcohol, drugs, etc.)
• Very dangerous occupation or leisure pursuits
• Adverse inheritable family or personal medical history

Moral hazard concerns rather more subjective factors surrounding the basic honesty or honorable intentions of the applicant/proposer. Whilst suicide is not a common potential problem, there are other considerations. It also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles. It can be present at any time two parties come into agreement with one another.

Classifying proposed risks into appropriate categories enables the insurer to determine an equitable premium. Insurers tend to have four categories of risks. It includes:
• Standard risks
• Sub-standard risks
• Declined risks
• Preferred risks

Declined risks
As the name indicates, these are risks that a particular insurer has found to be unacceptable. Insurers generally try to give cover if they reasonably can, but obviously, there are some applications where health or other factors make it impossible to accept.

Insurers tend to have four categories of risks. Sub-standard risks are sometimes called special class risks, they are expected to produce a higher mortality rate than a group of normal lives. They are insurable but only subject to certain considerations.

Further information is required from qualified medical practitioners. The source of such inquiry may be an attending physician or an examining physician. A number of factors need to be considered. It includes a sensitive subject, specialized medical questionnaire, confidentiality, and Attending Physician’s Statement (APS).

Attending Physician’s Statement (APS is the most frequently required medical report and the usual reasons for requesting it are:
• Specific medical disclosures on the application need further enquiry
• The amount of insurance requested is high
• The applicant is at a fairly advanced age (say, over 50)

Policy Delivery
Policy Delivery may be considered with policy issuance as the two are very closely connected. Using modern technology, policy documents can be produced with great speed and accuracy. It involves delivering the policy to the applicant and collecting any outstanding premium. It is usually delivered by an agent in person, but insurance companies may also permit the delivery by registered mail or courier.