IIQE Paper 5 English Key Study Notes

Unit-linked life/annuities:

This is a common term used in the UK. The term  unit-linked illustrates that the values of the policies are linked to the price of the units.

Variable life/annuities:

This is the common term used to describe investment-linked business in the US. The term “variable” illustrates that the returns vary with the value of the underlying investment.

There are two different types of variable life insurance.
1. Fixed premium variable life
2. Flexible premium variable life

It is a graph showing the quantity of a good that buyers are willing to buy on the x-axis at each price on the y-axis. The quantity demand is normally downward sloping with respect to price. This inverse relationship is due to the substitution effect and the income effect.

It is the process to revalue the collateral value of a client to reflect the current market value.

The SFC has a range of regulatory tools such as regulatory programmes, policy projects and compensation schemes. These tools are either diagnostic, monitoring, preventative or remedial in nature.

It is widely adopted as an industry benchmark for risk measurement for banks and financial institutions. It is a measure of the change in value of an investment as a result of changes in market conditions at a specified confidence levels.

The risk management process typically involves four steps:

Identification of Risk;
Measurement of Risk;
Management of Risk; and
Monitor of Risk.

Dollar cost averaging is a technique to prevent investors from putting all their money in the market at the inappropriate time. It involves investing a fixed sum of money at fixed intervals of time.

Diversification means owning different issues of the same asset class or different asset classes within a portfolio of investment, or investing in different markets, regions or countries. It is a normal practice of investment managers to reduce the risk without substantial reduction in returns.

Market risk – basic demand and supply in the market will affect the price of investment instruments. An investor will suffer a loss if he/she has to sell an asset when the price drops below his/her original purchase price.

The Securities and Futures Commission (SFC)

It is a graph showing the quantity of a good that sellers are willing to sell on the x-axis at each price on the y-axis. It is normally upward sloping.

M1: The sum of legal tender notes and coins held by the public plus customers’ demand deposits placed with banks.

M2: M1 plus customers’ savings and time deposits with banks plus negotiable certificates of deposit (NCDs) issued by banks held outside the banking sector.

M3: M2 plus customers’ deposits with restricted licence banks and deposit-taking companies plus NCDs issued by these institutions held outside the banking sector.

Specialization
Investment
Payment

The ultimate measurement of an economy’s performance is its gross domestic product. It is the market value of the final goods and services produced in a country during a given period.

Expansion
Peak
Recession
Trough

It refers to decisions on the government’s budget as to how much the government spends and how much tax it collects. The logic for a fiscal policy is clear: the government increases purchase of goods and services, which are components of GDP, would directly boast the GDP.

Interest rate is in essence the price of holding money which is determined by the demand and supply of money. The higher the market interest rate, the greater the cost of holding money as people would prefer the alternatives to money such as deposits and bonds.

Inflation is a measure of the annual percentage rate of change in the general price level. Higher inflation will bring about lower purchasing power of money.

Conservative
Aggressive
Balanced

This is the time period within which the investor intends to make the investment. This is dependent upon the investor’s investment objectives, age and current financial condition.

Investment advising refers to the process of providing investment advices to the clients. This focuses on the investment objectives and needs of the clients and provides investment advices on investment products, investment strategies and so on.

Knowing the client
Understanding the investment products
Providing reasonable advice

The US is one of the major trading and investment partners of Hong Kong.

Medium of exchange
A means of holding wealth
A unit to measure value

Monetary policy
Gross domestic product
Risk free rate
Unemployment rate

These are negotiable short-term time deposit certificates issued by commercial banks evidencing a deposit of a fixed maturity of less than 1 year. Most CDs are issued in amounts of HKD500,000 or HKD1,000,000.

Government Bills
Short-term Certificates of Deposit
Commercial Papers

These are short-term highly liquid, low-risk debt instruments issued by governments, banks and large non-financial corporations. They play an important role in the short-term investment and borrowing activities of most financial institutions.

These are unsecured promissory notes issued by top-rated financial and non-financial companies with maturities of under one year. CP is a low-cost alternative to bank borrowing.

Low risk
Provide a reserve for emergencies
Accumulate funds for specific future purposes
Principal will not change, sometimes insured
High liquidity

Supra-nationals Bonds
Government Bonds
Government Agency Securities
Municipal Bonds
Corporate Bonds

A normal or positive yield curve
Inverted or negative yield curve
Flat yield curve
Irregular yield curve

Eurobonds are bonds issued in the currency of one country but sold in other national markets. The major advantage of investing in the Eurobond market is that it is neither regulated nor taxed.

High denominations
Price risk – fluctuation in interest rates
Inflation risk – fixed interest rate
Liquidity – some bonds may not have a ready secondary market
No participation in company profits
No right of voting
Possibility of default by issuer
Sophisticated trading techniques may be involved

Initial Public Offering (IPO)
Private Placements
Equity Warrants
Rights Issues

The primary market is one when a company goes listed and new shares are issued for the first time. New capital from the public will be raised by the company. It is an exercise between the company and the investors.

The secondary market refers to the transaction between buyers and sellers of the shares of the already listed company. No funds are raised by the company irrespective of the price and trading volume of the company’s shares in the secondary market.

Market index is widely adopted in different stock exchange markets as reference of the price level of a particular stock market. One can find out the performance of the stock market during that period, by comparing the market index of the same market over a period.

Dividend Discount Model (DDM)
Price Earnings Model (P/E model)
Capital Asset Pricing Model (CAPM)

The relative strength indicator (RSI) plots the price relationship between the closing prices of up days and down days within a specific period, the most common is 14-day RSI. RSI has a value between 0 to 100%. Analysts normally use the 30 and 70 levels as the thresholds.

Risk management
Speculation
Arbitrage

Forward and Futures Contracts
Options and Warrants

Discover any replacement being recommended
Ensure that the agent/broker has explained the important consequences
Ensure that the client fully understands the important consequences

The cooling-off period provides policyholders a chance to re-think within a reasonable period of time their decision to purchase a life insurance product which is a long-term commitment. The policyholders will have the rights to serve a written notice to cancel the policy and obtain a refund of the paid premium less a market value adjustment.

Investment time frame
Principal brochure and illustration document
Product Key Facts Statement
Product risk
Product features and benefits
Fees and charges
Early termination, surrender and/or withdrawal risk
Premium holiday risk

Approach 1: PSAR to be conducted by an employee on site
Approach 2: PSAR to be conducted by call centre employee

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 (number of dependents, education funds, etc.)

These policies are entitled to receive a share of (participate in) the divisible surplus (profits) of the insurance company. These are normally paid in the form of dividends which will be credited into the account.

Wide Spectrum of Investment Choices
Flexible Premium
Variable Sum Assured
Variable Death Benefit
Partial Surrender/Withdrawals Allowed

Bond Fund
Equity Fund
Index Fund
Warrant Fund
Global Fund
Regional/Country Fund
Specialty Fund
Income Fund
Balanced Fund
Growth Fund
Guaranteed Fund
Fund of Funds (Unit Portfolio Management Funds)

Increasing death benefit
Level death benefit
105 plan

Investment-linked policies which are financed by single premiums are for individuals who have a large capital sum at their disposal. Along with the value of protection, they will be looking for a long-term and profitable investment alternative that will supply them with the freedom to achieve their own investment strategy.

This is a type of annuities whose annuity payment is variable according to the performance of the investment funds. Annuities are not common in Hong Kong as for the lack of demand.

Bid-offer Spread
Fund Management Fee
Fund Switching Charge
Surrender Charge
Top-up Fee
Fees and Charges of Underlying Funds

Term insurance
Endowment insurance
Whole life insurance
Universal life insurance

Front-end load
Back-end load
Level load

Provide effective hedge for unwanted risks
Efficient means for speculative purpose
Loss limited to premium paid only (for buyer of options)
Highly leveraged
Potential high return
Liquidity (for exchange traded derivatives)
Low transaction cost

Investment-linked policies financed by regular premiums are for individuals who want to build up savings on a regular basis. Along with the value of protection, they will enjoy a flexible investment strategy along with the ability to spread the risk of investment with small amounts of capital investment through unit participation in various investment funds.

Switching benefits the policyholders in the execution of an optimal investment portfolio to fit their personal investment objective or to react to changes in the financial markets.

Misrepresentation
Twisting
Rebating
Fraud

Change of beneficiary
Assignment of the policy
Change of address/personal particulars

Reinstatement
Change of frequency of premium payment
Change of sum assured
Policy loan
Surrender

It is prepared at least annually, within 30 days after the policy anniversary.

Cheque in favour of the Principal
Credit card/direct deposit/bank transfer from the customer’s account to the Principal.

Obtain authorisation from the IA
Become a member of a body of insurance brokers approved by the IA

The Members should at all times conduct their business with uttermost good faith and integrity.
The Members should do everything possible to satisfy the insurance requirements of their clients and should place the interests of those clients before all other considerations.
Statements made by or on behalf of the Members shall not be misleading or extravagant when advertising .

Credit Risk
Exchange Risk
Interest Rate Risk
Liquidity Risk and Reinvestment Rate Risk
Market Risk

CIB Members should keep documentary records which are sufficient to demonstrate satisfactory agreement with the procedures of client identification, needs analysis and risk profile.
They are encouraged to use their own forms for the purposes of product recommendations.
The records should be kept up to date.

It usually includes client’s investment objectives, investment knowledge and experience, preferred investment horizon, risk attitude and appetite, and risk tolerance or capacity.

PIBA Members should provide customers with clear information before, during and after the point of sale.
Projections in relation to growth scenarios should not be overly optimistic.

PIBA Members should establish and implement policies and procedure on fair treatment of customers, with proper control systems.
PIBA Members should follow the proper sales process as defined in the flowchart appended to the Guidance Note.

Product design
Provision of adequate and clear information
Suitability assessment
Advice to clients
Appropriate remuneration structure
Avoidance of conflict of interests
Clients’ investments and assets
Post-sale control

Integrate and adapt the law relating to financial products, the securities and futures market and the securities and futures industry.
Regulate activities and other matters connected with financial products, the securities and futures market and the securities and futures industry.
Provide for the protection of investors and other matters incidental thereto or connected therewith, and for connected purposes.

The participating persons of the CIS do not have day-to-day control over the management of the property.
The property of the CIS is managed by or on behalf of the person operating the arrangements.
The contributions of the participating persons and the profits or income are pooled.

A maximum fine of HKD5,000,000 and a maximum term of imprisonment of 7 years.

By proposal ways for single premium contracts in respect of investment bonds, purchased annuities, life insurances or personal pensions.
Return premiums.
Overpayment of premiums.

Placement
Layering
Integration

The general principle of an RBA is that where customers are evaluated to be of higher ML/TF risks, FIs should take appropriate measures to manage and reduce those risks.

Principle 1: purpose and manner of collection of personal data
Principle 2: accuracy and duration of retention of personal data
Principle 3: use of personal data
Principle 4: security of personal data
Principle 5: information to be generally available
Principle 6: access to personal data

A person who

(a) processes personal data on behalf of another person, and

(b) does not process the data for any of the person’s own purposes.

The purpose for which the data are to be used
The classes of persons to whom the data may be transferred
His/her rights to access and to request the correction of the data

A fine of up to HKD500,000 and imprisonment for up to 3 years.

Financial status
Relevant educational or other qualifications
Relevant criminal conviction or professional misconduct
Breach of HKFI rules

Authorisation of insurers
Capital requirements
Solvency margin requirements
Fit and proper requirement for controllers, directors, key persons in control functions and appointed actuaries
Adequate reinsurance

Open-ended
Unit offer price remains constant (e.g. HKD1,000)
Interest credited to the account as units purchased
Participation in short-term investment instruments

Higher return than money market fund
Fund managers can trade and take advantage of interest rate movements
Usually can cover inflation

All profits generated from the investments are “distributed” as bonus units to the investors; therefore increasing the number of units held. The price of the units remains the same.

105 Plan has a smaller insurance protection element as opposed to policies with either increasing death benefit or level death benefit. The death benefit will be 105% of the value of the policy account.