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Regulations and Industry Practices associated with the Sale of Insurance Policies

The Insurance Authority (“IA”) is committed to working with the insurance industry to promote good industry practices for consumer protection. It also issued guidelines which set out principles of best practice for compliance by insurers e.g. Guideline on Underwriting Class C Business (“GL15”), Guideline on Underwriting Long Term Insurance Business (other than Class C Business) (“GL16”), Guideline on Offering of Gifts (“GL25”), Guideline on Sale of Investment-Linked Assurance Scheme (“ILAS”) Products (“GL26”), Guideline on Long Term Insurance Policy Replacement (“GL27”), Guideline on Benefit Illustrations for Long Term Insurance Policies (“GL28”), Guideline on Cooling-off Period (“GL29”), Guideline on Financial Needs Analysis (“GL30”) and Guideline on Medical Insurance Business (“GL31”). GL25 – GL30 and GL31 have commenced on 23 September 2019 and 23 September 2020 respectively. In response to requests from the industry in view of the impact of recent COVID-19 outbreak, for GL25, GL27 – GL30, the IA will assess the degree of compliance by authorized insurers and licensed insurance intermediaries with the requirements therein as if the transitional period is extended until 31 March 2021. For GL31, the IA will exercise flexibility in determining if the requirements therein have been observed for a period up to 31 March 2021.

Code of Conduct for Insurance Intermediaries 

With the commencement of the regulatory regime for insurance intermediaries on 23 September 2019, any person who wishes to carry on regulated activity in Hong Kong must apply to the IA for an appropriate insurance intermediary licence. Licensed insurance intermediaries are required to comply with the statutory conduct requirements set out in sections 90, 91 and 92 (where applicable) of the Insurance Ordinance. The IA has also published the Code of Conduct for Licensed Insurance Agents and the Code of Conduct for Licensed Insurance Brokers. These codes aim to promulgate principles of conduct and related standards and practices with which licensed insurance agents and licensed insurance brokers are ordinarily expected to comply in carrying on regulated activities.

Regulation on the sale of long term policies for promotion of fair treatment of customers

The Insurance Core Principles, Standards, Guidance and Assessment Methodology No. 19 – Conduct of Business, promulgated by the International Association of Insurance Supervisors, stipulates that the conduct of the business of insurance should ensure that customers are treated fairly, both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied. GL15 and GL26 in respect of ILAS products, and GL16 in respect of non-ILAS products set out comprehensive requirements for authorized insurers underwriting long term business in all aspects from product development to post-sale controls. GL25, GL27 – GL30 also formulate specific requirements in the sales of long term insurance products. In tandem, the insurance industry has also drawn up a package of measures for purposes of enhancing policyholder protection. Requirements and measures include:

Adopting the "fair treatment of customers" principle in product design: Insurers should develop and market products with due regard to the interests of customers.

Provision of adequate and clear information to customers: In the sale of ILAS products, for example, insurers should include information on the key product features and risks in all the product documents (including information on the underlying investment choices), including the product brochure, product key facts statement, illustration document and Important Facts Statement / Applicant’s Declarations. Requirements are also in place to ensure the provision of adequate and clear information to customers for the sale of non-ILAS products.

Suitable insurance products to customers: Insurers should endeavour to reduce the risk of sales that do not meet the needs of customers. Clients’ needs must first be properly assessed through the use of Financial Needs Analysis form.

Appropriate Remuneration Structure and Avoidance of Conflict of Interest: Insurers have the duty to ensure that the remuneration structure for their intermediaries do not create misaligned incentives for the intermediaries. Also, the industry has adopted the formulation stipulated by the IA in calculating and disclosing the remuneration for each ILAS product and distribution channel.

Post-sale Control: To reaffirm client’s understanding of the ILAS policy that they have procured, GL15 and GL26 require insurers to have post-sale controls on sale to all ILAS clients. Similarly, post-sale control is required under GL16 for all vulnerable customers procuring life insurance products (except term insurance).

Long Term Insurance Policy Replacement

Life insurance policies are long-term contracts of insurance, designed and intended to be in force over multiple years of a person’s life. The terms and conditions of a life insurance policy reflects this intention. A policy holder, having purchased a life insurance policy, may later consider purchasing another life insurance policy to replace (whether in whole or in part) the life insurance policy initially purchased. In these circumstances, the policy holder should be mindful of the disadvantages of making changes to the life insurance policy initially purchased (for example, surrender or withdrawal charges may be incurred). Accordingly, if a policy holder applies to purchase a new life insurance policy and combines this with replacing or making changes to a life insurance policy previously purchased, authorized insurers and licensed insurance intermediaries should ensure the policy holder is fully informed of the consequences of such replacement of changes, so that he/she can make a fully informed decision. The purpose of GL27 is to address this issue.

Cooling-off Period for Long Term Insurance Policies

GL29 sets out the requirements on authorized insurers and licensed insurance intermediaries regarding the cooling-off period. The cooling-off period is a mechanism in relation to a life insurance policy to which GL29 applies, which provides the policy holders with the opportunity to reflect on their decisions and thereby protect policy holders’ interests. Cooling-off period in relation to a life insurance policy means the 21 calendar day period during which the policy holder can cancel the policy and obtain a refund of premium.

Benefit Illustrations for Long Term Insurance Policies

The IA sets out the standard requirements in GL28 for benefit illustration documents to be provided to potential policy holders and existing policy holders to allow them to have adequate and clear information on the benefits of a life insurance policy.  In addition to point-of-sale benefit illustrations, insurers may provide supplementary illustrations in relation to optional product features and should provide inforce re-projection illustrations periodically (where applicable) taking into account latest performance of the policy. 

GL28 applies to ILAS, participating, universal life and non-participating products. Among all the other requirements, below are the key requirements for specific type of products:

  • For ILAS policies, insurers are required to illustrate the assumed net rates of returns of 0%, 3%, 6% and 9% p.a. (or 0%, 3%, and 6% p.a.).
  • For participating policies, additional projections under pessimistic and optimistic scenarios must be provided to demonstrate variability of non-guaranteed benefits. 
  • For universal life policies, the benefit values should be provided under Guaranteed Basis / Conservative Basis and Current Assumed Basis.  Insurers are also required to provide a summary of fees and charges.  
  • For non-participating policies, guaranteed benefit values throughout the whole policy term have to be shown.

Offering of Gifts for Long Term Insurance Policies

To ensure that gifts or other similar gratuities would not distract a customer from making an informed decision when purchasing insurance products and assessing the suitability of such products to meet their insurance needs and other circumstances, the IA issued GL25 to set out the requirements on authorized insurers and licensed insurance intermediaries who offer those gifts or gratuities when marketing, promoting or distributing long term insurance policies.

Suitability and affordability assessment

GL30 sets out the requirements for a financial needs analysis to be conducted for every application of new life insurance policy. This is to ensure that authorized insurers or licensed insurance intermediaries can properly assess the needs and circumstances of the customer before recommending any life insurance policies.

Guidance on the sale of medical insurance policies for promotion of fair treatment of customers

To ensure fair consumer treatment in medical insurance business, the IA published GL31 in November 2019. This Guideline applies to all medical insurance business, including both individual and group medical insurance business. GL31 provides guidance on the standards and practices which are expected to be met in order to ensure fair treatment of customers across all aspects of medical insurance business, including selling, handling claims, after-sales service, and the handling of complaints.

Important Facts Statement for Mainland policy holders

To enable Mainland China visitors (“MCV”) to make an informed decision, the IA sees the need to remind them the factors and risks to be considered when taking out policies in Hong Kong. All insurers are required to include an "Important Facts Statement for Mainland policy holders" to new applications of individual long term insurance policies made by MCV with effect from 1 September 2016.