Regulator denies Ilas rules were imposed too fast

Hong Kong's Office of the Commissioner of Insurance (OCI) has denied that firms have had insufficient time to prepare investment-linked products to comply with new rules in the city.

On January 1, GN15 regulations setting out new standards for insurers underwriting investment-linked assurance schemes (Ilas) came into effect.

A week later the insurance regulator OCI issued guidance on new rules for disclosing the calculation of remuneration paid to the distributors of Ilas products, typically banks and independent financial advisers.

Mark Rawson, CEO of The Henley Group – now part of St. James's Place Wealth Management Group - said talks on changes to Ilas had taken place for a long time, but noted detailed guidance from the OCI was not introduced until July 30 last year. He suggested it would take a couple more months for many insurers to launch or revamp products that complied with the new rules.

But Hong Kong’s OCI said sufficient time had been given to insurance firms. “As GN15 was issued in July 2014, there had been several months for insurers to do the preparatory work," it stated.

"In fact, some insurers have several products revamped, approved and available for sale in the market. Others may require more time to do the product design or other preparatory work. It is [down to] insurers’ own business strategy in regard to the timing of launching new products.”

AsianInvestor spoke to a number of insurers. Friends Provident International (FPI) and Standard Life both said they had closed old Ilas products and launched new ones that are GN15-compliant. Axa, Old Mutual and Zurich declined to comment, while Manulife said it was in the process of revamping its Ilas products.

While only GN15-compliant products are allowed in the market as of January 1, a Manulife agent said it was still selling two old Ilas products in the interim. A spokeswoman noted this was legal.

While the OCI refused to comment on individual cases, it stated: “Even for such cases where the [Insurance Authority] has allowed a short grace period [lasting no more than a few weeks], the concerned insurers may, in the interim, only sell Ilas products that, in the IA's view, observe the spirit of GN15.”

As well as banning indemnity, or upfront payment of commissions, and limiting commissions to an earned basis, the OCI’s rules have increased the minimum death benefit to 105%, from 101% of the account value.  

The regulations also require enhanced interaction with customers, including pre- and post-sales controls comprising financial needs assessments and after-sales calls. The new rules aim to treat customers fairly and reduce the number of complaints.

Rawson noted that underwriting insurance business was more complex than launching a mutual fund and required time both to create product and to structure its funding model.

The delay in having GN15-compliant Ilas products on the shelves would impact IFAs holding only an insurance brokerage licence, added Rawson, as they must wait a few months to sell them.

He noted, too, that a large percentage of the industry was commission-based and reliant on old Ilas products. While the new Ilas will also be commission-based, the level of commission is lower and spread over more years.

As a knock-on effect, international life insurers relying solely on banks and IFAs for product distribution will see their market share hit in Hong Kong. “They don’t own distribution,” explained Rawson. “If their distributors get squeezed a bit they could have some difficulty in 2015.”

Insurers without their own sales agents include Generali, FPI, Old Mutual and Zurich. 

James Tan, managing director of FPI in Hong Kong, said the speed with which the new rules came into force caught some intermediary firms by surprise. “It takes time to adjust to new regulations, but in the long term the move is positive for customers,” he noted.

“There are changes made to the commission structure. However, ultimately customers are looking for products that meet their needs … If you have the right suite of products in the market, then the commission structure becomes less of a consideration.”

Because the GN15 rules apply only to underwriting Ilas, Tan said there is a possibility that other classes may be considered, while noting it had still not been extended to class A, or traditional life and annuity products, as yet.

“People could say that Ilas business is too much work to do, such as post-sales calls, more forms. However, there is still a need for Ilas products as part of the financial planning process for affluent customers," he said.