This Code relates to all policy quotations for individual policies issued by member offices.

Transcription

1 CODE ON POLICY QUOTATIONS 1. PREAMBLE This Code relates to all policy quotations for individual policies issued by member offices. Each member office must ensure that all policy quotations that it issues to obtain new business, comply with the Code. Each member office must take whatever steps are necessary to ensure that intermediaries also comply with the Code when product quotations are made to the public. The Code is an industry agreement and is not legislation. Offices should therefore not attempt to exploit possible loopholes in the wording of the Code and should strive to comply with the letter and the spirit of the Code The current requirements of the Code come into force on 1 January Previous major revisions of this code are as follows: Effective date Comment / changes made 1 January 2009 Removal of projected maturity values 1 July 2005 Including reduction in yield 1 January 2005 Code on Policy Quotations Upper projection rate 10% pa Lower Projection rate 4% pa 31 May 2002 Upper projection rate 10% pa Lower Projection rate 5% pa 1 March 2000 Upper projection rate 12% pa Lower Projection rate 6% pa 1 August 1997 Upper projection rate 12% pa Lower Projection rate 9% pa 1 April 1997 Illustration of early surrender values 1 August 1994 Taxed business Upper projection rate 12% pa Lower Projection rate 9% pa Untaxed Upper projection rate 14% pa Lower Projection rate 11% pa 1 July 1983 Code on Benefit Illustration Upper projection rate 15% pa Lower Projection rate 12% pa 22 May 1981 Code of Practice : Projected Values Upper projection rate 15% pa

2 2. OBJECTIVES The Code is intended to ensure that policyholder expectations of benefits and premium rates, created by quotations presented in the sales process, are reasonable (given the economic environment and policy charging structure) and do not damage the industry s image. Specific objectives with the Code are to: regulate the use of projected values demonstrate the consequences of early termination show the effect of all expense charges on the overall investment return show the expected impact of premium rate reviews after the expiry of the guaranteed term. 3. SCOPE OF THE CODE The Code relates to all with profit and linked individual policies, including living annuities, where the benefits are dependent upon unknown future performance of the underlying investment portfolios. Section 8 of the Code relates to individual risk policies. The Code includes all composite products involving individual policies. Member offices shall ensure that each product component of such composite products comply with the Code, if applicable. True group schemes, where the individual member does not enter into the negotiation, do not fall within the Code scope. Group schemes based on individual policies (possibly issued at preferential rates) clearly fall within the Code. Schemes may have elements of both types, and the office must take the nature of the scheme into account when deciding whether it falls within the Code or not. 4. PROJECTED VALUES 4.1. No projected benefits (including but not limited to maturity, income, death, disability or (partial) surrender benefits) will be quoted for a policy where benefits depend on future unknown investment performance, other than the optional attachment of Annexure II to the quote and to meet the requirements under section 8 of this code Early termination charges must be disclosed (e.g. on full or partial surrender, premium alteration or early maturity). Where these depend on future unknown investment performance this illustration must be done using the same gross return as for the RIY calculation (see section 5). The projected early termination charges must make allowances for all initial and ongoing policy charges, early termination charges (e.g. for unrecouped expenses or for any other reason) and the cost of mortality and morbidity. All of these must be on a best estimate basis in the opinion of the valuator, and not less than those actually used for the policy concerned Any guaranteed values must be included in the quotation.

3 5. REDUCTION IN YIELD 5.1. In the case of a savings or investment or living annuity policy contract, the office must calculate the Reduction in Yield (RIY) associated with the full actual expense charges applicable to the policy. The RIY must similarly be calculated on the savings element of a policy that provides a combination of risk and savings benefits or a policy that is sold predominantly as a savings policy. This includes all policies where the savings premium can be identified separately and the risk premium is a predetermined fixed amount. (Universal life policies, where varying risk premiums are recouped from the investment fund, are excluded from these RIY requirements.) 5.2. The RIY must be calculated using a gross return (before expenses but after tax) of 10% effective per annum All charges and fees (including performance fees, distribution, advice, commission, administration, asset management and any other) in what ever way they are expressed (including as percentage of premiums or investment fund, as monetary amount, as buy-sell spread, as reduction in units, or any other way) must be included in the calculation of the RIY. Where the expense charges can vary, for example with a choice of different portfolios, the average RIY must be shown Some detailed requirements for the calculation of the RIY are as follows: Term For recurring premium policies the RIY must be calculated over a term not longer than the commission term of the policy or the term to the contractual maturity date. For single premium investment policies the RIY must be calculated over a term not longer than 10 years or the term to the contractual maturity date. The RIY for a living annuity contract must be calculated over a maximum term of 15 years. Asset management fee For a policy with multiple investment funds, the asset management fee in the RIY calculation must be the weighted average of the asset management fees for all the funds, in proportion to the premiums invested in each fund. In the case of multi manager funds, fund of funds, wrap funds, hedge funds, etc., all of the tiers of management charges that reduce the gross return earned on the ultimate underlying asset pools, must be included in the asset management fee and used in the RIY calculation. Where the proportion in the underlying funds varies frequently so that an accurate calculation of the total annual management fees cannot be done, then the best and worst possible RIY, must be shown.

4 Performance Fees Where any type of performance fee is payable, the impact of this must be shown. The RIY should include performance fees calculated at each fund s actual benchmark. (Note that this is NOT the performance fee hurdle rate.) It should be calculated for each fund individually and then be aggregated across all funds, weighted by the premiums invested in each fund. The performance fee should be fully disclosed, including the following statements: the level of the performance fee included in the RIY, and the benchmark for each fund at which it was determined that the actual RIY could be higher or lower depending on the performance of the fund (and the related performance fee levied) the minimum and maximum (if capped) performance fee (for each fund). If the performance fee is uncapped this must be clearly stated. Guarantee Loadings Any fee in respect of guarantees provided within the asset pool, must be included in the total RIY. However, these fees and their impact on the RIY can be shown separately as they are fees for a specific benefit rather than for expense recovery. The suggested format is to disclose a RIY net of guarantee costs and a RIY gross of such costs. Bonus Funds For bonus funds, the RIY must include all fees for smoothing and guarantees, as used by the actuary in calculating the bonus to be declared. Where these fees vary from declaration to declaration, then the office must use the average from the last five annual declarations. As above, these fees and their impact on the RIY can be shown separately. The suggested format is to disclose a RIY net of guarantee costs and a RIY gross of such costs. Transfers to or from smoothing reserves, that merely alter the timing of the participation of the client in the investment performance should not be included in this calculation. Structured Products The RIY does not need to be calculated for the so-called structured products, for example policies that provide absolute guarantees that are fully linked to an index.

5 6. PRESENTATION OF INFORMATION 6.1. All quotations must comply with the requirements of the General Code of Conduct in terms of the Financial Advisory and Intermediary Services Act and where applicable Long Term Insurance Act and the Policyholder Protection Rules in terms of the Long-term Insurance Act. The additional requirements of the Code are intended to ensure that information is clearly communicated and explained The RIY must be shown prominently in the quotation. Recommended layout and wording are set out in Annexure I 6.3. Full disclosure of all charges is required in terms of the General Code of Conduct in terms of the Financial Advisory and Intermediary Services Act and where applicable in terms of the Policyholder Protection Rules in terms of the Long-term Insurance Act. This disclosure must be done together in one section under an appropriate heading. All the charges included in the RIY calculation must be described and quantified in this section If the policy provides any guarantees these must be clearly disclosed. If applicable, the quotation must also indicate instances in which the guarantee does not apply, when the guarantee expires, and what the implication of that on the policy will be Each policy quotation must include statements to the effect that: actual benefits will depend upon the rate of actual investment return and the actual expense charges over the lifetime of the policy. policy benefits should be measured against the purchasing power of money when benefits are paid, and the real return is the rate of return in excess of inflation. investment returns are subject to tax (and an indication of the effective tax rates of various portfolio types must be included) Quotations for retirement annuities must include a statement that the benefits after retirement will be taxable in terms of the Income Tax Act, as follows: a maximum of one-third of the retirement fund may be taken in cash and the balance must be used to purchase an annuity; the cash lump sum is tax free within certain limits and that amounts in excess of these limits are taxable; the annuity is fully taxable as income; 6.7. Quotations for provident fund policies must include a statement that the benefits on retirement will be taxable through the Income Tax Act, as follows:

6 the cash benefit is tax free within certain limits and that amounts in excess of these limits are taxable as determined in terms of the Income Tax Act; 6.8. Any other relevant qualifications (e.g. that calculation bases will remain unaltered, or that cover will remain level only if assumed bonus rates are at least maintained, etc.) must be stated. 7. REPORTING OF ACTUAL PERFORMANCE When actual past investment performance is provided with a policy quotation, it must be presented in a responsible manner: All information must be accurate and must be provided in the correct context, and the office must be able to substantiate all claims. A statement must be included that past performance cannot be extrapolated into the future and is not always an indication of future performance. The extent to which the investment returns allow for tax and expenses must be described. If gross investment returns are provided, it must be clearly stated that the returns are before any deduction of expenses and tax. Past performance figures should never be presented in such a way that intermediaries would be inclined to use them as projected performance figures for the future. 8. PREMIUM REVIEWS OF RISK POLICIES This section relates to policies providing risk benefits, where the premiums are guaranteed for a limited term shorter than the full policy term. Please refer to annexure III for suggested wording for the disclosures. Affected products are those that cover life risk only, for example death, disability and critical illness. The following two product structures need to be considered: Products where premiums are priced lower than would be required to maintain a given level of cover for the whole duration of the contract, and where the premiums are expected to increase during the term of the contract. Products priced to last for the whole contract but where premiums are only guaranteed for a limited period. The two structures are related in the sense that both give rise to the risk that policyholder expectations may not be met if premiums increase during the term of the contract. The difference is that in the former there is a clear intention to increase premiums beyond the pricing term, whereas in the latter, the office only reserves the right to increase premiums should expected experience at the

7 time prove this to be necessary. Both situations require adequate disclosure at the time of sale, but in the first case, disclosure should be focused on the likely future level of increases and in the second case on what reviewability means, and under what circumstances premiums could increase Product priced for less than the full term The office must disclose the expected impact of the planned premium increase during the term of the contract. This must allow for the ageing of the policyholder, the value of the reserves, the actual method of review to be applied, and any other factor that will be relevant at the future point. If the premiums are only guaranteed for a certain term, then the disclosures raised in 8.2 must also be covered Products priced for the full term, but with a limited guarantee period These products are priced for the full term of the policy, which may be whole of life, and the intention is that the premium will not increase (except for scheduled increases 1 ) unless the expected experience on the whole book, or a specific sub set of business worsens. It should be noted that premiums could also decrease if experience is particularly favourable. Section 8.2 covers situations where the product is priced for the full term, and premiums are not expected to increase unless there is a significant worsening in the assumptions underlying the pricing. This is in contrast to Section 8.1 which covers situations where the premiums are expected to increase during the term of the contract. However, there is also a grey area of products which are priced for the term, that is, they should be covered by Section 8.2, but due to aggressive assumptions used in the pricing, it is likely that the premium will increase at the end of the term. The statutory actuary must, in these instances, make it clear that it is likely that the premiums will increase and the expected level of increase should be illustrated. 1 Scheduled increase could have the following forms, for example: premiums increase every year by CPI, sum insured stays the same, premiums increase every year by 5%, sum insured stays the same, premiums increase every year by 5%, sum insured increases every year by 3%, premiums increase every year based on the policyholder s age each year and the increases are predetermined and can be shown to the policyholder.

8 9. ABRIDGED REQUIREMENTS FOR PROMOTIONAL MATERIAL Where advertisements and promotional material provide projected values of a general nature, which do not provide information sufficiently specific to be considered a policy quotation for concluding a sale, all the conditions in this Code need not be observed. Specifically, it must comply with the conditions as outlined in paragraphs 2, 3, 4, 5 and MONITORING OF THE CODE 1.1. Standing Committee on Products (SCOP) is responsible for maintaining this Code, and the Board of Directors may amend the projection rates in paragraph 5.2, upon the recommendation of SCOP Matters relating to the interpretation of the Code will be decided upon by SCOP, who will issue interpretative notes as required. Where SCOP is unable to agree on an interpretation, the matter shall be referred to the Board, whose decision shall be final and binding At the request of SCOP the Board may instruct all member offices to provide to SCOP the calculation basis and sample calculations of the early termination charges (as set out in section 4), RIY (as set out in section 5) and sample calculations of premium reviews (as set out in section 8) for specific policies, to ensure that all offices interpret and apply the requirements consistently Formal complaints of non-compliance with this Code by a member office will be dealt with under the LOA Disciplinary Provisions as adopted by the Board of Directors. 11. ANNUAL CERTIFICATE The Statutory Actuary of every member office shall submit an annual certificate to the LOA 14 (fourteen) days prior to the annual general meeting of the LOA containing a written and signed statement that the Statutory Actuary is satisfied that the calculation basis for the early termination charge, RIY and the calculation basis of the projected premiums conform to the requirements of the Code.

9 ANNEXURE I LAYOUT AND WORDING It is recommended that projected early termination charges be provided in a table as follows: Term/Date Early termination charge as a % of the fund / Rand amount The RIY disclosures should be presented as follows, immediately below the expense disclosures. Effect of expenses The reduction in yield (RIY) shows the extent to which the return on the assets will be eroded due to expenses charged against the policy. Assumed gross return 10% Reduction in Yield 4.1% Return after expenses 5.9% The gross investment return assumed in the table above is not guaranteed, but merely used to illustrate the impact of expenses. The actual investment return earned on premiums paid in, will depend on the gross investment return earned on the assets and the extent to which this return is reduced by taxation and expenses. Note on performance fee The above RIY figure includes a performance fee levied on the underlying funds. This amount assumes that the fund return is the same as that of its benchmark, as disclosed. The actual performance fee could be higher or lower depending on the performance of the underlying fund, ranging from X% 2 to a maximum of Y% 2. Effect of inflation The gross investment return will depend on financial market conditions and the rate of inflation during the policy term. Inflation has a major impact on investment returns, and in general higher inflation leads 2 X% and Y% will differ by fund. The minimum and maximum performance fee of each fund should be substituted for X% and Y% in this note. If the fund has no maximum performance fee, then the note should state clearly that the performance fee for that fund is UNCAPPED.

10 to higher investment returns and lower inflation leads to lower investment returns. Real rates of return (the excess of the investment return over the inflation rate) give a more meaningful indication of how the investment has performed. Effect of taxation Depending on the type of policy, insurance companies pay different rates of tax on investment returns. The effective tax rates may also differ between insurance companies, based on their level of expenses. Typically, the effective rate of tax (on income and capital gains) on the gross investment returns will be about 7% for equity funds, 14% for balanced funds and 30% for money market funds. (In the case of retirement annuity and preservation fund policies, the above percentages change to 0%, 3% and 9%).

11 ANNEXURE II OPTIONAL ATTACHMENT TO THE QUOTE The following can be attached to the quotation, not as part of the quotation but as an information sheet to assist with financial planning. It is mainly aimed at intermediaries who do not use an electronic needs analysis package and require a paper-based tool to use in the needs analysis process. The Annexure must be included as is, i.e. it is a standard attachment that will be identical for all life offices. ILLUSTRATION OF THE EFFECT OF COMPOUND INTEREST Projected value of R100 per month, at various growth rates Term 2% 4% 6% 8% 10% 5 R 6,300 R 6,600 R7,000 R7,300 R7,700 6 R 7,700 R 8,100 R8,600 R9,200 R9,800 7 R 9,000 R 9,700 R10,400 R11,200 R12,000 8 R 10,400 R 11,300 R12,300 R13,300 R14,500 9 R 11,800 R 13,000 R14,200 R15,600 R17, R 13,300 R 14,700 R16,300 R18,100 R20, R 21,000 R 24,500 R28,800 R34,000 R40, R 29,500 R 36,500 R45,600 R57,300 R72, R 38,900 R 51,100 R68,000 R91,500 R124,300 Term ILLUSTRATION OF THE EFFECT OF PREMIUM INCREASES Projected value of R100 p.m. Monthly premium 6% Growth rate Projected value of R100 p.m. increasing annually at 5% Monthly premium 6% Growth rate 5 R100 R7 000 R122 R R100 R R155 R R100 R R198 R R100 R R253 R R100 R R323 R Please note the following: The tables above are standard tables that bear no relation to the actual quotation to which it is attached. They serve merely as an illustration of compound interest for financial planning purposes and do not take into account the details of the actual product that will be invested in. The growth rates in tables serve as an illustration only and are not guaranteed. The actual growth rates will depend on the gross investment return earned on the assets and the extent to which this return is reduced by taxation and expenses. The actual growth rates can be negative, depending on the type of portfolio the assets are invested in.

12 ANNEXURE III EXAMPLE WORDING FOR DISCLOSURE OF PREMIUM REVIEWS Product priced for a specified term Your premium for the next <ten> years is guaranteed to be <Rx> per month. Should you choose to extend your policy by another <ten> years, your new premium will increase. Although the actual premium will only be determined at that time, it is projected to be at least <Ry> per month. Products priced for the full term, but with a limited guarantee period Your premiums are reviewable. This means that the assumptions we have used to calculate your premium have been adopted to cover the whole period of the policy but will be reviewed as set out below. We will not change your premium before the <fifth> anniversary of the policy commencement date. We will review your premium and it may change on the <fifth and then every subsequent > anniversary of the policy commencement date. At a review we look at the assumptions relating to [here insert the relevant assumptions that may be reviewed 3 ]. In reviewing our assumptions we will analyse <our claims experience for similar policies, industry claims experience and the impact of future medical advances and practices>. We will compare the assumptions that are applicable at the time of the review with those that were previously used and, by reference to that comparison, use a fair and reasonable method of calculating any change in your premium. Your premium may therefore increase or decrease at each review as a result of the revised assumptions. However, if the premium resulting from a review is within <X%> of your existing premium then we will not change your premium as a result of the review. There is no upper limit to the increase or decrease that may apply. Changes in premium will not depend on your individual circumstances, for example your health, at the time of the review. Any change in your premium will take effect from the relevant policy anniversary commencement date and we will tell you at least <60> days before we make any change. If we advise you of an increase to your premium as a result of a review, then you can choose to continue paying the previous amount and your cover will be reduced proportionately. To do this you must tell us at least <10> days before the change would otherwise have taken effect, and your reduced cover will apply from that date. 3 Examples of assumptions that the insurer could change for valid reasons at a review are: the insurer s expectation of future claims; expectation or experience of investment returns on premium income; the incidence of taxation on the insurer; the cost of reinsurance. It is for the individual insurer to determine which assumptions that were taken into account in fixing the initial premium will or will not be open to review and to insert them as appropriate. The list must be complete.