Treating customers fairly (TCF) is a global trend and is meant to protect customers from unfair selling practices by the insurance industry. Its regulations affect not only mature markets but also emerging markets in Asia-Pacific (APAC). Its significance is further addressed by the Insurance Core Principles (ICP) published by the International Association of Insurance Supervisors (IAIS).
In 2015, the Monetary Authority of Singapore (MAS) implemented the Direct Purchase Insurance (DPI) initiative1 and Aggregator initiative – “compareFIRST”2.
The goal of these initiatives is to promote transparency in insurance products, and to enhance the efficiency of the distribution of life insurance products in Singapore. Other initiatives, such as a balanced scorecard framework for the remuneration of financial advisor representatives and supervisors, are expected to be fully implemented in either late 2015 or early 2016. The Malaysian government also recently issued a public consultation paper which covers TCF.
GN 15 and 16 in Hong Kong
In December 2014, the Hong Kong Office of Insurance Commission (OCI) adopted the Guidance Note 15 (GN 15) which addresses the TCF regulations for Class C business: Investment-Linked Assurance Schemes (ILAS) business. According to emerging statistics, the volume of Class C new business in Hong Kong, coincidentally, has significantly shrunk since the effective date of GN 15.
In July 2015, HK OCI issued GN 16, the “Guidance Note on underwriting Long Term Insurance Business (other than Class C Business).” The objective of this guidance note has been to strengthen policyholder protection for all long-term business sold in Hong Kong.
The adoption of both GN 15 and GN 16 is consistent with the global “call” for more ethical selling practices to better incorporate TCF principles.
GN 16 requirements and implications
From a management perspective, compliance requirements for GN 16 can be viewed as a disrupter to the current playing field amongst insurers.
Insurance companies with recently updated business models/practices may capture market share from insurers with more outdated ones. Companies may also wisely use their compliance efforts to incorporate TCF principles to differentiate themselves from other less well-prepared companies.
The influence of GN 16 on the potentially manageable business volume of new long-term business, if harnessed appropriately, enables companies to improve their key performance indices.
While GN 16 places heavy emphasis on participating products and universal life products, it is also applicable to other business such as health, annuity, and non-participating business, such as term insurance.
The new guidance note covers many aspects of the product lifecycle and affects pre-sale, sale, and post-sale activities as well as remuneration practices. The necessary compliance focus for these activities can be summarised in the table above.
Implications: Cultural changes rather than “tick-the-box” exercises
It is widely agreed that TCF is a cultural change rather than a “tick-the-box” exercise.
It requires insurers to control conduct risk at the earliest possible stage and turn lagging indicators of customer deficiencies into indicators for remedies. With the help of GN 16, customers may feel more confident that they are dealing with insurers who consider fair treatment of customers as a part of their corporate culture.
Implementing GN 16 into a business requires cooperation from various departments. Most HK insurers have assembled dedicated teams with members from actuarial, finance, IT, legal/compliance, marketing, product development, distribution channels, etc. In many cases, the necessary compliance work to prepare for the implementation of the GN 16 recommendations will need to be managed under a tight budget and to a non-yielding timeline.
The status of progress for GN 16 implementation in insurance businesses is likely to vary widely and continued feedback from the regulator and industry peers, may well impact practices going forward, making them gravitate to a narrower range. Thus, an insurer may consider participating in a GN 16 survey to compare itself with its peers for a current assessment and to establish future required improvements.
Benefits and unintended consequences of GN 16 for customers
GN 16 changes the communication amongst insurance companies, intermediaries and customers.
For sophisticated customers, more explanations on product features and their risk profiles is likely to be perceived as positive. For customers who are used to a less defined information structure, the sudden influx of additional post-sale information may cause confusion and possible resentment as the information had not been provided previously. In addition, policyholders may challenge the rationale of prior fulfilment ratios for participating business and the reasonableness of prior crediting interest rates for universal life business.
Thus, introducing new information requirements to existing customers is an important factor to minimise any potential anxiety experienced by these customers. Intermediaries also need clear guidance from insurance companies to ensure compliance. Brokers and agents are much more likely to sell long-term products for companies providing clear product terms, guidance and easy-to-use compliance tools.
Clear documentation is also another important factor as companies will need to retain relevant information for future audits and challenges/complaints from customers and regulators. IT systems may need to be upgraded or improved to manage the data storage challenges that this requirement will bring.
Not just a simple one-off exercise
GN 16 applies to both new and current products. The effective date for GN 16 is 1 April 2016 for new products and 1 January 2017 for existing products.
As GN 16 is a principles-based regulation, it is important for each insurer to start with a comprehensive GN 16 governance programme before the implementation.
GN 16 is not intended to be a one-off compliance exercise. Companies need to continuously monitor and assess their current status and remediate processes that exhibit gaps between the current practice and the GN 16 requirements.
Even if the compliance policies and governance structures are well-designed, they will always be dependent on the degree of diligence adopted during execution. There are ongoing discussions around this topic and more are expected in the future. Both the insurers and the customers should feel comfortable with the new information flow proposed by GN 16 as there is no doubt that it will change the way that Hong Kong insurers conduct business going forward.
Mr Vincent Tsang is an Executive Director and Mr Steve Cheung is a Consulting Actuary of EY Insurance & Actuarial Advisory Services based in Hong Kong.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.
EY’s white paper, “Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong” can be found at the link below:
1 Direct Purchase Insurance (DPI) is a class of simple term and whole life insurance products with total and permanent disability (TPD) cover and optional critical illness (CI) riders that customers can buy directly from life insurance companies. As DPI is sold without financial advice, no commission is charged and customers pay lower premiums than comparable life insurance products. DPI have broadly standardised features which makes it easier to compare products when deciding which DPI to purchase.
2 “compareFIRST” is a joint effort by the Consumers Association of Singapore (CASE), the MAS, the Life Insurance Association Singapore (LIA) and MoneySENSE to enable consumers to more easily compare and find life insurance products most suited to their financial objectives.