Enhanced Measures on Selling of Annuity Insurance Products

Our Ref: B1/15C
C2/5C
25 September 2019
The Chief Executive
All Authorized Institutions
Dear Sir / Madam,
Enhanced Measures on Selling of Annuity Insurance Products In light of the long term nature, complexity and increasing popularity of annuity insurance products, the Hong Kong Monetary Authority (“HKMA”) sees a need to enhance the customer protection measures applicable to authorized institutions (“AIs”) in selling annuity insurance products as set out in the circular “Selling of Annuity Insurance Products” dated 6 June 2018 (“2018 Annuity Circular”). In this connection, the HKMA has consulted the Insurance Authority (“IA”) and the industry. Under the 2018 Annuity Circular, AIs are required to provide a separate fact sheet to non-vulnerable customers (“non-VCs”) who opt out of the audio-recording arrangement. To enhance customer protection and to ensure that the customers understand the product, if the proposed annuity insurance policy has non-guaranteed annuity payments, AIs should work with the insurer to add in the fact sheet or in the benefit illustration (“BI”) an “Annuity Payment
Table” illustrating the amounts of annuity payments to draw the customer’s
attention to the fluctuation of annuity payments under different scenarios/bases. AIs should disclose and explain the information in the fact sheet to all customers; and require vulnerable customers (“VCs”), and non-VCs who opt out of the audio-recording arrangement to sign on the fact sheet and provide them with a copy of such for their record. AIs should also arrange vetting of the audio-records of the transactions conducted with VCs.

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  Meanwhile, having regard to observations in the supervisory process, the HKMA would like to take this opportunity to provide clarifications on certain existing requirements on sale of annuity insurance products to assist AIs in complying with the requirements. Details of the enhanced measures and clarifications are set out in Annex 1 and the requirements on the Annuity Payment Table are set out in Annex 2. AIs should implement the measures in this circular as soon as practicable, and in any case no later than 12 months from the date of issuance of this circular. This circular and the 2018 Annuity Circular are only applicable to retail banking customers. Nonetheless, in selling annuity insurance products to customers other than retail banking customers, AIs should also adequately disclose and explain to the customers during the selling process the nature, key features and risks of the products, including but not limited to the information stipulated in these two circulars. If you have any question on this circular, please contact Mr Kevin Sham at 2878-1594 or Ms Candy Tam at 2878-1292. Yours faithfully, Alan Au Executive Director (Banking Conduct) Encl. c.c. IA (Attn: Ms Carol Hui, Executive Director (Long Term Business) Mr Stephen Po, Executive Director (Market Conduct))

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Annex 1

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  Details of the Enhanced Measures and Clarifications Additional disclosure for annuity insurance products

1. As far as the fact sheet required in the Annex to the 2018 Annuity Circular
   is concerned, in addition to the four broad items set out in paragraph 1 thereof, if the proposed policy has non-guaranteed annuity payments 1 , AIs should work with the insurer to add in the fact sheet the following information regarding the annuity payments of the proposed policy as a separate broad item that the customer should sign against (i.e. five broad items in total to be signed against by the customer to confirm that he/she has read and understood such information). (i) A table illustrating the amounts of annuity payments 1 based on the BI (i.e. “Annuity Payment Table”) to draw the customer’s attention to the fluctuation of annuity payments under different scenarios/bases. Requirements on the Annuity Payment Table are set out in Annex 2. As an alternative to adding the Annuity Payment Table in the fact sheet, AIs may choose to arrange the Annuity Payment Table to be included in the BI. In such a case, AIs should include in the fact sheet a statement which refers the customer to the BI for the Annuity Payment Table under this same broad item. (ii) The actual non-guaranteed benefits (including but not limited to non-guaranteed annuity payments) and actual non-guaranteed rate of return of the policy depend on various factors such as the performance of the insurer’s investment, the insurer’s experiences in payment of claims, expenses and policy lapse and surrender, and the insurer’s 1 For the sake of clarity, for the purposes of such requirements, annuity payments are assumed to be cashed out, i.e. on a non-accumulated basis. Interests generated from accumulation of guaranteed or non-guaranteed annuity payments or other guaranteed or non-guaranteed benefits under the policy are not considered as annuity payments. The Annuity Payment Table should be based on non-accumulated annuity payments. Meanwhile, the “substance over form” principle should be adopted for compliance with such requirements. For example, benefits that annuitise the cash value of the policy should be covered regardless of whether they are named as “annuity payment”.

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  long-term expected performance of its investment and the above-said experiences. (iii) The illustrated amounts of annuity payments under different scenarios/bases on the benefit illustration, including the [Pessimistic/ Conservative/ Pessimistic and Conservative] 2 scenario(s)/basis(es), may not be achieved because non-guaranteed annuity payments may be zero. (Note: Item (iii) is not applicable if the proposed annuity insurance policy is a universal life policy of which the BI only illustrates Guaranteed Basis and Current Assumed Basis but not Conservative Basis, Pessimistic Scenario or Optimistic Scenario.)

2. AIs should put in place proper procedures and controls to ensure that the
   information on the fact sheet including without limitation the amounts of annuity payments (if the Annuity Payment Table is included therein) is correct.
3. AIs should disclose and explain the above information to all customers of
   annuity insurance products with non-guaranteed annuity payments (i.e. including VCs, non-VCs who opt out of the audio-recording arrangement, and non-VCs who do not opt out of the audio-recording arrangement). Such disclosure should be audio-recorded unless the audio-recording arrangement is opted out of by a non-VC subject to the HKMA’s requirements for the opt-out arrangement as set out in the 2018 Annuity Circular. 2 “Pessimistic and Conservative” should be used for universal life policies with both “Conservative Basis” and “Pessimistic Scenario” provided in the BI.

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  Additional protection to VCs

4. In addition to audio-recording the selling process, AIs should provide and
   explain to VCs the fact sheet for annuity insurance products. The requirement of signing by the customer on the fact sheet against each of the broad items should also be applied to VCs.
5. AIs should arrange vetting by another staff of the audio-records of the
   transactions conducted with VCs as soon as practicable and in any case no later than the expiry of the cooling-off period of the policy. The vetting should cover whether the sale process was duly audio-recorded as well as whether the sale process was properly conducted. In this connection, AIs should adopt a risk-based approach in the sampling, and the sample size should be appropriate. Any irregularities identified in the vetting should be followed up promptly with necessary remedial actions to address any prejudiced interests of the customers. Clarifications
6. Along the requirements stipulated in the 2018 Annuity Circular, the selling
   process to be audio-recorded should cover: (i) suitability assessment; (ii) disclosure of product nature, features (including but not limited to benefits) and risks 3 ; and (iii) arrangements regarding policy replacement (e.g. questions and answers for identifying policy replacement and potential policy replacement, assessment and advice given, and explanation of and declarations in the Important Facts Statement – Policy Replacement).
7. On product disclosure, accordingly, among other things, AIs should
   audio-record the disclosure and explanation of the BI, including but not limited to the policy benefits which are material to a customer’s decision having regard to his/her objectives, needs and other circumstances (e.g. 3 Codes, guidelines, circulars, etc. issued by the IA and the HKMA set out requirements on disclosure of product nature, features (including but not limited to benefits) and risks during the selling process of annuity insurance products, e.g. the IA’s codes of conduct for licensed insurance agents and brokers, GL16 and GL19, and the HKMA’s circulars on selling of non-investment-linked long term insurance products issued on 8 December 2014 and 4 August 2015 and circular “Guideline issued by the Insurance Authority on Qualifying Deferred Annuity Policy” of 2 April 2019.

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  when the income period will start, amounts of guaranteed annuity payments and non-guaranteed annuity payments, amounts of guaranteed benefits and non-guaranteed benefits if annuity payments are not taken out but are accumulated in the policy, death benefits) as illustrated under all scenarios/bases provided in the BI.

8. AIs may choose whether to audio-record the disclosure and explanation of:
   (i) (for customers who do not intend to choose accumulation option) the amounts of guaranteed benefits and non-guaranteed benefits if annuity payments are not taken out but are accumulated in the policy, provided that the disclosure that the accumulation option has been explained is audio-recorded; and (ii) the investment strategy of the underlying investment; and the insurer’s philosophy in deciding dividends/bonuses 4 .
9. For the avoidance of doubt, regardless of whether the fact sheet for the
   annuity insurance product needs to be provided to a customer, the product disclosure and the relevant audio-recording should also cover, among other things, the information stipulated in the fact sheet for the annuity insurance product and reminder to the customer of his/her cooling-off rights (i.e. paragraphs 1 and 3 of the Annex to the 2018 Annuity Circular and the additional information as required in paragraph 1 above, to the extent applicable). For customers to whom the fact sheet should be provided (i.e. non-VCs who opt out of the audio-recording arrangement and all VCs), AIs are required to provide a copy of the fact sheet signed by the customer for his/her record. Qualifying Deferred Annuity Policy (“QDAP”)
10. AIs are reminded that they should disclose and explain to customers during
    the selling process of a QDAP that the IA’s certification is not a recommendation or endorsement of the QDAP, nor does it guarantee the commercial merits of the policy or its performance. AIs may choose whether to audio-record this disclosure. 4 Paragraphs 4.1(a)(iii) and (iv) of Appendix 1 to IA’s GL16.

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Annex 2

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  Requirements on the Annuity Payment Table (A)If the proposed annuity insurance policy is a participating policy: The
  table should illustrate the amounts of the [monthly] 1 guaranteed annuity
  payment, [monthly] non-guaranteed annuity payment and [monthly] total annuity payment under the Current Assumed Basis, Pessimistic Scenario and Optimistic Scenario2 in the policy currency as well as when the income period will start. Example of presentation on the fact sheet:
  “Below is a table illustrating the amounts of projected [monthly] annuity payments starting from [the Nth policy year] / [Policy Year N] and the fluctuation under different scenarios/bases based on the benefit illustration. For details of the scenarios/bases, please refer to the benefit illustration. Currency: [HK$] Current Assumed Basis Pessimistic Scenario Optimistic Scenario [Monthly] guaranteed annuity payment [x,xxx] / [x,xxx-x,xxx] [Monthly] non-guaranteed annuity payment [x,xxx] / [x,xxx-x,xxx] [x,xxx] / [x,xxx-x,xxx] [x,xxx] / [x,xxx-x,xxx] [Monthly] total annuity payment [x,xxx] / [x,xxx-x,xxx] [x,xxx] / [x,xxx-x,xxx] [x,xxx] / [x,xxx-x,xxx] 1 If the annuity payment is not paid on monthly basis, the annuity payment according to the frequency of payment (e.g. quarterly or annual) should be used. 2 Under a particular scenario/basis, if there is more than one numerical amount for the annuity payments over the income period, a range should be used.

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  (B)If the proposed annuity insurance policy is a universal life policy: The
  table should illustrate the amounts of the [monthly]1 total annuity payment
  under the [Guaranteed Basis] / [Conservative Basis], Current Assumed Basis, Pessimistic Scenario [if illustrated in the BI] and Optimistic Scenario [if illustrated in the BI]2 in the policy currency as well as when the income period will start. Example of presentation on the fact sheet:
  “Below is a table illustrating the amount of projected [monthly] annuity payments starting from [the Nth policy year] / [Policy Year N] and the fluctuation under different scenarios/bases based on the benefit illustration. For details of the scenarios/bases, please refer to the benefit illustration. Currency:
  [HK$]
  [Guaranteed
  Basis] /
  [Conservative
  Basis]
  Current
  Assumed
  Basis
  Pessimistic
  Scenario
  [if illustrated in the BI]
  Optimistic
  Scenario
  [if illustrated in the BI]
  [Monthly] total annuity payment
  [x,xxx] /
  [x,xxx-x,xxx]
  [x,xxx] /
  [x,xxx-x,xxx]
  [x,xxx] /
  [x,xxx-x,xxx]
  [x,xxx] /
  [x,xxx-x,xxx]