Paper III - Long Term Insurance

The illustration document for investment-linked policies, as mandated by the SFC, serves to provide potential policyholders with a clear understanding of the policy’s potential performance and associated risks. It must include a projection of both the guaranteed and non-guaranteed benefits, clearly distinguishing between the two. The document should also outline the various fees and charges associated with the policy, enabling the client to make an informed decision. While past performance data can be included, it must be presented responsibly and with the explicit disclaimer that past performance is not indicative of future results. The illustration document is not a marketing brochure, and therefore should not focus on promotional aspects or sales targets. Therefore, statements I and II are correct.

Mutual insurance companies are owned by their participating policyholders, meaning those who hold participating policies. These policyholders share in the company’s profits, as there are no external shareholders to distribute profits to. Proprietary companies, on the other hand, are owned by shareholders, and their liability is limited to the extent of their investment in the company’s shares. The accounts department is responsible for monitoring and recording payments, including claims, salaries, and commissions. The actuarial department is responsible for product pricing, valuation of assets and liabilities, and claims and reinsurance calculations. Therefore, all of the above statements are correct.

When calculating life insurance premiums, insurers consider several key factors to ensure they can cover potential payouts and operational costs while remaining competitive. Mortality reflects the likelihood of death within a given population, influencing the expected number of claims. Interest rates play a crucial role as insurers invest premiums to generate returns, which can offset costs and lower premiums. Expenses cover the insurer’s operational costs, including administrative, marketing, and claims processing expenses. Morbidity, which relates to the incidence of disease and illness, is more directly relevant to health insurance rather than life insurance premiums. Therefore, mortality, interest, and expenses are the primary considerations in life insurance premium calculations, aligning with standard actuarial practices and regulatory requirements in Hong Kong under the Insurance Ordinance.

The Insurance Authority (IA) is empowered to establish and enforce codes and guidelines for insurers and intermediaries, ensuring fair practices and consumer protection. These guidelines cover various aspects of insurance operations, including sales practices, claims handling, and financial stability. The IA’s role is crucial in maintaining the integrity and stability of the insurance market in Hong Kong, fostering public trust and confidence in the industry. Therefore, the Insurance Authority is responsible for issuing guidelines to insurers and intermediaries.

When processing a life insurance application in Hong Kong, it’s vital to ensure accuracy and completeness to avoid delays and potential issues with the policy’s validity. Alterations should be avoided if possible, but if necessary, they must be clear, signed, and dated by the applicant. All questions on the application should be answered fully, as incomplete information can cause delays. The commencement date should be clearly indicated, and while backdating may be allowed, it varies among insurers. Verifying the identity of the applicant and the life to be insured is crucial, often requiring inspection of an Identity Card or equivalent. Age next birthday is a key factor in premium calculation, and insurers may use January 1st as the birthday if only the year of birth is known. Finally, the signatures of both the applicant and the life to be insured are required; if a signatory cannot write, a witnessed mark or chop is acceptable. Therefore, all of the above statements are correct.

The Insurance Authority (IA) is the primary regulatory body overseeing the insurance industry in Hong Kong. Its responsibilities include licensing insurance intermediaries, setting conduct requirements, and ensuring compliance with regulations to protect policyholders’ interests. The IA’s role is crucial in maintaining the stability and integrity of the insurance market in Hong Kong. The other options describe functions that are not the primary responsibility of the IA.

Mutual insurance companies are owned by their participating policyholders, meaning those who hold participating policies. This ownership structure allows policyholders to benefit from the company’s profits without needing to share them with external shareholders. The company is governed by its Board of Directors and senior management, who are responsible for making decisions in the best interests of the policyholders. Proprietary or stock companies, on the other hand, are owned by shareholders, and profits are distributed accordingly. Understanding the difference between these two types of companies is crucial for comprehending the operational structure and financial dynamics of life insurance companies in Hong Kong, as regulated by the Insurance Ordinance.

The Insurance Authority (IA) has the power to investigate potential breaches of the Insurance Ordinance. If, after an investigation, the IA believes that a regulated person has contravened a relevant provision, it may take disciplinary action. This action could include a public or private reprimand, an order to remedy the contravention, a financial penalty, or, in severe cases, the revocation or suspension of a license. The severity of the disciplinary action depends on the nature and seriousness of the contravention, as well as the regulated person’s history of compliance.

In Hong Kong, according to the Law Amendment and Reform (Consolidation) Ordinance and standard insurance practices, an assignment of a life insurance policy has specific characteristics. An assignment is valid from the date the insurer receives written notice. The insurer isn’t responsible for the assignment’s validity, suggesting the assignor should seek legal advice. The assignee inherits the assignor’s rights but cannot recover more than the assignor is entitled to. The law does not allow assigning obligations (like premium payments) without the insurer’s consent. Therefore, statements I, II and III are correct.

The Insurance Ordinance (Cap. 41) in Hong Kong mandates that insurance intermediaries, including those dealing with long-term insurance, must act honestly, fairly, and in the best interests of their clients. This includes providing suitable advice based on a reasonable assessment of the client’s needs and circumstances. Failure to do so can result in disciplinary actions and penalties. The Insurance Authority (IA) oversees the conduct of insurance intermediaries and enforces these regulations. Therefore, providing suitable advice is a legal and ethical obligation for insurance intermediaries in Hong Kong. Therefore, statement I is correct.

The 1/16 alternative arrangement in long-term insurance is viable because the premiums paid in the initial years of the policy have not yet been fully earned by the insurer. This unearned portion allows for flexibility in policy adjustments. Understanding the policy’s cash value is also crucial, as it represents the accumulated value available to the policyholder, influenced by premium payments and policy duration. The surrender value, which is the amount the policyholder receives upon canceling the policy, is directly linked to the unearned premiums and the policy’s cash value. The policy’s dividend payout is determined by the insurance company’s financial performance and is not directly related to the 1/16 alternative arrangement. Therefore, statements I, II and III are correct.

The illustration document for investment-linked policies, as mandated by the SFC, aims to provide potential policyholders with a clear understanding of the policy’s potential performance under different investment scenarios. This allows them to make informed decisions. The illustration document must disclose the fees and charges that will be deducted from the policy, as well as the projected surrender values under different investment return scenarios. This disclosure helps potential policyholders understand the potential impact of fees and charges on their investment returns and the potential value of their policy if they surrender it early. The illustration document is not a guarantee of future performance, and it is important for potential policyholders to understand the risks involved in investing in investment-linked policies. The document should not include any promotional material or marketing language. Therefore, the primary goal is to provide a balanced and objective view of the policy’s features and risks.

The Insurance Companies Ordinance (ICO) in Hong Kong mandates specific requirements for insurers regarding the maintenance of assets within the city. This is to ensure that insurers have sufficient assets readily available to meet their policyholder obligations. The amount of assets required to be maintained locally is determined by regulatory guidelines and is designed to protect the interests of policyholders. The specific amount is not arbitrarily chosen by the insurer but is calculated based on regulatory requirements. Insurers are not allowed to freely transfer assets out of Hong Kong without regulatory approval, as this could jeopardize their ability to meet local liabilities. Therefore, the statement that insurers can freely transfer assets out of Hong Kong is incorrect. Therefore, statements I and II are correct.

In Hong Kong, under Section 9 of the Law Amendment and Reform (Consolidation) Ordinance, assigning an insurance contract requires specific formalities. A valid assignment necessitates that the chose in action (the interest being assigned) must be present, not future. Notice to the insurer validates the assignment from the date it’s received. The assignee acquires the assignor’s rights but cannot recover more than the assignor is entitled to. An assignment cannot impose obligations (like premium payments) on another party without their consent. Assignments must also respect beneficiaries’ vested rights and not be for illegal purposes. Absolute assignments transfer all ownership rights irrevocably, while collateral assignments are temporary, often used as security for a loan. Therefore, statements I and II are correct.

Universal Life Insurance offers policyholders flexibility and transparency. Flexible premiums allow policyholders to adjust their payments, even skipping them after the initial year, although this affects the cover and cash value. The adjustable death benefit allows for increases or decreases in coverage, subject to insurability for increases. Unbundled pricing provides transparency by disclosing the cost of protection, interest, and expenses separately. The policy accumulates a cash value, influenced by premiums paid and interest earned, less expense charges and the cost of protection. Therefore, all of the above statements are correct.

When an insurance intermediary engages with a potential client, understanding their financial goals is paramount. Discovering what the client hopes to achieve with the insurance policy allows the intermediary to tailor recommendations to meet those specific needs. Assessing the client’s financial capacity is also important to ensure the proposed insurance plan aligns with their budget and financial situation. Therefore, determining the client’s objectives and financial capabilities are key steps in the insurance sales process. Therefore, statements I and II are correct.

Renewable term insurance provides the policyholder with the option to extend the policy for additional terms without needing to provide proof of insurability. The premium is recalculated at each renewal based on the insured’s attained age, which typically results in an increased premium. This type of policy may include limitations such as restrictions on the number of renewals, face amount, or premium rates. Convertible term insurance allows the policyholder to change the term policy into a permanent plan without evidence of insurability, subject to certain age or duration restrictions. Endowment plans combine insurance coverage with a savings component, paying out the face amount at the end of a specified term or upon earlier death. Whole life insurance provides coverage for the entirety of the insured’s life, paying out the face amount upon death, with premiums that can be payable throughout life or for a limited period. Understanding the differences between these policy types is crucial for the IIQE Paper 3 exam.

The Customer Protection Declaration (CPD) form is a crucial document in the insurance application process, designed to identify potential replacements of existing policies. Insurance intermediaries are obligated to discuss the implications of any replacement with the applicant, providing written justifications and reasons in the CPD form. This includes assessing financial implications such as potential losses and changes in annualised premiums. The policy set-up cost mentioned on the CPD form serves as a reference point for estimating losses, but intermediaries can use other references if justified.

Statement I is incorrect because the CPD form is completed before the applicant makes a decision about purchasing a new policy, not after. Statement II is correct as the insurance intermediary must explain the implications of a replacement to the applicant. Statement III is correct because the CPD form is designed to discover any replacement being recommended. Statement IV is incorrect because the insurance intermediary can use other references for the estimated loss if he could reasonably justify the estimation. Therefore, statements II and III are correct.

Reversionary bonuses, common in with-profits policies, represent a financial interest that exists immediately but whose full benefits are deferred until a future point. These bonuses accumulate over time and are added to the policy’s value at a later date, such as maturity or surrender. Settlement options provide choices to the policyowner regarding how the policy proceeds will be distributed upon a claim or maturity. Riders are amendments to an insurance policy that modify its coverage, either expanding or limiting the benefits. Understanding these concepts is crucial for advising clients on long-term insurance products and their features, as well as ensuring compliance with HK IIQE regulations regarding product knowledge and suitability.

The Insurance Authority (IA) has the power to investigate complaints against insurance intermediaries. If, after an investigation, the IA believes an intermediary has violated insurance regulations, it can take disciplinary actions. These actions can include public reprimands, suspension of licenses, or even revocation of licenses, depending on the severity and nature of the violation. The IA’s primary goal is to protect policyholders and maintain the integrity of the insurance market in Hong Kong. Therefore, the IA is empowered to take disciplinary actions against intermediaries who are found to have breached insurance regulations.

Renewable term insurance provides the policyholder with the option to extend the policy term without needing to provide proof of insurability. The premium will be adjusted to reflect the insured’s age at the time of renewal. Limitations on renewals, such as restricting the number of renewals or limiting the face amount, may be put in place to mitigate anti-selection. Convertible term insurance gives the policyholder the right to switch to a permanent insurance plan without providing evidence of insurability. Restrictions, such as age limits or time limits on conversion, are common to manage potential anti-selection. Therefore, statements I and II are correct.

The Insurance Ordinance (Cap. 41) outlines the regulatory framework for insurers in Hong Kong. A key aspect is the requirement for insurers to maintain adequate solvency margins. This ensures that insurers have sufficient assets to cover their liabilities and protect policyholders’ interests. The Insurance Authority (IA) is responsible for supervising insurers and enforcing these solvency requirements. Failing to meet the required solvency margin can lead to regulatory intervention, including restrictions on business operations or even revocation of authorization. Therefore, maintaining adequate solvency is crucial for insurers to operate legally and sustainably in Hong Kong.

The Insurance Ordinance (Cap. 41) in Hong Kong mandates that insurers must establish and maintain adequate solvency margins. This requirement ensures that insurers have sufficient assets to cover their liabilities and protect policyholders’ interests. The solvency margin is calculated based on the insurer’s risk profile and business operations, and it serves as a financial buffer to absorb unexpected losses. Regular monitoring and reporting of solvency margins are crucial for maintaining the stability and integrity of the insurance market in Hong Kong. Therefore, maintaining adequate solvency margins is a legal requirement for insurers in Hong Kong.

When replacing an existing life insurance policy with a new one, it’s crucial to consider several factors to ensure the client’s best interests are protected, as emphasized in the HK IIQE Paper 3 Long Term Insurance Examination syllabus.

Projected values in a new policy are often dependent on the insurer’s performance and are not guaranteed, unlike the guaranteed cash values. Insurance intermediaries must accurately fill in the guaranteed cash values of both the existing and new policies, especially around the policy anniversary dates after the applicant turns 65, or earlier if a policy matures sooner. This comparison helps the client understand the potential differences in guaranteed returns.

The new insurer will assess the life insured’s health, occupation, lifestyle, habits, and recreational activities. Any significant changes may lead to coverage denial or higher premiums. This insurability implication must be clearly explained to the client.

New policies may have different provisions regarding suicide clauses and contestability periods, potentially restarting these periods. This could result in a claim denial under the new policy that would have been covered under the old one. Intermediaries must help clients understand the expiry dates of these clauses in both policies.

Furthermore, the intermediary must list any riders or supplementary benefits present in the existing policy but absent in the new one. They should also explain why the new policy is more suitable for the applicant and discuss any alternatives to replacing the existing policy. The CPD Form documents these considerations, with copies kept by the selling office, the client, and the non-selling office.

Therefore, all of the above statements are correct.

The 1/16 alternative arrangement in long-term insurance is viable because the premiums paid in the early years haven’t been fully earned by the insurer. This is due to the initial expenses and acquisition costs that the insurer incurs. If a policyholder discontinues the policy early, the surrender value reflects this unearned portion.

Statement I is correct because the insurer has not yet earned the full premium due to initial expenses.
Statement II is incorrect because the surrender value is typically less than the total premiums paid, not more.
Statement III is correct because the insurer needs to cover initial costs, such as commissions and administrative expenses.
Statement IV is incorrect because the policyholder does not receive all premiums back; a portion is retained by the insurer to cover costs and risks. Therefore, statements I and III are correct.

Term insurance provides coverage for a specified period. Level term insurance maintains a consistent death benefit throughout the policy’s duration, with premiums remaining level. Decreasing term insurance features a death benefit that decreases over time, often used for purposes like mortgage protection. Increasing term insurance offers a death benefit that increases over time, potentially to offset inflation. Considering these characteristics, level term insurance is best suited for temporary needs that remain relatively constant.

The Insurance Ordinance (Cap. 41) mandates that insurers must maintain adequate assets to cover their liabilities. This includes establishing and maintaining a solvency margin, which is the excess of assets over liabilities. The solvency margin acts as a financial buffer to protect policyholders in case of unexpected losses or adverse events. The Insurance Authority (IA) has the power to intervene if an insurer’s solvency margin falls below the required level, potentially taking actions to protect policyholders’ interests. Therefore, maintaining an adequate solvency margin is a legal requirement under the Insurance Ordinance.

According to the guidelines for illustration documents in long-term insurance policies in Hong Kong, the document must include projected surrender values and death benefits at specified intervals (end of each of the first 5 years, and every fifth year thereafter) based on assumed rates of return. The illustration should include policy-level charges but not fund management charges. Prescribed statements, including a warning about potential losses from early termination or premium cessation, must also be included. Insurers may customize the document with additional information, provided it is not misleading and does not detract from the minimum required disclosures. The illustration document must be provided to the prospective policyholder for review and signature before the application form is signed. These requirements are designed to ensure transparency and help potential policyholders understand the potential impact of fees and charges on their policy’s surrender values and death benefits. The assumed rates of return are for illustrative purposes only and are neither guaranteed nor based on past performance. The actual return may differ. The policyholder should only invest in the product if they intend to pay the premium for the whole of their chosen premium payment term. Should they terminate the product early or cease paying premiums early, they may suffer a significant loss.

The Insurance Ordinance (Cap. 41) in Hong Kong mandates that insurers must maintain adequate assets to cover their liabilities. This includes establishing and maintaining statutory funds specifically for long-term business. These funds are segregated from other assets of the insurer to protect policyholders. The ordinance also requires insurers to appoint an actuary who is responsible for assessing the financial condition of the long-term business and providing an opinion on the adequacy of the statutory funds. The appointed actuary must also report any concerns about the insurer’s financial solvency to the Insurance Authority. Therefore, all of the above statements are correct.

Mutual insurance companies are owned by their participating policyholders, not shareholders. This ownership structure allows policyholders to potentially benefit from the company’s profits without needing to share them with external shareholders. Proprietary companies, on the other hand, are owned by shareholders. The Accounts Department is responsible for financial record maintenance, including monitoring payments and submitting audited accounts as required by the Insurance Ordinance. The Actuarial Department plays a crucial role in product pricing, valuation of assets and liabilities, and claims and reinsurance calculations. Agency training and control are vital for ensuring that insurance agents are properly trained and disciplined, in compliance with regulations such as the Insurance Intermediaries Quality Assurance Scheme. Therefore, the statement accurately describes the operational aspects of a life insurance company.