Newsletter
With Surge in Consumer Complaints, FSC to Enhance Supervision on Investment-Linked Insurance Products
With the acceleration in global inflation, the U.S. Federal Reserve's aggressive interest rate hikes and the public market correction, the value of the underlying assets of investment-linked insurance products (the "ILPs") has dropped significantly, leading to plenty of consumer disputes.
To avoid excessive risk taking by policyholders and disputes arising from complex or misleading policies, the Financial Supervisory Commission of Taiwan ("FSC") has proposed draft amendments to three regulations: (i) "Directions for Review of Life Insurance Products," (ii) "Matters for Attention in the Custody of Investment-Linked Insurance Separate Accounts and Underlying Assets," and (iii) "Compliance Matters for Disclosure of Information on Investment-linked Insurance" to strengthen supervision of ILPs and interest sensitive insurance policies. The main points of the draft amendments are as follows:
1. No dividend distribution is allowed if the net asset value of the discretionary investment management account falls below 80%
To prevent dividend distribution out of the principal or misleading policyholders with complex design of ILPs, the existing regulations require that if the net asset value of the discretionary investment management account for discretionary investment-oriented policies falls below 80% of the net asset value on the day that the account was set up, no dividend may be paid to the policyholders. The proposed amendment further requires that the dividend payout for discretionary investment-oriented policies can only be in the form of cash.
2. Bonus rewards may only be offered where the policy has been in force for more than five years
Considering that offering bonus rewards before the policy value has begun accumulating is, in a sense, equivalent to returning premium to the policyholder immediately after collecting it, which may distort the premium structure and is forbidden under applicable insurance regulations, the draft amendments stipulate that ILPs' bonus rewards can only be offered after the policy has been in force for over five years. In addition, insurers are required to disclose the sources of bonus reward payment.
3. ILPs are prohibited from investing in leveraged and inverse ETFs.
To prevent excessive risk taking by policyholders, ILPs will no longer be permitted to invest in leveraged and inverse ETFs.
4. Investment limits on non-investment-grade bond funds and emerging market bond funds for discretionary investment-oriented policies
To control credit risk, the amendment requires that a discretionary investment-oriented policy is subject to 10% investment limit on non-investment-grade bond funds and 20% investment limit if including investment in emerging market bond funds.
5. Prohibition of investment in non-investment-grade bond funds and emerging market bond funds for policyholder-selected investment-oriented policies
ILPs other than discretionary investment-oriented policies (i.e., policyholder-selected investment-oriented policies) will no longer be able to invest in non-investment-grade bond funds and emerging market bond funds at all.
6. Strengthened information disclosure
To strengthen information disclosure on ILPs and protect policyholder rights, the draft amendments stipulate the particulars and relevant cautionary language that must be included in the insurance product prospectus, the introduction of the insurance product, and regular reports on policy value.
These amendments are expected to be implemented on July 1, 2023. ILPs that do not comply with the amendments must be revised before they can be sold in the market.