The product names (e.g. “Universal Life” and “Variable Life” in North America) will be fully described in a later paper in this series. (p9)

4.4 ADEQUATE SYSTEMS

• The flexibility of unit-linked products means that there can be a large number of options as to how the policy is put together.
• There are options regarding the choice of add-on insurance benefits, the term of the policy and whether the cash value is payable as part of the sum insured or in addition to the sum insured on the occurrence of the insured event.
  • This means that complex point-of-sale illustration systems are required to support unit-linked products.  (p16)
• The two key sales messages are normally:
  1. The unbundled nature of the product – i.e. that the investment and insurance elements of the policy can be controlled separately.
  2. Clients can therefore structure their insurance benefits to meet their exact needs, control the amounts that will be invested and the nature of the
     investments.
•  The possible application or applications of the savings element in the future, e.g. mortgage repayment, pension provision, school fees, etc.
• The various applications may be covered in one client brochure, but more often specific applications or groups of applications are covered in separate client brochures.
  • The client brochure concentrates on these messages but, of course, adapts them to any particular requirements of the chosen target market.
  • The point-of-sale illustration system should be able to reinforce the messages in the client brochure, as the most common point of reference for clients after the sale is the printed illustration given to them at the point of sale. (p25)
• Client brochures may also deal with investment performance, but in many countries what can be said is limited by regulation.
• Such limitations were usually imposed following very aggressive selling in the hope for future investment returns based on the then very high investment returns in the early 1980s.
  • When policy maturity values are calculated based on, say, 15% investment return before expenses, the effect of expenses reducing this to, say, 12% still leaves an impressive figure at maturity.
  • However, when expenses reduce an investment return of 6% to 3%, the resulting maturity value is
    considerably less impressive.
• When the high projected returns failed to materialize it became clear that the investment was in fact a very poor investment and many countries took action by limiting the rates of investment return that could be used in projecting maturity values. (p25)
• The normal range of new product material for intermediaries consists of:
  •  An outline of the product (usually a simplified version of the full technical specification covered in Section 5) (p26)

7 LEARNING FROM EXPERIENCE – COMMON PROBLEM AREAS

7.2.1 POLICIES WITH NO TARGET MATURITY VALUE

• Poor investment performance leads to the difference between the total sum insured and the value of units being larger than expected, and hence the cost of the benefits cover is higher than expected and the maximum benefits that can be supported are therefore lower.
• At review, if the existing benefits are greater than the maximum supportable benefits, the review provisions give the insurer the right to ask for a higher overall premium if existing benefit levels are to be maintained. Alternatively, the insurer can reduce the current benefits to a level that can be supported by the current premiums.

7.2.2 POLICIES WITH A TARGET MATURITY VALUE

7.2.3 PROBLEMS

In the case of policies with no target maturity value, clients often do not understand why the current level of benefits cannot be supported in the future.

In the case of policies with a target maturity value, clients often think that the maturity value is guaranteed and cannot understand why a premium increase is required.

In both cases, the problem is best addressed at the point of sale, but by the time the review comes around, the explanations given have been forgotten.

Premium increases at review cause considerable problems with clients and lapse rates show significant peaks following reviews.

7.4 MISSELLING - Misselling of insurance and investment products has not been confined to unit-linked products.

• Misselling in general falls under three categories:
  1. The sale of an inappropriate product
  2. The use of unrealistic assumptions to illustrate the benefits under the product
  3. Failure to explain the way the product works, including an explanation of policy factors that are and are not guaranteed or subject to review.

In relation to unit-linked products, the potential client should be fully aware that its contract does not guarantee returns (unless otherwise stated) and that point-of-sale illustrations are used only to demonstrate how benefits would be affected under hypothetical investment scenarios.

However, intermediaries may be tempted to use unrealistic return assumptions for these illustrations in order to facilitate the sale, especially in a competitive environment.

In unregulated markets with no illustration guidelines, some purchasers may be misled into believing that the rates were guaranteed or that there were some minimum guarantees.

• Widespread misselling of investment products can result in the local regulator imposing remedial action on the insurers (for example the pensions review in the UK) or in class action lawsuits against them (for example the “vanishing premium” class action in the USA).
• The UK pensions review arose from sales of inappropriate products.
• The “vanishing premium” class action arose from sales of universal-life policies where the high interest rates of the early 1980s were assumed to continue far into the future.
  • As interest rates actually fell, clients were notified that they would have to pay premiums for a longer period of time than illustrated in order to maintain their benefits or achieve their cash-surrender value objectives.
  • In the end, the insurance companies paid heavy fines and illustration guidelines were created.

7.6.3 ILLIQUID INVESTMENTS - <Moratorium>

7.9 TRANSITION STRATEGY - <1035>

Other potential problem areas with respect to unit-linked plans relate to the provision of guarantees, policy reviews, sales methods, misselling, investment fund links, unit pricing, valuation, and the need for a transition strategy when introducing unit-linked funds.

2000 - Munich Re Group - Unit-Linked Insurance: A General Report - 51p