Let SFC regulate investment-linked insurance policies
New insurance regulator may lack expertise when it comes to investment-linked policies
The Hong Kong government will finally push ahead with the long-awaited establishment of an Insurance Authority next year, but the reform has not gone far enough to solve the problem of investment-linked assurance schemes (ILAS).
To protect the interest of policyholders, the ultimate solution should be to move these products under the regulation of the Securities and Futures Commission instead of the Insurance Authority.
The products, which have become popular in recent years, are a combination of a life insurance policy and an investment fund. Policyholders choose how to invest the premium among various funds.
This is different from traditional insurance policies, where the insurer decides how to invest the premium and pays dividends to the policyholders.
Investment-linked policies have the advantage of providing a higher return in a bull market run. But what goes up can come down.
When the market declines, policyholders may have their fingers burned, and there have been many complaints from policyholders that salespeople did not tell them the whole truth about the risks of the products.
Another problem is that these policies provide less insurance protection. When the policyholder dies, the amount of money left for the family may not be as high as expected.
Hong Kong's 80,000 insurance salespeople, be they insurance agents, brokers or bank staff, do not need to apply for a licence. The lack of regulation has led to mis-selling.
The setting up of the Insurance Authority will help solve this problem, as the regulator will license and regulate the salespeople and may fine those who have committed misconduct as much as HK$10 million.
However, the regulator will not have as much investment expertise as the SFC. So the government should shift the regulation of investment-linked policies to the SFC.
Statistics show investors buy investment-linked products in line with stock market movements. When the Hang Seng Index rose to a record in October 2007, their sales also reached a high of HK$60 billion, three times that of traditional insurance policies.
Then, when the markets were hit by the global financial crisis, such sales dropped in 2009 to HK$15.06 billion, or about half those of traditional insurance policies.
If investors are treating these policies like investments, the job of regulation should fall under the SFC, which has the mandate to protect investors.