Technical Savings and Investments Information

CONCEPT

As mentioned in the previous section, investment-linked insurance policies are insurance policies with its policy value directly linked to the performance of its underlying investment.  This may be achieved by formally linking the policy value to units in a special unitized fund run by the life insurer, or linked with the units in a unit trust (or mutual fund). The value of the units is directly related to the value of the underlying assets of the fund. This value may fluctuate according to the performance of the investments concerned.

Investment-linked insurance policies may come in a variety of forms, but there is a common factor. All or part of the premiums will be used to purchase units in a fund at the price applicable at the time of purchase. The value of the policy will then fluctuate according to the value of the units allocated to it.

How the investment-linked insurance policies work somewhat differs from the traditional life insurance and annuities. The net premium payments from traditional life insurance and annuity policies are invested in the company’s general investment whose earning helps to accumulate the cash value and pay benefits to policyholders. The death benefit and cash value of these policies are usually fixed and guaranteed. Under these types of policies, the insurance company assumes the investment risk. If investment proceeds is more than what is required to fund the insurance contract’s guarantees, the difference is added to the company’s income. Sometimes, part of such earning will be distributed to the policyholders and/or shareholders in the form of dividends. If investment performance is unfavorable, the insurance company bears the loss.

However, for the investment-linked insurance policies, the net premium payments are invested in the investment funds accounts that are separated from the company’s general assets and are therefore entirely separated from the insurer’s general account liabilities. The policy value, death benefit or annuity payment amounts will vary depending on the performance of these investment fund accounts. With these types of policies, all the investment risk is borne by the policyholder who however does not directly own any of the underlying assets recorded in the accounts. This allows investment gains to be passed through to the policyholders, but it also means that investment losses are borne by the policyholders.

A variety of assets may be used for linking purpose including equities (ordinary shares), fixed income securities (money market instruments and bonds) and a whole range of cash and other security/asset funds.

As these policies are considered collective investment schemes under the definition provided for in the “Securities and Futures Ordinance” (Cap 571) authorization has to be sought from the SFC if they are sold to the general investing public.

Finally, it should be noted that only insurance companies authorized under the “Insurance Companies Ordinance” (Cap 41) to carry on Class C business in or from Hong Kong can underwrite investment-linked long term insurance policies.