CEILLI (Investment-linked Examination)

WEALTH MANAGEMENTR139G155B147

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CEILLI(Investment-linked Examination)

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AIA confidential and proprietary information. Not for distribution. AIA confidential and proprietary information. Not for distribution. 2

1 INTRODUCTION TO INVESTMENT-LINKED LIFE INSURANCE

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Chapter 1: Introduction to Investment-Linked Life Insurance

PolicyholderPolicyholder

Fund ManagedFund ManagedBy InsurerBy Insurer

ProtectionProtection InvestmentInvestment

Pro

tect

ion

Capital G

ain

pay premium



4

Special unitised fund

Investment Performance

Linked

Value fluctuates

Value of policy

Directly linked

UNITSUNITS




5

Investment-Linked

Unit-Linked Variable Life

United Kingdom U.S.A.Malaysia

Refers to the same thing


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2 KEY CONSIDERATIONS IN INVESTMENT

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2.1 Investment Objectives

2.2 Funds Available

2.3 Risk or Security

2.4 Investment Horizon

2.5 Accessibility of Funds2.6 Taxation Treatment

2.7 Performance of the Investment

2.8 Diversification

Chapter 2 Key Considerations in Investment



8

Why do people invest?

Retirement income

Education & up-bringing

Funds for dependents

Improve financial position

Comfortable standard of

living

Pay expenses & taxes upon

death




9

What should I invest in?

Depends on what you want!

orRegular Income Flow


Capital Gains



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More free funds

Wider choice of investment

Level or Amount of Funds Available Fixed surplus

current income set aside

Certain types of investment e.g.

insurance policies or unit trusts

Source of Available Funds

2.2 Funds Available



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1.Individual’s Need for Security

Investment Risk

Loss of Initial

Investment

Rate of Return is Not Up to Expectation

3 Considerations in Investment



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Risk Tolerance

Low Risk,Low Potential Return


2. Attitude Towards Risk


High Risk,High Potential Return

Risk Adverse Risk TakerRisk Neutral



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3. Type of Investment with Certain Inherent Risk

Risk

Capital and income growth

potential

Investments

Higher risk & uncertainty

Higher potential for

capital & income growth





14

Match your investment horizon with the maturity of the investment asset

Investment Objectives

Investor’s Age

Current Financial Condition

ImportantImportant

2.4 Investment Horizon

How long are you willing to

lock into an investment?



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2.5 Accessibility of Funds

Earlywithdrawal

cost or penalty ? Initial cost in setting or buying the investment ?

Liquidity : short term

vs.long term investment ?



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Different types of investment

Different tax treatment

The tax statusof investment

linked life insurance is the

same as traditional with

profit life insurance

To be discussed in Chapter 10

2.6 Taxation Treatment



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Performance depends on

Competencies & capabilities

of management team

Invested company’s level of costsInvested company’s

past experience & history

Country’s economic factors

Life cycle of investment

2.7 Performance of the Investment



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2.8 Diversification

• Invest in different assets classes and across different market environments

• Spreading of risks

• Effective in reducing risk without sacrificing returns



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3.Shares at different countries

2.Different type of shares

Spreading of risks by :

1. Categories of investment e.g. shares, bonds, money market instruments

2.8 Diversification

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3 TYPES OF INVESTMENT ASSETS

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3.1 Cash and Deposit

3.2 Fixed Income Securities

3.3 Shares

3.4 Unit Trusts

3.5 Investment Trusts

3.6 Properties

3.7 Derivatives

3.8 Exchange Trade Funds

3.9 Sukuk Bonds

3.10 Capital Guaranteed Fund

Chapter 3: Types of Investment Assets



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• Refers to all liquid instruments

• Carry little or no risk of losing principal amount

• Cash

- Not an investment Capital value won’t increase

No additional income

generated

- Only a medium of exchange

3.1 Cash and Deposits



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The definition of cash covers:-

3.1 Cash and Deposits (continue)

Treasury Bills Bank Accounts



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Treasury Bills

Central BankGovernment

Institution

issued at discount rate

discharged at face value

No risk : guaranteed by Government (unless politically unstable) Short term : < 1 year



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Bank Accounts

Place fixed/time deposits

Bank

Pay fixed interests

Public

• Bad inflation hedge• Penalties on early withdrawal

• Low in yield



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Types of Account

Savings Accounts

Current Accounts

Fixed Deposits

Investment Accounts

Time Deposits

Offshore Accounts

Bank Accounts available (continue)



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choices of deposits

prevailing market condition

funds available for investment

how long fundcan remain

in the account

emergency withdrawal

Bank Accounts (continue)

Factors influencing ‘Choice of Deposits’:



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Companies or

government

Public

3.2 Fixed Income Securities

Invest principal by buying securitiesPublic lends money to company or government

Pays fixed periodic interest incomeAt maturity, repayment of principal

Can be bought and sold anytime before maturity

in secondary market



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Government Bonds

Money Market

Instruments

Corporate Bonds

Preference Shares

3.2 Fixed Income Securities (continue)

Types of Fixed

Income Securities



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Government Bonds

• Safest – little or no default or credit risk

• Government guarantees to pay interest and repay principal

• Fixed interest rate

• Issued when government needs money to finance projects

Advantages

• Easily marketable

• Income for future years guaranteed

Disadvantage

• In times of high inflation, capital can be eroded



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Maturity Period

Medium Term

5 to 10 years

Long Term

Above 15 years

Short Term

Below 5 years

Government Bonds (continue)



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Corporate Bonds

Advantages

• Higher return than govt. bonds

• More marketable

• Potential for capital gains

Disadvantage

• More risky

Debenture stocks

Loan stocks

Convertible Stocks

Bonds issued by companies



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Debenture Stocks

• Secured loans [Fixed charge on company’s property or assets

(stocks)]

• Fixed rate and term

• Trustee appoint Supervise interest & capital payment

If default, act for investors

Corporate Bonds (continue)



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• Company can repay earlier if wishes

• No government guarantee (riskier)

• Interest rate higher

How it differs from Government Bonds




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Loan Stocks

• Unsecured loans• Fixed interest rate

and term• Risk losing capital• Less secure than

debenture stocks. Therefore, higher interest rate

Risk-Return

Government Bonds

Debenture Stocks

Loan Stocks

Risk

Return




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Convertible Stocks

Can be converted to ordinary shares of a company on a fixed date

Become part owner and entitled to profits through

dividends declared




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• Factors affecting decision to convert: (i) Dividend income

(ii) Capital appreciation in share price

Whether are better than fixed interest given



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Government Bonds

Debenture Stocks

Loan Stocks

Return

Risk-Return

Risk



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• Shareholder = part owner of a company

• Not liable for company’s debt

• Can attend Annual General Meeting (AGM) vote for major issues and

appointment of directors

3.3 Shares

• Share certificate = evidence of title



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Company

Private companyPublic Company

•Shares quoted on KLSE•Available to ordinary investors

•Not listed on stock exchange•Not available to ordinary investors

3.3 Shares (continue)



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Market’s view on compan

y

Currency performanc

e

Inflation rate

Country’s economy

Company’s earning

Interest rate levels

Share price influenced

by:




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Ordinary Share Preference Share

• May or may not receive dividends

• Right to a fixed dividend provided that enough profit has been made

• Dividend is fixed• Ranks ahead of

ordinary shareholders when company winds up

• Dividend rates fluctuates according to company’s profits




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3.4 Unit Trusts

• Purchase in units

• Buy at Offer Price (selling price)

• Sell back at Bid Price

(buying price)



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3.4 Unit Trusts (continue)

• Funds managed by professional fund managers in well diversified range

• Unit trust are authorized & supervised by the Securities Commission

• Value of units based on performance of investment



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• Open-ended fund

• No fixed redemption date

• Fund manager can create units if required, and cancel units if encashment exceeds new purchases




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• If too many investors cash-in, may have to sell fund’s assets

• All unit trusts are required to state investment objectives in prospectus

• Medium to long term investment (> 3 years)




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Advantages

• Spread of investments

• Lower risk compared to shares

• Professional service from fund managers

• Minimises paperwork of investors

• Income from dividend can be reinvested

Disadvantages

• Bewildering array of funds

• Extra costs for switching




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“Three Way Arrangement”

Investors

TrustDeed

FundManager Trustee

Invest capital

Select & Manage fund

Hold pool of money in trust on behalf investors




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Trust deed sets out:

• Fund manager’s investment powers

• Price structure

• Registration of unit-holders

• Remuneration of fund managers

• Accounting and auditing rules




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Investment Trustcompany

Investment fund

managed by specialist fund

manager

Shares value fluctuate according to whether loss or profit made from the investment fund

3.5 Investment Trusts

sharesInvestor



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Purchasing shares in company

Purchase units in trust, not shares in company

Closed-end funds Open-ended fund

No asset disposals if large numbers of investors cash-in

Disposes assets when large numbers of investors cash-in

Investment Trust Unit Trust

Registered Under Companies’ Act

Formed by Trust Deed

3.5 Investment Trusts (continue)



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AdvantageFlexible –

investors can borrow to finance

purchases of investment trusts

DisadvantageGreater risk

exposures due to price volatility

Higher risk/reward profile than unit trusts

3.5 Investment Trusts (continue)



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3.6 Properties

3 types

Price depends on:

• Quality of land – profitability of crops

• Location of land

• Value of buildings on land

Agricultural Property

Commercial/ Industrial Property

Domestic Property

Price depends on location and types of buildings on the land



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Advantages

• Good capital appreciation

• Steady flow of income

• Low risk

Disadvantages

• Difficult to be disposed off during recession

• By mortgaging, capital can be free

3.6 Properties (continue)



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3.7 Derivatives

What are derivatives?

Two popular

derivatives are stock options and financial futures

Financial instruments whose values are linked to

the price of underlying instruments in the

cash markets



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3.7 Derivatives (continue)

Stock Options Financial Futures

Options Warrants Futures



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Options

• Duration usually 3, 6 or 9 months

• To purchase or sell security within a specified time period

• A right, not an obligation

• At a fixed price

Call(A right to buy)

Put(A right to sell)



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Options (continue)

Call options are bought in hope of price increase. Sellers want reverse to happen

Put options are bought in anticipating a decline in price. Sellers want reverse to happen



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Call Option

Share Price = RM10,000 per lot

Price of Call Option = RM200 (expires after 6 months)

January: Share Price = RM10,000 per lot

February: Share Price = RM11,000 per lot

Gain = RM1,000 - RM200 = RM800



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Put Option

Share Price = RM10,000 per lot

Price of Put Option = RM300 (expires after 6 months)

January: Share Price = RM10,000 per lot

February: Share Price = RM9,000 per lot

Gain = RM1,000 - RM300 = RM700



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• Transferable Subscription Rights (TSR)

• Holder has right to subscribe shares in the company

• At pre-determined ratio (conversion ratio)

• At pre-determined subscription price (exercise price)

• Within a specified time period (fixed at beginning)

• Corporate-created option

Warrants



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Warrants (continue)

Corporationissues warrants Investors

• Similar to call option

• Option to purchase,within a specified time,

a stated number of shares at a specified

price

• Attach free with loan stock or rights

• Often issue free



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Advantages

• Small initial outlay – buy warrant, pay exercise price later, and convert warrant to the underlying share

• Capital gains from sale of warrants

Disadvantages

• On expiry, warrants not exercised lose value completely – no chance for price recovery

• No interests or dividends

• Carry no voting rights

Warrants (continue)



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Futures

Physical commodities & financial

instruments

Future markets

Traded in cash market

Cannot be cancelled

unless both parties agree

Forward markets

Price of an item for deferred

delivery

Current market price of item available for immediate delivery

Spot markets



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Future markets

Futures exchange determines:

• Contract size• Delivery date• Conditions

Trader determines:

• Price• Number of

contracts

Set price today for an instrument that will be delivered on a specified future date

Obligation, not an option

E.g. Stock index

futures

Futures (continue)



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Stock index futures• Based on a particulars share price index

• Settlement Made in cash without the actual delivery of the

securities covered by the index

• Profit Derived from price difference of original

contract value and value at time of settlement

Futures (continue)



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Advantages

• Enable investors to protect their investments (hedging)

• Shifts risk of price fluctuations to those who are willing

• Price discovery – futures price reflects current expectations

• Speculative trading – potential large gains

• High risk – may face huge losses if wrongly speculated

Disadvantages

Must have clear understanding of

hedging

Futures (continue)



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• Also known as Exchange-trade product (ETP)

• Traded in Stock exchanges

• Underlying asset ie stocks, bonds and trades



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• Attractive as an investments instrument : Low costs

Tax efficiency

Stock like features



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• Traditionally an index funds

• An actively managed fund since 2008

• ETFs - USA since 1993 - Europe since 1999



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• Index ETFs• Commodity ETFs or ETCs• Bond ETFs• Currency ETFs or ETCs• Actively managed ETFs• Exchange-traded grantor trusts• Leveraged ETFs

Types of ETFs




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3.9 SUKUK BONDS

- An Arabic name equivalent of Bonds

- Structured to comply with Islamic Law and its investment principles

- Over $ 1.2 Trillion of asset are managed according to the Islamic Investment Principles

- Not a Bond because it isn’t based on debt

- Regards as commercial paper that give ownership to investor



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3.9 SUKUK BONDS

Characteristics of Sukuk :

1. Pooled of funds2. Based on hard assets that generate steady income and expectations3. Maybe guaranteed or not by their originators4. Investors received a fee equal to the income5. Issued by Special Purpose Vehicles (SPV)6. Sukuk issued in dollars7. Different from conventional bonds as its based on tangible asset that debt8. 14 types of Sukuk – Sukuk Al Ijara and Sukuk Al Mucharaka



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Definition

- Guaranteed the investor’s capital investment from losses

- Didn’t redeem investment before maturity date



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Features

- High asset allocation – 80% to 90% of total fund size

- Benchmark against Fixed Deposit

- Investment Horizon 3 to 5 years

- Offered during an offer period. Once closed, no new investors

- Normal unit – RM 1

- Higher initial investment then Unit Trust. Minimum RM 5,000

- Lower Front end. Service charge id 1.5%



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Features (Con’t)

- Redemption fee before maturity ranging from 03% to 1.5%

- Guaranteed capital preservation

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4 INVESTMENT-LINKED LIFE INSURANCE PRODUCT: WORLD SCENARIO

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Chapter 4: Investment-Linked Life Insurance Product - A World Scenario

4.1 In United Kingdom

4.2 In USA

4.3 In Singapore

4.4 In Malaysia



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4.1 In United Kingdom

1957• First investment-linked life

insurance contract in UK

• Individual retirement annuity for self-employed

• By London & Manchester Assurance Company Limited

• Linked to an external unit trust



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4.1 In United Kingdom (continue)

Investment-linked life insurance business has been transacted for more than 30 years

Allow the policyowner total flexibility to alter his needs for investment and protection in accordance to his wishes

In 1986 approximately 130 companies were writing investment-linked life insurance business



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4.2 In the United States of America

More commonly called ‘Variable Life Insurance’ in USA

Offered for sale to the general public in the US in 1976

Only after the product had been successfully marketed in the Netherlands, United Kingdom and Canada

Very much affected by regulations

• State insurance laws and regulations

• Federal Securities laws (Securities & Exchange Commission)



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4.3 In Singapore

The first single premium investment-linked policy introduced in Singapore was in 1973

Enhanced Investment Scheme (EIS) was introduced by the Central Provident Fund (CPF) in 1993

This contributed to the expansion of the life insurance industry, including investment-linked life insurance business

Allowed CPF members to invest 80% of the excess of S$50,000 in their ordinary account in eligible investment instruments



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4.4 In Malaysia

Investment-linked life insurance products are very new in Malaysia

Syarikat Takaful Malaysia Sdn Bhd (now Syarikat

Takaful Malaysia Bhd) was first to sell a simplified product to the public in August 1985

In July 1997, Berjaya Prudential Assurance Bhd became the first traditional insurance company to launch the investment-linked life insurance product

Then onwards Mayban Life Assurance Bhd was given approval in February 1998, followed by Malaysian Assurance Allied Bhd



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Single Premium/ Top-up

Life Office

Units which belong to policyowner

Unallocated premium

(To meet marketing and set-up expenses)

Allocated premium used to buy units from investment-linked funds at offer price

Surrender claim

Withdrawals

Death claim

(Pay value of units)

(Pay value of units withdrawn)

(Pay value of units and/ or sum assured)

OrTop-up

Cancel unit (To pay mortality charge & policy fee)

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5 TYPES OF INVESTMENT-LINKED LIFE INSURANCE PRODUCTS

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Chapter 5: Types of Investment-Linked Life Insurance Products

5.2 Comparing Investment-Linked and Traditional With-Profit Life Insurance

5.3 Definitions

5.4 Characteristics of Investment-Linked Life Insurance Policies

5.1 How do Investment-Linked Life Insurance Policies Work?

5.5 Types of Investment-Linked Life Insurance Policies5.6 Loans and Withdrawals



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• Operate on similar principle as Unit Trusts

• Returns not guaranteed

• Linked to performance of investment fund

• Unit price depends on net asset value of the fund

• Value fluctuates as market prices rise and fall – lacks smoothing process

5.1 How do Investment-Linked Life Insurance Policies Work?



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Investment Used to purchase

units in fund managed by life

office

Mortality Protection

PREMIUMS

5.1 How do Investment-Linked Life Insurance Policies Work? (cont)



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Single premium/Top-Up

Life office

marketing &set-up expenses

Policyowner’s units

Surrender

Withdrawals

Death ClaimCancel unitsMortality charge& policy fee

5.1 How do Investment-Linked Life Insurance Policies Work? (cont)



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Policy charges and investment content are more identifiable

Potential for higher returnsbut higher risk (equity funds)

Traditional With-Profit Life Insurance

Investment-linked

Produce steady return by smoothing out short term market fluctuationCharges not specifically detailed in the policy

5.2 The Fundamental Differences



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Traditional With-Profit Life Insurance

Investment-linked

Offers more choice of investment funds

Choice of Investment is Insurer’s discretion

Benefit & risks immediately passedto policyowner


Most of risk passedto insurer



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Traditional With-Profit Life InsuranceInvestment-linked

Investment element is made known to policyowner at outset

Investment element is NOT made knownto policyowner at outset

Value of policy fluctuate depends on value of units held

Never reduce in value provided life office is solvent




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Charges levied on investment-linked life insurance policies:- Policy fees- Annual fund management fee- Bid-offer spread- Reduction in allocation of units - Unallocated

premiums- Initial units- Mortality charges- Surrender charges

5.3 Definitions



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Policy Fee

• Administrative expenses of setting up the policy

Annual Fund Management Fee

• Investment management charges.

• Deduction of between 0.5% to 2% per year from fund accumulated

5.3 Definitions (continue)



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Offer Price

• Selling price of units by the life office

Bid Price

• Price at which the units are cashed when the policy matures, or surrendered, or used to pay charges

• Bid price is always lower than offer price at the published date




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Bid-Offer Spread

Bid-Offer Spread

Initial charge 5% to 6% on every premium made to cover expenses in

setting up the policy

Offer price Bid PriceMinus (-)




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Reduction in Allocation of Units – Unallocated Premiums

• Not all of a policyowner’s premium is allocated to buying investment units

• Unallocated premium used to meet marketing and setting-up expenses of the policy

• Some insurers make nil allocation to units until expenses recouped




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Initial Units

• All of a policyowner’s premium allocated to buy investment units

• Units allocated in early years known as “initial units” – have higher annual management charges, e.g. 6% p.a., throughout term of the policy contract

• Bears heavy discontinuance charges

• Cash value much lower than face value for years

• Less common nowadays




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Mortality Charges

• Dependent on age

• Covers mortality cost of the policy

• Can be a recurrent charge (e.g. monthly) – funded by cancellation of units on a regular basis

• Allows policyowner to vary sum assured over time




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Surrender Charges

• Charge deducted from value of units at surrender

• Represents initial expenses incurred but yet to be recovered




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Can have larger exposure to

equity

Investment

Protection• Life cover• TPD• PA benefit• Health



102

Investment performance of

underlying assets

Prices of the units

Reflects

Protection benefits

Cash value

AffectsAffects




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• Protection costs are explicit

Met by cancellation of units

For single premium plan, met by flat initial charge

• Commission and office expenses are met explicitly

May vary, but must give 6 months notice prior to change




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Cash Value

Value of units allocated to policyowner, calculated at bid price




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5.5 Type of Investment-linked Life Insurance Policies

1. Single Premium investment-Linked Whole Life Insurance Plan

2. Regular Premium Investment-linked Whole Life Plan

4. Investment-linked Permanent Health Insurance

5. Investment-linked Dread Diseases Insurance

3. Investment-Linked Individual Pension Plan



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Single Premium Investment-Linked Whole Life Insurance Plan

‘One-off’ premium contribution

Protection is 125% of total single premium paid, subject to a minimum of RM5,000

Minimum premium is RM3,000

Emphasize on long-term savings and investment – offers only nominal life protection

5.5 Type of Investment-linked Life Insurance Policies (continue)



107

Top up or single premium injection is allowed

Policy fees

Other admin

charges

Mortalitycharges

Admin and

insurance charges

Investmentmanagementfee (0.5% to

2% p.a)

Single Premium Investment-Linked Life Insurance Plan




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Features

• Premium holidays

• Top-ups

• Withdrawals

• Surrenders

Regular Premium Investment-Linked Whole Life Insurance Plan

Regular Premiums

• Monthly

• Quarterly

• Annually

Purpose

• Life protection (main)

• Investment

Regular Premiums

Purpose




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Investment-Linked Individual Pension Plan

High allocation of premium to investments

Accumulate fund to retirement

Upon retirement Use fund to

purchase annuity

Basic Plan • Conventionally, no life cover other than return of investment funds on death

• Cancelling investments to fund life cover

• Conversion to traditional with-profit life

New Feature



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Investment-Linked Permanent Health Insurance

• Provides health coverage such as disability income

• Contains cash value- Traditional health products don’t have cash value



111

Investment-Linked Dread Disease Insurance

Advances whole of face amount upon diagnosis with dread diseases such as heart attack, stroke, coronary artery by pass, end stage renal failure or total permanent disablement



112

Loans may be limited to some percentage of the

cash value

5.6 Loans and withdrawals

Partial surrender and withdrawal

can be met by cashing the sufficient units at

the bid price

Reason:Cash value fluctuates on a daily

basis



113

5.7 Risk Base Capital Guidelines

Implementation of Risk Based Capital Framework for Insurers

- Came into effect 1st Jan 2009

- better align regulatory capital requirement

- Improve transparency of prudential buffers

- allow greater flexibility for insurers to operate at different risk level

- Are more granular and risk sensitive



114


Example :

- Insurers with asset portfolios on high risk assets are required to hold more capital

- Insurers with high risk profiles will have higher Capital Adequacy Ratios (CAR)

- Investment strategies are rebalanced to response to prevailing market conditions



115


- RBC expected to raise the overall level of resilience

- Improvement of quality and depth of statutory

- Have strong capital adequacy, liquidity positions and risk management practices



116


Investment of Insurance Funds

Investment Strategy:

- Investment Objectives, both at Company and fund specific Level

- Risk and Liability of Insurer

- Strategic asset allocation i.e long term asset mix main investment categories

- Extent holding of certain types of assets is restricted or disallowed

- overall policy of usage of derivatives and structured products



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Requirement of Insurers :

- Established adequate internal controls of management of approved asset

- Put in place rigorous audit procedures

- Install effective monitoring and managing asset and liability

- Put in place suitable plans to mitigate effect arising from deteriorating market conditions

- Undertake regular stress testing

- Ensure key staffs are Skills, Experience, Expertise and integrity



118

Conclusion

Popularity of Investment-Linked Life Insurance Policies will continue because:

4) performance of the funds can be monitored

in daily newspapers

1) Its contracts are easier to understand2) the charges are more transparent3) It is much more flexible

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6 STRUCTURE OF INVESTMENT-LINKED FUNDS

119



120

Chapter 6: Structure of Investment-Linked Funds

6.1 Accumulation Units & Distribution Units

6.2 Types of Investment-linked Funds

6.3 Risk-return Profile

6.4 Fund Switching



121

6.1 Accumulation and Distribution Units

- 2 ways to structure investment-linked funds

Unit price unchanged

Distribution

Fund Investment

Capital

Income

Purchase more units

Accumulation

Fund Investment

Capital

Income

In long term

Unit price



122

6.2 Types of Investment-Linked Funds

Types of Funds

Cash Funds

Equity Funds

Bond Funds

Property Funds

Specialised Funds

Balanced Funds

Managed Funds



123

Equity Funds• Invest in stock, shares• Higher risk – equity prices volatile

• Aim for capital appreciation• Magnitude of change of unit price

depends on quality of equities held

Cash Funds• Invest in cash and bank deposits

• Safe, low risk

6.2 Types of Investment-Linked Funds (continue)



124

Bond Funds (IOUs)• Fixed income instruments (government/

corporate bonds)• Income-producing

Property Funds

• Invest in properties e.g. real estate and property shares

• Safer than equity, but have lower liquidity• Provision allows fund manager to defer

redemption of units up to 12 months




125

Specialised Funds

• ASEAN• Emerging Markets• International Bond

Geographical Region

• China Fund• US Fund

Particular Country

• Commodities• Mining• Plantation• Public utilities

Industry Specialised

Offers exposure to different markets, regions and currencies




126

Managed Funds

• Invest in wide variety of assets

• Asset allocation depends on fund manager’s view

Balanced Funds

• Invest in fixed proportion of specified assets

e.g

70% 30%

Equity Fixed Securities




127

6.3 Risk-Return Profile

Risk

Return

Cash Funds Bond Funds

Balanced Funds

Managed Funds

Equity FundsHigher return, higher risk



128

6.4 Switching

Fund A Fund B

Free for limited no. of switches within a

given period, subsequently

charges imposed

Free

Switching part or all investment from one fund to another

Useful for financial planning

Specific charge for each and every switch

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7 HOW INVESTMENT-LINKED INSURANCE PRODUCTS WORK

129



130

•Create new units•Add investment

monies to the

fund

Unit Price

No. of Units

• Lump sum (Single premium) • Regular payment (Regular premium)

7: How Investment-linked Insurance products Work

Premium

Value Value of the of the policypolicy

At any time, policyowner may choose to

• Top up – to purchase additional units (subject to minimum amount)

• Withdrawal – sell some units

• Surrender – sell all the units

determined bydetermined by




• Single Pricing• One quoted price• Policyowner buy or sell

units at the same quoted price

• Dual Pricing• Offer Price• policyowner buys units• Bid Price• Policyowner sell units

131

• Bid price is always lower than offer price.• Bid-offer spread – the difference in the bid and offer price

(explained in chapter 5)

• Charges normally deducted are• Policy fee • Administrative charge• Mortality charge

Methods of Calculating Benefits



132

Number of Units purchased

= Premium – Charges imposed Unit Price

Cash Value = (Number of Units x Unit Price) – (Mortality

charges + Policy Fee)

Annual Yield On Gross Premium

= (RGP)1/n - 1; n = No. of Years

Return on Gross Premium (RGP)

= Ending Value of Investment Beginning Value of Investment

Single Pricing Method




133

Sample Calculations: Single Pricing Method

Premium = RM 4,000

Unit Price = RM 1

Charges = 5% (from total premium)

Mortality Charge = 1% (of fund value)

Policy Fee = RM100



134

= RM 4,000 - (RM4,000 x 5%)

RM 1

= RM 4,000 – RM 200

RM 1

= RM 3, 800

RM 1

= 3,800 units



= Premium – Charges imposed Unit Price



135

= (3,800units x RM1) – [(3800 x RM 1) 1%+RM100]

= RM 3,800 - (RM 38 + RM 100)

= RM 3,800 - RM 138

= RM 3,662


Cash Value = (Number of Units x Unit Price) –

(Mortality charges + Policy Fee)



136

Annual Yield On Gross Premium Suppose Unit Price after 10 Years = RM 1.97






End Value of Investment

= (Number of Units x Unit Price) – (Mortality charges + Policy Fee)



137

= (3,800 units x RM1.97) – [(3800 x RM1.97) 1% + RM100)]= RM 7,486 - (RM 74.86 + RM 100)= RM 7311.14


End Value of Investment

= (Number of Units x Unit Price) – (Mortality charges + Policy Fee)



= RM 7311.14 = 1.828 RM4000

The annual yield = (1.828)1/10 -1 = 1.062 - 1 = 0.062 or 6.2%



138


= Premium Offer Price

Cash Value = (Number of Units x Bid Price) – (Mortality






Dual Pricing Method




139

Sample Calculations: Dual Pricing Method

Premium = RM 4,000

Offer Price = RM 1

Bid-Offer Spread = 5% (from total premium)

Mortality Charge = 1% (of fund value)

Policy Fee = RM100



140

= RM 4,000 RM 1

= 4,000 units


= Premium Offer Price

Cashed in or Claim

= No. of Unit Bid Price

Bid Price = RM 1 x 95% (bid offer spread = 5%) = RM 0.95

Claim amount = RM 3,800 (4,000 units x RM0.95)

If unit price increased to RM 1.20, bid price = RM 1.14 (RM 1.20x95%)Claim amount = RM 4,560 (4,000 units x RM1.14)




141

= (4,000 units x RM0.95) – [(4000 x RM0.95) 1% + RM100]

= RM 3,800 - (RM 38 + RM 100)

= RM 3,800 - RM 138

= RM 3,662

Cash Value = (Number of Units x Bid Price) – (Mortality





142

Suppose Offer Price after 10 Years = RM 1.97

Bid Price = RM 1.97 x 95% = RM 1.8715








143

= (4000 units x RM1.8715) – [(4000 x RM 1.8715) 1% + RM100]

= RM 7,486 - (RM 74.86 + RM 100)

= RM 7,486 - RM 174.86

= RM 7311.14

End value of investment

= (Number of Units x Bid Price) – (Mortality charges + Policy Fee)

Beginning value of investment = RM 4,000 (4,000 units x RM 1)

= RM 7,311.14 RM 4,000= RM 1.828



Annual Yield = (RM 1.828) 1/10 -1= 1.062 – 1= 0.062 or 6.2%




144

Withdrawal Option

No. of UnitsMoney receive = No. of units x

Unit/ Bid Price

Fixed MonetaryUnits Cancel = Fixed Monetary

Unit/ Bid Price

Eg: •No. of Unit = 500•Unit/ Bid Price= RM 2Money receive = 500 units x RM 2= RM 1,000

Eg: Fixed Monetary = RM 3,000Unit/ Bid Price = RM 2Units cancel = RM 3,000

RM 2 = 1,500 units


Withdrawal Benefits

*Surrender value calculation is similar to withdrawal



145

2 types of Death Benefit

Unit Value + Sum AssuredUnit Value or Sum Assured

(Whichever is higher)


Death Benefits

Death Cover / Sum Assured

Value of Unit

Death Benefit

Years

RM

Value of Units

Death Cover / Sum Assured

Years

RM

Time t



146

Single Pricing Death Benefits = (No. of Units x Unit Price) + Sum Assured

E.g: Suppose Sum assured = RM 5,000; Unit price = RM 1.22 at the time of deathDeath Benefits = 3,800 unit x RM 1.22 + RM 5,000

= RM 9,636


Death Benefits Unit Value + Sum Assured

Dual Pricing = (No. of Units x Bid Price) + Sum Assured

E.g: Suppose Sum assured = RM 5,000; Offer price = RM 1.22 at the time of deathBid price = RM 1.159 (RM 1.22 x 95%) Death Benefits = 3,800 unit x RM 1.159 + RM 5,000

= RM 9,636



147

Single Pricing Death Benefits = (No. of Units x Unit Price)

Dual Pricing = (No. of Units x Bid Price)

Death Benefits for both calculation = RM 4,636

Death Benefits payable will be RM 5,000 (Death Cover / Sum Assured)


Death Benefits Unit Value or Sum Assured, (Whichever is higher)



148


Regular Premium Policies

Policyowner:•Are required to pay premiums regularly but enjoy the flexibility of:

• Being able to vary the level of premium• Doing single top up• Taking premium holidays

•May surrender all or part of his unit •May vary the sum assured without changing his premium•May also increase or reduce his regular premium

*Note: Check out more scenarios from The MII text book

149|


8 BENEFITS AND RISKS OF INVESTING IN INVESTMENT-LINKED FUNDS

149



150

8: Benefits and Risks of Investing In Investments-Linked Funds

Investment-linked Insurance Plan

Protection Investment

Premium to be allocated to

protection or investment

to invest in the funds that you choose



151


Policyowner can access to a pooled or diversified portfolio of investment.

Policyowner can easily change the level of his premium payment.

The funds are managed by professional fund managers in accordance with the investment objectives.

Policyowner can get access to a well diversified investment-linked funds.

Policyowner is relieved of the day-to-day administration of his investment, just has to keep track through the unit statement provided regularly.



152


• Cash and maturity values will rise and fall based on the fund invested

• With equity fund, policyowner may expect to achieve higher return than traditional product over long term

• The administrative fee, insurance charge, fund management fee etc are usually not guaranteed

• They are subject to regular review and can be changed by insurance company

153|


9 COMPARISON BETWEEN INVESTMENT-LINKED LIFE INSURANCE AND TRADITIONAL WITH PROFIT LIFE INSURANCE PRODUCTS

153



154

Comparison Criteria

Investment Returns and Risks

Premium Computation

Surrender Value

Death Benefit Option to Top-up

9: Comparison between Investment-linked and Traditional with Profit Life Insurance Products



155


Traditional Guaranteed without Profit Products

Traditional with-profit Products

Investment-linked Products

• Guaranteed a fixed rate of return

• E.g: Term Insurance, non participating insurance

• Similar to without profit insurance but ‘profit’ are added to the sum assured

• E.g: whole life, endowment insurance

• Wholly or partly determined by reference to the value of invested property/ index

Introduction



156





• A fixed amount is made when the insured dies within the term or period of assurance

• The amount payable does not depend on the investment performance of the company

• No investment risks except he risk of insolvency of the company

• Bonuses can be allocated as an addition to the sum assured

• Bonus are not directly linked to the investment performance, it has been smoothened by the life office

• E.g: Cash bonus, reversionary bonus, terminal bonus

• Policy values vary according to the values of the underlying assets that the policy tied to.

• The investment returns and risk are directly transferred to the policyowners.

Investment Returns and Risks



157





• Premium is determined and fixed at inception

• Life company may not alter the terms and conditions without the agreement of policyowner

• Sum assured driven

• Premium is determined and fixed at inception


• Sum assured driven

• Policyowner has the flexibility in changing their premium payments, top up or take premium holiday

• Life office may also retain certain right to alter charges, like monthly policy fees

• Account driven

Premium Computation



158





• Death benefit (sum assured) is determined at inception


• Death benefits is fixed sum assured plus accumulated bonuses less any outstanding policy loans and automatic premium loans (inclusive of interest)

• Maturity benefits is fixed sum assured plus bonuses accumulated less any outstanding policy loans and automatic premium loans (inclusive of interest)

• Single Premium plans

• Minimum sum assured or value of units at bid price, whichever higher

• Minimum sum assured plus value of units

• Regular Premium Plans

• Sum assured or value of units at bid price

• Sum assured plus value of units at bid price

Death Benefits



159





• No surrender value except plan with terms more than 20 years

• Cash surrender value includes surrender value reversionary bonus

• Usually higher than the without profit policy

• Surrender value is market price x unit / bid price

• Depends on policies

• Sum assured can be increased each year by a set percentage of the original sum assured

• Very few with profit policies allow the option to top up

• Similar to the without profit policies

• Allow policyowner to buy additional number of units without taking out a new policy

Surrender Value & Option to Top up

160|


10 TAXATION AND LAW COVERING INVESTMENT-LINKED LIFE INSURANCE PRODUCTS

160



161

Taxation are treated same manner as other Insurance policies

Companies Act 1965

Contract Act 1950

Insurance Act 1996

CommonLaw

10: Taxation And Law Covering Investment-Linked Life Insurance Products

•Investment-linked business governed by



162

The premium is allowable for tax relief whenthe life Insurance or deferred annuity is:

a. on the individual’s lifeb. on the life of the spouse of the individualc. on the joint lives of the individual and his/her spouse


Income Tax Act 1967



163

+All life insurance premiums

All life insurance premiums

Approved Fund (e.g. EPF)

Approved Fund (e.g. EPF)

Education and medical insurance premium

Education and medical insurance premium

Total Relief Allowable RM6000 per year

Additional Tax ReliefRM3000

From 1996 budget


* No longer subject to 7% limit



164

Insurance companies

Taxed at 8% of chargeable income and realized capital gain of a life

fund


Proceeds distributed to policyowners are tax-free



165

The main purposes of regulation included:-I) The protection of public interest

II) The promotion of fairness and equity

III) The fostering of competence

IV) The playing a developmental role

Insurance act, 1996 & regulations

Ensuring the insurer is financially solvent and able to meet its obligations

Ensuring that the insurers, insurance brokers adjusters are fair and equitable in their dealings with clients and claimants

By insisting a high level of professionalism competence and integrity

To in the take an active part economy development of the country




166

Investment-Linked Insurance Business

Section 7(2)(b) defines as

Effecting and carrying out of a contract of insurance on human life or annuity where the benefits are, wholly or partly, to be determined by reference to the value of, or the income from, property of any description or by reference to fluctuations in, or in an index of, the value of property of any description




167

Insurance Act 1996 Section 7(1)(b)

To carry out the investment-linked life insurance business:

1)Prior written approval by Bank Negara Malaysia

2)Detailed business plan to be submitted to BNM

Insurers are also required to maintain separate funds in respect each inv link funds




168

Investment Limits

BNM Circular JPI:1/1997

Specification of Assets for the purpose of a Licensed Insurer Margin of

Solvency which specifies that Investment-linked funds :

•are not applicable to licensed insurer’s margin of solvency

•could be invested 100% in equity

•are subject to the general restrictions to reduce the risk exposure to any

once company




169

Investment in securities in any one investee should not exceed:•5% paid up capital of the investee Company•5% of the total value of the assets of the fund

whichever is lower

Investment Limits – general restriction

Investment in loans or debentures to anyone borrower or group of borrowers should not exceed 5% of the total value of the assets of the fund



170

At least 18 years old

Policyowner may cancel the policy and get premium refunded within 15 days after delivery of policy

Age limit of Policyowner

Free Look provision




171

RM5,000 or 125% of single premium, whichever is higher

At least RM3,000 payment

Minimum Death Benefits & Premium Payment for Single Premium

Minimum Death Benefits

Minimum Premium Payment

• Basic qualification: CEILLI exam• Specifically trained & equipped with the

product knowledge

Intermediation




172

Disclosure of Information

Sales Materials/Illustrations must contain

1) General description of the investment policy and objective of the fund and the manner investment income distributed

2) Policy benefit based on the performance the funds and factors affecting the policy Benefits

3) Investment risks solely borne by policyowner must clearly informed

4) Max amount of initial charge, management

fee, mortality cost and any other charges must be stated




173

Disclosure of Information (Continued)

5) The basis of computation for benefits, bid and offer price, units allocation and unit cancellation

6) The basis and frequency of valuation of underlying assets

7) All guarantees and non guarantees facts and benefits

8) Statement of fund performance for past 5 years

9) Clear worded warning that policy value may rise or fall, results shown for illustration, fund performance is not guaranteed

10)Any information Bank Negara deemed necessary

Disclosure of Information

Sales Materials/Illustrations must contain



174

• Statement to policy owners• Fund performance report to policyowners

Refer to the book

175|


11 IDENTIFYING AND SATISFYING CUSTOMERS’ NEEDS

175



176

11: Identifying And Satisfying Customers’ Needs

a) Establishing Relationship with the Client

b) Gathering all relevant Financial Data

c) Establishing current Financial Position and Goals

d) Developing plans and strategies to meet the goals

e) Discuss possible recommendations

f) Implementation of the agreed recommendation

g) Monitoring the portfolio

The process of providing advice involves 7 stages :

Structured approach is important for an effective advice



177

Stage 1 Establishing Relationship with the Client- Convince client that he is able to assist the client to fulfil financial goals- Do a preliminary screening of client’s financial objectives and goals


Stage 2 Gathering all relevant financial dataTo obtain all relevant information about the

•customer in order to do an analysis

•Customer’s Personal and Dependents details

•Life and Financial Priorities and Goals

•Risk Profile

•Net Worth Analysis

•Cash Flow Analysis

•Recommendations and Record of Advice

The process of providing advice



178

Stage 3 Establishing Current Financial Position and Goals- After gathering all relevant data, agents to analyse and establish client’s

financial position and also future goals- This will allow agents to come up with a blue print for a recommendation



Stage 4 Developing Plans and Strategies to meet the Goals

Adequate Insurance Coverage for Liability cancellation, basic Protection and medical cover, disability

cover, dread diseases cover etc



179

Explaining the recommendations

Provides options and alternatives

open

Reviews Recommendations

Stage 5 Discuss Possible Recommendations



Stage 6 Implementation of the agreed recommendations

- Once agreed, agents put into effect all recommendations

- Implementation is done

- Any changes must be communicated with client before putting it through



180

Step 7 Monitoring the portfolio

- Regular monitoring of clients portfolio

- Ensure clients are informed of the progress of their policy

- Ensure client get quarterly or half year report by Insurer

- Assist client to make necessary switching and adjustment to ensure the clients gets the best returns from the policy

-Ensure policy review is done half year or yearly basis, adhoc review can be done if there is a special need

- Allow agents to obtain quality referrals and cross sell



181|


12 •MARKETING AND AFTER SALES SERVICES, ETHICS & CODE OF CONDUCT

181



182

12.1 Marketing

• In the past, role is strictly to sell company developed products

• hard sales technique are frequently used to stimulate customers’ interest

• Customers do not understand, meet their needs, or not afford to pay

12: Marketing And After Sales Services, Ethics And Code of Conduct

Definition: the management process responsible for identifying, anticipating satisfying customers requirements profitably

Sales Orientated

Sales Orientated



183

12.1 Marketing


• Role of the sales & marketing dept is to determine the needs of customers and satisfying these needs by dev and distributing appropriate policies

Market Orientated

Market Orientated

Generally functions• Planning & control – dev marketing plan and controling its results

against the plan by making necessary changes• Market identification – selection of segments of the market• Product development – develop appropriate policies to meet the

needs of the segments• Selection of distribution channel – identify and select the suitable

channel for distributing the policies to the customers• Promotion – suitable promotional activities including advertisement,

sales promotion etc



184

12.2.1 A Market Oriented Agent

• Objectives: To satisfying customers' requirements and needs, and at the same time earn an income for himself

• Sales Plan which allows planning and controlling


Objectives: Target market

Strategy

Implementation and control

Sales goal



185

1. Problem recognition

2. Information search

3. Evaluation of alternative policies

4. Purchase

5. Post- purchase evaluation

12.2.2 Customer Buying Decision Process




186

1.Locating prospective customer

2. Create sales presentation

3. Conducting sales interview4. Handling

objections

5. Closing the sales

12.2.3 The Selling Process




187

Agents role after closing the sale:

a. Application is complete and all the proposer's answers have been recorded accurately clearly;

b. Providing timely response to any applicant or company questions or requests.




188

Delivery of a policy gives the agent an opportunity to perform the following :-

a)Dispel the customer's cognitive dissonance

b)Provide a basis for future sales by reminding the policyowner about any currently unmet or future financial needs or expectations;

c)Re-emphasize the insurance agent's commitment to providing the policyowner quality service;

d)Encourage the policyowner to call the agent

e)Explain the policy's provisions, terms and conditions

f)Obtain names of referred leads and other prospects

g)Strengthen the customer relationship and help encourage persistency




189

Ethics & Conducts

Ethics should include :-

a)Behaving with Complete Integrity in an Insurance Agent's Professional Lifeb)Complying with the Law and with the Best Principles and Practice relating to Financial Advicec)Behaving in a Professional and Honourable Manner towards client, customer and whoever the Isurance Agent is in Contact in Businessd)Observing and Applying the Relevant Codes of Good Practices




190

12.3.1 LIAM’S GUIDELINES ON THE CODE OF CONDUCT

Part I - Guidelines on the Code of Conduct.Part II – Life Insurance Selling.Part III Statement of Life Insurance Practice.

Part I - Guidelines on the Code of Conduct.

• Statement of Philosophy.• Coverage.• Monitoring Devices.• Seven Principles of the Guidelines.• Code of Conduct.




191


Part II – Life Insurance Selling.•Introduction.•General Sales Principles.•Explanation.•Disclosure of Underwriting Information.•Accounts and Financial Aspects.




192

General Sales Principles

The intermediary shall : Produce Registered Intermediary Authorization Card Ensure the policy proposed is suitable to the needs Give advice only Treat all information as completely confidential Make comparisons with other types of policies, make

clear different characteristics of each policy Render continuous service to the policy holder




193

× Make inaccurate or unfair criticism of any insurers

× Attempt to persuade a prospective policy holder to cancel any existing policies unless these are clearly unsuited to the policy holder’s needs

The intermediary shall not:

TwistingTo discontinue a policy or to have a policy made paid-up and replace a new one in another company or the same company

General Sales Principles



194


Part III Statement of Life Insurance Practice.•Introduction.•Claims.•Proposal Forms.•Policies and Accompanying Documents.•Sales Materials/Advertisements.




195195

Important Chapters in Exam

Focus on..



196196

Exam Questions Analysis


Thank You