Ceilli Presentation

8/10/2019 Ceilli Presentation

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AIA confidential and proprietary information. Not for distribution.

AIA.COM

CEILLI(Investment-linked Examination)


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AIA confidential and proprietary information. Not for distribution. 1

1 INTRODUCTION TO INVESTMENT-LINKED LIFE INSURANCE

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AIA confidential and proprietary information. Not for distribution.2

Chapter 1: Introduction to Investment-Linked Life Insurance

Policyholder

Fund ManagedBy Insurer

Protection Investment

P r o

t e c

t i o n C a

pi t al G

ai n

pay premium


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Specialunitised fund

InvestmentPerformance

Linked

Valuefluctuates

Value ofpolicy

Directly linked

UNITS



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Investment-Linked Unit-Linked Variable Life

United Kingdom U.S.A.Malaysia

Refers to the same thing



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2 KEY CONSIDERATIONS ININVESTMENT

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2.1 Investment Objectives2.2 Funds Available

2.3 Risk or Security2.4 Investment Horizon2.5 Accessibility of Funds

2.6 Taxation Treatment2.7 Performance of the Investment2.8 Diversification

Chapter 2 Key Considerations in Investment


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Why dopeopleinvest?

Retirementincome

Education &up-bringing

Funds fordependents

Improvefinancialposition

Comfortablestandard of

living

Pay expenses& taxes upon

death

2.1 Investment Objectives


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What should Iinvest in?

Depends on whatyou want!

orRegularIncome Flow

2.1 Investment Objectives

Capital Gains


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More free funds

Wider choice ofinvestment

Level or Amountof Funds

Available Fixed surpluscurrent income set

aside

Certain types ofinvestment e.g.

insurance policiesor unit trusts

Source of Available Funds

2.2 Funds Available


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2.3 Risk or Security

1. Individuals Need for Security

InvestmentRisk

Loss ofInitial

Investment

Rate of Returnis Not Up toExpectation

3 Considerations in Investment


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Risk Tolerance

Low Risk,Low Potential Return


2. AttitudeTowards Risk


High Risk,High Potential Return

Risk Adverse Risk TakerRisk Neutral


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3. Type of Investment withCertain Inherent Risk

Risk

Capital andincome growth

potential

Investments

Higher risk &

uncertainty

Higherpotential for

capital &income growth




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Match your investment horizon withthe maturity of the investment asset

Investment Objectives

Investor s Age

Current FinancialCondition

Important

2.4 Investment Horizon

How longare youwilling to

lock into aninvestment?


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2.5 Accessibility of Funds

Earlywithdrawal

cost or penalty ? Initial cost insetting or buyingthe investment ?

Liquidity :short term

vs.

long term investment ?


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Different types ofinvestment

Different tax

treatment

The tax statusof investment

linked lifeinsurance is the

same astraditional with

profit lifeinsurance

To b e dis cu ss ed in Chapter 10

2.6 Taxation Treatment


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Performancedepends on

Competencies &capabilities

of managementteam

Invested company slevel of costsInvested company s

past experience & history

Country s economicfactors

Life cycleof investment

2.7 Performance of the Investment


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2.8 Diversification

Invest in different assetsclasses and across differentmarket environments

Spreading of risks

Effective in reducing riskwithout sacrificing returns


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3.Shares at

differentcountries

2.Different typeof shares

Spreading of risks by :1. Categories of investment

e.g. shares, bonds,

money marketinstruments

2.8 Diversification


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AIA confidential and proprietary information. Not for distribution. AIA confidential and proprietary information. Not for distribution. 19

3 TYPES OF INVESTMENT ASSETS

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3.1 Cash and Deposit 3.2 Fixed Income

Securities

3.3 Shares3.4 Unit Trusts

3.5 InvestmentTrusts

3.6 Properties

3.7 Derivatives

3.8 ExchangeTrade Funds

3.9 Sukuk Bonds3.10 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 atdiscount rate

dischargedat 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 ofAccount

Savings AccountsCurrent

Accounts

FixedDeposits

Investment Accounts

Time

Deposits

Offshore Accounts

Bank Accounts available (continue)


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choices ofdeposits

prevailingmarket condition

funds available for investment

how long fundcan remain

in the account

emergencywithdrawal

Bank Accounts (continue) Factors influencing Choice of Deposits:


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Companiesor

government

Public

3.2 Fixed Income Securities

Invest principal by buying securitiesPublic lends money to company or government

Pays fixed periodic interest income At maturity, repayment of principal

Can be bought and soldanytime before maturity

in secondary market


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Government Bonds

Safest little or no defaultor credit risk

Government guarantees to

pay interest and repayprincipal

Fixed interest rate

Issued when governmentneeds money to financeprojects

Advantages Easily marketable

Income for futureyears guaranteed

Disadvantage

In times of highinflation,capital can beeroded


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Maturity Period

Medium Term

5 to 10years

Long Term

Above 15years

Short Term

Below 5years

Government Bonds (continue)


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Corporate Bonds

Advantages Higher return thangovt. bonds

More marketable

Potential for capitalgains

Disadvantage

More risky

Debenture stocks

Loan stocksConvertible Stocks

Bonds issued bycompanies


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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 & capitalpaymentIf 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, higherinterest rate

Risk-Return

Government

Bonds

DebentureStocks

LoanStocks

Risk

Return



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Convertible Stocks

Can be converted to ordinaryshares of a company on a fixed date

Become part owner andentitled 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 fixedinterest 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 toordinary investors

Not listed on

stock exchangeNot available toordinary investors

3.3 Shares (continue)


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Market sview oncompan

y

Currencyperformanc

e

Inflationrate

Country

seconomy

Company s earning

Interestrate levels

Share priceinfluenced

by:



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Ordinary Share Preference Share

May or may not receive

dividends

Right to a fixeddividend provided thatenough profit hasbeen made

Dividend is fixed

Ranks ahead ofordinaryshareholders whencompany winds up

Dividend ratesfluctuates according tocompany 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 professionalfund managers in well diversifiedrange

Unit trust are authorized &supervised by the SecuritiesCommission

Value of units based on performance ofinvestment


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Open-ended fund

No fixed redemption date

Fund manager can create units if required,and cancel units if encashment exceedsnew purchases



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If too many investors cash-in,may have to sell funds assets

All unit trusts are required tostate investment objectives inprospectus

Medium to long terminvestment (> 3 years)



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Advantages Spread of investments

Lower risk compared to shares

Professional service from fundmanagers

Minimises paperwork ofinvestors

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

Investcapital

Select &Managefund

Hold poolof moneyin trust onbehalf

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 byspecialist fund

manager

Shares value fluctuate according towhether loss or profit made from theinvestment fund

3.5 Investment Trusts

sharesInvestor

3 5 I T


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Purchasing shares incompany

Purchase units in trust,not shares in company

Closed-end funds Open-ended fund

No asset disposals iflarge numbers ofinvestors cash-in

Disposes assetswhen large numbersof investors cash-in

Investment Trust Unit TrustRegistered UnderCompanies Act

Formed by Trust Deed

3.5 Investment Trusts (continue)

3 5 I T


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AdvantageFlexible

investors can

borrow to financepurchases ofinvestment trusts

DisadvantageGreater risk

exposures due

to price volatility

Higher risk/rewardprofile than unit trusts

3.5 Investment Trusts (continue)

3 6 P i


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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

AgriculturalProperty

Commercial/IndustrialProperty

DomesticProperty

Price depends onlocation and typesof buildings on theland

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Advantages

Good capital

appreciation Steady flow of income

Low risk

Disadvantages

Difficult to be

disposed offduring recession

By mortgaging,capital can be free

3.6 Properties (continue)

3 7 D i ti


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3.7 Derivatives

What are derivatives?

Twopopular

derivatives arestock options andfinancial futures

Financialinstruments whose

values are linked tothe price of underlying

instruments in thecash markets

3 7 Derivatives ( i )


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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 aspecified time period

A right, not an obligation

At a fixed price

Call(A right to buy)

Put(A right to sell)

O ti


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Options (continue)

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

Put options are bought in anticipating a

decline in price. Sellers want reverse tohappen

C ll O i


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Call Option

Share Price = RM10,000 per lotPrice of Call Option = RM200 (expires after 6 months)

January: Share Price = RM10,000 per lot

February: Share Price = RM11,000 per lotGain = 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

W t


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Transferable Subscription Rights (TSR)

Holder has right to subscribe shares in thecompany

At pre-determined ratio (conversionratio)

At pre-determined subscription price(exercise price)

Within a specified time period (fixed atbeginning)

Corporate-created option

Warrants

Warrants (continue)


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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

Warrants (continue)


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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 warrantsDisadvantages On expiry, warrants not exercised lose value

completely no chance for price recovery No interests or dividends

Carry no voting rights

Warrants (continue)

Futures


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Futures

Physicalcommodities

& financialinstruments

Future markets

Traded incash market

Cannot becancelled

unless bothparties agree

Forward marketsPrice of an item

for deferred

delivery

Current market priceof item available for

immediate delivery

Spot markets

Futures (continue)


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Futuremarkets

Futures exchange

determines: Contract size Delivery date Conditions

Trader

determines: Price Number of

contractsSet price today foran instrument thatwill be delivered

on a specifiedfuture date

Obligation,

not anoption

E.g. Stockindex

futures

Futures (continue)

Futures ( ti )


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Stock indexfutures Based on a particulars share price index

SettlementMade in cash without the actual delivery of thesecurities covered by the index

ProfitDerived from price difference of originalcontract value and value at time of settlement

Futures (continue)

Futures (continue)


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Advantages

Enable investors to protecttheir investments (hedging)

Shifts risk of price fluctuationsto those who are willing

Price discovery futures pricereflects current expectations

Speculative trading potential large gains

High risk mayface huge lossesif wrongly

speculated

Disadvantages

Must have clearunderstanding of

hedging

Futures (continue)

3 8 E h g T d F d


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3.8 Exchange Trade Funds

Also known as Exchange-trade product(ETP)

Traded in Stock exchanges

Underlying asset ie stocks, bonds andtrades



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Attractive as an investments instrument :

Low costs

Tax efficiency

Stock like features

3 8 Exchange Trade Funds


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Traditionally an index funds

An actively managed fund since 2008

ETFs - USA since 1993- Europe since 1999

3 8 Exchange Trade Funds


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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


3 9 SUKUK BONDS


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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 tothe Islamic Investment Principles

- Not a Bond because it isnt based ondebt

- Regards as commercial paper thatgive ownership to investor

3 9 SUKUK BONDS


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3.9 SUKUK BONDS

Characteristics of Sukuk :

1. Pooled of funds2. Based on hard assets that generate steady income and

expectations

3. 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

3 10 Capital Guaranteed Fund


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3.10 Capital Guaranteed Fund

Definition

- Guaranteed the investors capital investment from losses

- Didnt redeem investment before maturity date

3 10 Capital Guaranteed Fund


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3.10 Capital Guaranteed Fund

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 newinvestors

- 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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4 INVESTMENT-LINKED LIFEINSURANCE PRODUCT: WORLDSCENARIO

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Chapter 4: Investment-Linked Life Insurance Product - AWorld Scenario


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World Scenario

4.1 In United Kingdom4.2 In USA

4.3 In Singapore4.4 In Malaysia

4 1 In United Kingdom


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4.1 In United Kingdom

1957 First investment-linked lifeinsurance contract in UK

Individual retirement annuity

for self-employed By London & Manchester

Assurance Company Limited

Linked to an external unittrust

4.1 In United Kingdom (continue)


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g

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

Allow the policyowner total flexibility toalter his needs for investment andprotection in accordance to his wishes

In 1986 approximately 130 companies werewriting investment-linked life insurancebusiness

4.2 In the United States of America


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4.2 In the United States of America

More commonly called Variable Life Insurance inUSA

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 & ExchangeCommission)

4.3 In Singapore


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4.3 In Singapore

The first single premium investment-linked policyintroduced 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 insuranceindustry, including investment-linked life insurancebusiness

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

instruments

4.4 In Malaysia


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4.4 In Malaysia

Investment-linked life insurance products are verynew in MalaysiaSyarikat 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 approvalin February 1998, followed by Malaysian Assurance Allied Bhd


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Single Premium/ Top-up

Life Office

Units which belongto policyowner

Unallocatedpremium

(To meet marketingand set-up expenses)

Allocated premiumused to buy unitsfrom investment-linked funds atoffer price

Surrender claim

Withdrawals

Death claim

(Pay value of units)

(Pay value of units withdrawn)

(Pay value of units and/ orsum assured)

OrTop-up

Cancel unit (To pay mortalitycharge & policy fee)

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5 TYPES OF INVESTMENT-LINKEDLIFE INSURANCE PRODUCTS

84

Chapter 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 TraditionalWith-Profit Life Insurance

5.3 Definitions5.4 Characteristics of Investment-Linked Life

Insurance Policies

5.1 How do Investment-Linked Life InsurancePolicies Work?

5.5 Types of Investment-Linked Life InsurancePolicies

5.6 Loans and Withdrawals

5 1 How do Investment-Linked Life Insurance Policies Work?


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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 thefund

Value fluctuates as market prices rise and fall lacks smoothing process

5.1 How do Investment Linked Life Insurance Policies Work?

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


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InvestmentUsed to purchase

units in fundmanaged by lifeoffice

Mortality

Protection

PREMIUMS

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

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


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Single premium/Top-Up

Life office

m arke ting &set -up expenses

Policyowner s units

SurrenderWithdrawals

Death Claim Cancel unitsMorta li ty ch arge& p ol icy fee

( )

5.2 The Fundamental Differences


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Policy charges andinvestment contentare more identifiable

Potential for higherreturnsbut higher risk (equityfunds)

Traditional With-Profit Life Insurance Investment-linkedProduce steadyreturn by smoothingout short term marketfluctuationCharges not

specificallydetailed inthe policy


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5.2 The Fundamental Differences


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Traditional With-Profit Life InsuranceInvestment-linked

Investment element

is made known topolicyowner at outset

Investment elementis NOT made knownto policyowner atoutset

Value of policyfluctuate depends onvalue of units held

Never reduce in valueprovided life office issolvent

5.3 Definitions


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Charges levied on investment-linked lifeinsurance policies:- Policy fees- Annual fund management fee- Bid-offer spread

- Reduction in allocation of units - Unallocatedpremiums- Initial units- Mortality charges- Surrender charges

5.3 Definitions (continue)


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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 fromfund accumulated



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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 everypremium made to cover expenses insetting 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 isallocated to buying investment units

Unallocated premium used to meetmarketing and setting-up expenses of thepolicy

Some insurers make nil allocation to unitsuntil 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 initialunits 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) fundedby 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

5.4 Characteristics of Investment-Linked Life

Insurance Policies


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Can have largerexposure to

equity

Investment

Protection Life cover TPD PA benefit Health


Insurance Policies


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Investmentperformance of

underlying assets

Prices of the units

Reflects

ProtectionbenefitsCash value

Affec t sAffec t s


Insurance Policies


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Protection costs are explicitMet by cancellation of units

For single premium plan, met by flatinitial charge

Commission and office expenses are met

explicitlyMay vary, but must give 6 monthsnotice prior to change


Insurance Policies


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CashValue

Value of units

allocated topolicyowner,calculated atbid price


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5.5 Type of Investment-linkedLife Insurance Policies (continue)


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Single Premium Investment-LinkedWhole 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 offersonly nominal life protection



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Top up or single premium injection is allowed

Policyfees

Other

admincharges

Mortalitycharges

Adminand

insurance

charges

Investmentmanagementfee (0.5% to

2% p.a)

Single Premium Investment-Linked LifeInsurance Plan



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Features

Premiumholidays

Top-ups

Withdrawals

Surrenders

Regular Premium Investment-Linked Whole Life Insurance Plan

RegularPremiums

Monthly

Quarterly Annually

Purpose

Lifeprotection(main)

Investment

RegularPremiums

Purpose

Investment-Linked Individual Pension Plan


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High allocation ofpremium to investments

Accumulate fund toretirement

Upon retirementUse fund to

purchase annuity

Basic Plan Conventionally, no lifecover other than returnof investment funds ondeath

Cancelling investments

to fund life cover Conversion to traditional

with-profit life

New Feature

Investment-Linked Permanent Health Insurance


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Provides health coverage such asdisability income

Contains cash value - Tradi t ion al heal th pro du cts d on t have

cash v a lue

Investment-Linked Dread Disease Insurance


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Advances whole of face amountupon diagnosis with dreaddiseases such as heart attack,stroke, coronary artery by pass,end stage renal failure or totalpermanent disablement

5.6 Loans and withdrawals


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Loans may be limited tosome percentage of the

cash value

Partial surrenderand withdrawal

can be met by cashing thesufficient units at

the bid price

Reason:Cash valuefluctuateson a daily

basis


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5.7 Risk Base Capital Guidelines


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Example :

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

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

- Investment strategies are rebalanced to response toprevailing market conditions



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- RBC expected to raise the overall level of resilience- Improvement of quality and depth of statutory

- Have strong capital adequacy, liquidity positionsand risk management practices



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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 investmentcategories

- 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 approvedasset

- Put in place rigorous audit procedures

- Install effective monitoring and managing asset and liability

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

- Undertake regular stress testing- Ensure key staffs are Skills, Experience, Expertise and integrity

Conclusion


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Popularity of Investment-Linked Life InsurancePolicies will continue because:

4) performance of the funds can be monitoredin daily newspapers

1) Its contracts are easier to understand2) the charges are more transparent

3) It is much more flexible

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6 STRUCTURE OF INVESTMENT-LINKED FUNDS

118

Chapter 6: Structure of Investment-Linked Funds


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6.1 Accumulation Units & Distribution Units6.2 Types of Investment-linked Funds

6.3 Risk-return Profile

6.4 Fund Switching

6.1 Accumulation and Distribution Units


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- 2 ways to structure investment-linked funds

Unit priceunchanged

Distribution

Fund Investment

Capital

IncomePurchase

more units

Accumulation

Fund Investment

Capital

IncomeIn long term

Unit price

6.2 Types of Investment-Linked Funds


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Types ofFunds

Cash Funds

Equity Funds

Bond Funds

PropertyFunds

SpecialisedFunds

BalancedFunds

ManagedFunds

6.2 Types of Investment-Linked Funds (continue)


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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



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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



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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



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Managed Funds Invest in wide variety of assets Asset allocation depends on fund manager s

view

Balanced Funds

Invest in fixed proportion of specified assetse.g

70% 30%Equity Fixed Securities

6.3 Risk-Return Profile


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Risk

Return

CashFunds Bond Funds

Balanced Funds

Managed Funds

Equity FundsHigher return, higher risk

6.4 Switching


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Fund A Fund B

Free for limited no.of switches within a

given period,subsequently

charges imposed

Free

Switching part or all investmentfrom one fund to another

Useful forfinancialplanning

Specific

charge foreach andevery switch

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7 HOW INVESTMENT-LINKEDINSURANCE PRODUCTS WORK

128

7: How Investment-linked Insurance products Work


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Create new units

Add investmentmonies to thefund

Unit Price

No. of Units

Lump sum (Single premium)

Regular payment (Regular premium)Premium

Valueof thepolicy

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 by



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Single Pricing One quoted price Policyowner buy or sellunits at the same quoted

price

Dual Pricing Offer Price policyowner buys units Bid Price

Policyowner sell units

130

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


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Sample Calculations: Single Pricing Method


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Premium = RM 4,000

Unit Price = RM 1

Charges = 5% (from total premium)

Mortality Charge = 1% (of fund value)

Policy Fee = RM100



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= RM 4,000 - (RM4,000 x 5%)RM 1

= RM 4,000 RM 200RM 1

= RM 3, 800RM 1

= 3,800 units

Number of Units

purchased

= Premium Charges imposed

Unit Price



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= (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)



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Annual Yield On Gross Premium

Suppose Unit Price after 10 Years = RM 1.97

Annual Yield OnGross Premium = (RGP)

1/n - 1; n = No. of Years

Return on GrossPremium (RGP)

= Ending Value of InvestmentBeginning Value of Investment

End Value of

Investment

= (Number of Units x Unit Price)




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= (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)




= RM 7311.14 = 1.828

RM4000The annual yield = (1.828) 1/10 -1= 1.062 - 1 = 0.062 or 6.2%



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Number of Unitspurchased

= PremiumOffer Price

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

charges + Policy Fee) Annual Yield OnGross Premium = (RGP)

1/n - 1; n = No. of Years



Dual Pricing Method

Sample Calculations: Dual Pricing Method


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Premium = RM 4,000

Offer Price = RM 1

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

Mortality Charge = 1% (of fund value)

Policy Fee = RM100



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= RM 4,000RM 1

= 4,000 units

Number of Unitspurchased

= PremiumOffer Price

Cashed in orClaim

= No. of UnitBid 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)



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= (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

charges + Policy Fee)


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= (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 7,311.14RM 4,000

= RM 1.828



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


hd l f


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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 2

Money receive= 500 units x RM 2= RM 1,000

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

Units cancel = RM 3,000RM 2= 1,500 units

Withdrawal Benefits

*Surrender value calculation is similar to withdrawal


D h B fi


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2 types of Death Benefit

Unit Value + Sum Assured Unit Value or Sum Assured(Whichever is higher)

Death Benefits

Death Cover /Sum Assured

Value of Unit

Death Benefit

Years

RM

Value ofUnits

Death Cover /Sum Assured

Years

RM

Time t


D h B fi l d


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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 timeof 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 thetime 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


D h B fi U i V l S A d (Whi h i hi h )


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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)


R l P i P li i


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Regular Premium Policies

Policyowner: Are required to pay premiums regularly but enjoy theflexibility of:

Being able to vary the level of premium

Doing single top up Taking premium holidays

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

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

148|


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

148

8 BENEFITS AND RISKS OFINVESTING IN INVESTMENT-LINKEDFUNDS

148


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8: Benefits and Risks of Investing In Investments-

Linked Funds


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Pooling orDiversification

Flexibility

Expertise

Access

Administration

BENEFITS

Policyowner can access to a pooled ordiversified portfolio of investment.

Policyowner can easily change the level of hispremium payment.

The funds are managed by professional fundmanagers in accordance with the investmentobjectives.

Policyowner can get access to a well diversifiedinvestment-linked funds.Policyowner is relieved of the day-to-day

administration of his investment, just has to keeptrack through the unit statement provided regularly.

8: Benefits and Risks of Investing In Investments-

Linked Funds


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Cash and maturity values will rise andfall based on the fund invested

With equity fund, policyowner mayexpect to achieve higher return thantraditional product over long term

The administrative fee, insurancecharge, fund management fee etc areusually not guaranteed

They are subject to regular review andcan be changed by insurance company

InvestmentRisk

Charges

RISKS

152|


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

152

9 COMPARISON BETWEENINVESTMENT-LINKED LIFEINSURANCE AND TRADITIONALWITH PROFIT LIFE INSURANCEPRODUCTS

152

9: Comparison between Investment-linked and

Traditional with Profit Life Insurance Products


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Comparison Criteria

Investment Returnsand Risks

Premium

ComputationSurrender Value

Death Benefit Option to Top-up



d


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Traditional Guaranteedwithout Profit Products

Traditional with-profitProducts

Investment-linkedProducts

Guaranteed a fixed rateof return

E.g: Term Insurance, non

participating insurance

Similar to without profitinsurance but profit areadded to the sum

assured E.g: whole life,

endowment insurance

Wholly or partlydetermined by referenceto the value of invested

property/ index

Introduction



I R d Ri k


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A fixed amount is madewhen the insured dieswithin the term or period

of assurance The amount payable

does not depend on theinvestment performanceof the company

No investment risks

except he risk ofinsolvency of thecompany

Bonuses can beallocated as an additionto the sum assured

Bonus are not directlylinked to the investmentperformance, it has beensmoothened by the lifeoffice

E.g: Cash bonus,

reversionary bonus,terminal bonus

Policy values varyaccording to the valuesof the underlying assets

that the policy tied to. The investment returns

and risk are directlytransferred to thepolicyowners.

Investment Returns and Risks

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

P i C i


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Premium is determinedand fixed at inception

Life company may not

alter the terms andconditions without theagreement ofpolicyowner

Sum assured driven

Premium is determinedand fixed at inception

Life company may not

alter the terms andconditions without theagreement ofpolicyowner

Sum assured driven

Policyowner has theflexibility in changingtheir premium payments,

top up or take premiumholiday Life office may also

retain certain right toalter charges, likemonthly policy fees

Account driven

Premium Computation


Death Benefits


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Traditional Guaranteedwithout Profit Products Traditional with-profitProducts Investment-linkedProducts

Death benefit (sumassured) is determined atinception

Life company may notalter the terms andconditions without theagreement ofpolicyowner

Death benefits is fixedsum assured plusaccumulated bonusesless any outstanding

policy loans andautomatic premium loans(inclusive of interest)

Maturity benefits is fixedsum assured plusbonuses accumulated

less any outstandingpolicy loans andautomatic premium loans(inclusive of interest)

Single Premium plans Minimum sum

assured or value ofunits at bid price,whichever higher

Minimum sumassured plus valueof units

Regular Premium Plans

Sum assured orvalue of units at bidprice

Sum assured plusvalue of units at bidprice

Death Benefits


S d V l & O i T


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No surrender valueexcept plan with termsmore than 20 years

Cash surrender valueincludes surrender valuereversionary bonus

Usually higher than thewithout profit policy

Surrender value ismarket price x unit / bidprice

Depends on policies Sum assured can be

increased each year by aset percentage of theoriginal sum assured

Very few with profitpolicies allow the optionto top up

Similar to the withoutprofit policies

Allow policyowner to buyadditional number ofunits without taking out anew policy

Surrender Value & Option to Top up

159|


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10 TAXATION AND LAW COVERINGINVESTMENT-LINKED LIFEINSURANCE PRODUCTS

159

10: Taxation And Law Covering Investment-Linked LifeInsurance Products


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Taxation are treatedsame manner as other Insurance policies

Companies Act 1965

Contract Act 1950

Insurance Act 1996

CommonLaw

Investment-linked business governed by



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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



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+All lifeinsurance

premiums

Approved Fund(e.g. EPF)

Education andmedical insurance

premium

Total Relief AllowableRM6000 per year

Additional Tax ReliefRM3000

From 1996 budget

* No longer subject to7% limit



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Insurance companiesTaxed at 8% of chargeable income

and realized capital gain of a lifefund

Proceeds distributed to policyowners

are tax-free

1996 & l i



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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 andequitable 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

Investment Linked Insurance Business



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Investment-Linked Insurance Business

Section 7(2)(b) defines as

Effecting and carrying out of a contract ofinsurance on human life or annuity where the

benefits are, wholly or partly, to be determinedby reference to the value of, or the incomefrom, property of any description or byr eference to fluctuations in, or in an index of,the value of property of any description



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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 respecteach inv link funds

I t t Li it



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Investment LimitsBNM 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 insurers margin of solvency could be invested 100% in equity

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

once company

Investment Limits general restriction


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Investment in securities in any one investee should notexceed:5% paid up capital of the investee Company5% of the total value of the assets of the fund

whichever is lower

Investment Limits general restriction

Investment in loans or debentures to anyone borroweror group of borrowers should not exceed 5% of the totalvalue of the assets of the fund



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At least 18 years old

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

Age limit ofPolicyowner

Free Lookprovision

Minimum Death Benefits & Premium Payment for



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RM5,000 or 125% of singlepremium, whichever is higher

At least RM3,000 payment

Minimum Death Benefits & Premium Payment forSingle Premium

Minimum DeathBenefits

Minimum PremiumPayment

Basic qualification: CEILLI exam

Specifically trained & equipped with theproduct knowledgeIntermediation

Disclosure of Information



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Sales Materials/Illustrations must contain1) General description of the investment policy and objective

of the fund and the manner investment income distributed2) Policy benefit based on the performance the funds and

factors affecting the policy Benefits3) Investment risks solely borne by policyowner must clearly

informed4) Max amount of initial charge, management

fee, mortality cost and any other charges must be stated

Disclosure of Information (Continued)



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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 benefits8) Statement of fund performance for past 5 years9) Clear worded warning that policy value may rise or fall,

results shown for illustration, fund performance is notguaranteed

10)Any information Bank Negara deemed necessary

Sales Materials/Illustrations must contain


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Statement to policy owners Fund performance report to policyowners

Refer to the book

174|


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11 IDENTIFYING AND SATISFYINGCUSTOMERS NEEDS

174

11: Identifying And Satisfying Customers Needs

St t d h i i t t f ff ti d i


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a) Establishing Relationship with the Clientb) Gathering all relevant Financial Datac) Establishing current Financial Position and Goals

d) Developing plans and strategies to meet the goalse) Discuss possible recommendationsf) Implementation of the agreed recommendationg) Monitoring the portfolio

The process of providing advice involves 7 stages :

Structured approach is important for an effective advice


The process of providing advice
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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 clients 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




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

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 forLiability cancellation, basic Protection and medical cover, disability

cover, dread diseases cover etc

Planning for Childrens Education RetirementPlanning

Asset AccumulationEstatePlanning




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Explaining therecommendations

Provides optionsand alternatives

open

ReviewsRecommendations

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




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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 ensurethe 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

180|


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12 MARKETING AND AFTER SALESSERVICES, ETHICS & CODE OFCONDUCT

180

12 1 Marketing

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


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12.1 Marketing

In the past, role is strictly to sell companydeveloped products

hard sales technique are frequently used tostimulate customers interest

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

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

SalesOrientated

12 1 Marketing



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12.1 Marketing

Role of the sales & marketing dept is todetermine the needs of customers and satisfyingthese needs by dev and distributing appropriatepolicies

MarketOrientated

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 suitablechannel for distributing the policies to the customers

Promotion suitable promotional activities including advertisement,sales promotion etc

12.2.1 A Market Oriented Agent



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g

Objectives: To satisfying customers' requirements andneeds, and at the same time earn an income for himself Sales Plan which allows planning and controlling

Objectives: Target market

Strategy

Implementationand control

Sales goal

12.2.2 Customer Buying Decision Process



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1. Problemrecognition

2. Information search

3. Evaluation of alternativepolicies4. Purchase

5. Post- purchase

evaluation

12.2.3 The Selling Process



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1.Locating prospectivecustomer

2. Create sales

presentation

3. Conducting sales

interview4. Handlingobjections

5. Closing the sales



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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.

Delivery of a policy gives the agent an opportunity to perform the

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Delivery of a policy gives the agent an opportunity to perform thefollowing :-a) Dispel the customer's cognitive dissonanceb) 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 agente) Explain the policy's provisions, terms and conditionsf) Obtain names of referred leads and other prospects

g) Strengthen the customer relationship and help encouragepersistency

Ethics & Conducts



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Ethics should include :-

a)Behaving with Complete Integrity in an Insurance Agent's ProfessionalLifeb)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

12.3.1 LIAMS GUIDELINES ON THE CODE OF CONDUCT



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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.




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

General Sales Principles



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The intermediary shall : Produce Registered Intermediary Authorization CardEnsure the policy proposed is suitable to the ne eds

Give advice onlyTreat all information as completely confidentialMake comparisons with other types of policies, makeclear different characteristics of each policy

Render continuous service to the policy holder

General Sales Principles
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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 madepaid-up and replace a new one in another companyor the same company




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Part III Statement of Life Insurance Practice. Introduction. Claims.

Proposal Forms. Policies and Accompanying Documents. Sales Materials/Advertisements.


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Exam Questions Analysis


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Thank You