UNIT LINKED PRODUCTS AND FUND
[Gazette of Pakistan, Extraordinary, Part-II, 23rd April, 2015]
S.R.O. 343(I)/2015, dated 22.4.2015.–In exercise of the powers conferred by Section 83 of the Insurance Ordinance, 2000 read with Section 167(2) thereof, the Securities and Exchange Commission of Pakistan with the approval of the Policy Board, is pleased to make the following Rules, the same having been previously published in the official Gazette through SRO 68(I)/2014, dated January 30, 2014.
1. Short Title and Commencement.–(1) These Rules shall be called the “Unit Linked Products and Fund Rules, 2015”.
(2) These Rules shall come into force at once.
2. Definitions.–(1) In these Rules, unless there is anything repugnant in the subject or context,–
(a) “Basic Annual Premium” means the net premium determined as gross premium paid by the policy-holders less charges for riders/supplementary benefits and extra mortality/morbidity charges;
(b) “Gross Annual premium” means the amount of premium paid by the policy holder to the insurer for the purchase of a unit linked product;
(c) “Bid Price” is the price at which the units of a fund are redeemed, calculated as the net asset value adjusted for selling costs;
(d) “Forward Pricing” means a specific pricing methodology which involves calculation of the unit prices at which the transaction is undertaken after the deal is done, so as to establish the true value of the units at the time of purchase or disposal;
(e) “Indexation” means a life insurance product feature which enables automatic increase in sum cover and/or premium on compound/simple basis without requiring a policy-holder to undergo medical underwriting on each renewal date;
(f) “Offer Price” means the price at which the units of a fund are allocated to policies, calculated as the net asset value adjusted for acquisition costs and a front end load, if any;
(g) “Ordinance” means Insurance Ordinance, 2000;
(h) “Rules” means Unit Linked Products and Fund Rules, 2015;
(i) “Unit Linked” in relation to life insurance means individual life insurance contracts offering life insurance coverage coupled with saving component where under the saving component is managed through operating unit linked investment funds;
(j) “Unit Linked Contracts” means Investment-Linked Contracts as defined in Section 2 (xxxiii) of the Ordinance;
(k) “Unit-linked Fund” means a group of assets and liabilities, the values of which are used to determine the values of Unit Linked Contracts;
(2) In these Rules, the word 'Takaful’ may be used inter-changeably with the word 'insurance', 'Family Takaful’ with 'Life Insurance', 'General Takaful' with 'General Insurance', 'contribution' with 'premium' and 'Company' & 'Insurer' with 'Takaful Operator'. Similarly other terms used in the Takaful Rules, 2012 associated with the Takaful business may be used inter-changeably with their conventional counterpart words/terms.
(3) The words and expressions used but not defined shall have the same meaning assigned to them in the Ordinance.
UNIT LINKED PRODUCTS
3. Minimum Financial Protection.–All life insurers carrying out unit linked business shall offer the unit linked products having the minimum financial protection component (i.e. life insurance coverage) as specified in table below:
Type of Product
Minimum Financial Protection (life insurance cover for death due to any cause)
Regular premium individual life contracts (endowment, wholelife etc.)
5 times of the Basic Annual Premium
Child education/marriage or family income benefit contracts (where no fixed sum cover is paid on death due to any cause)
5 times of the Basic Annual Premium
Single premium contracts
1.25 times of the premium
4. Indexation of Premium.–(1) The policy-holder shall have an option to avail the policy through level premium or indexation premium.
(2) All unit linked products shall have an Indexation option based on any one of the following:
(a) Automatic Default Option: Under this option, the basic or gross premium shall be increased with a fixed Indexation rate on compound or simple basis. However, insurers shall incorporate a reasonable level of Indexation.
(b) Indexation of Premium and Sum Cover: Under this option, both the premium and sum cover shall be increased with a fixed Indexation rate on compound or simple basis.
(3) The Insurer in respect of their unit linked Bankassurance business shall ensure that the Bank’s premium collection system is effectively deducting the indexed premium, and if it is not, shall take such action as is required to ensure that it shall start deducting the indexed premium within a period of not more than two year after the commencement date.
5. Minimum Term of the Regular Premium Individual Life Plans.–No Insurer shall offer a unit-linked regular premium plan (saving) of a term shorter than 5 years through any distribution channel.
6. Disclosures to Policy-holders.–(1) All insurers offering unit linked products shall disclose the following:–
(a) Disclosure of Investment Risk: All sales literature, brochure and annual statements/letters to the policy-holder shall contain a disclosure that the investment risk shall be borne by the policy-holder and actual maturity or surrender values may be lower or higher than the projected figures.
(b) Targeted Asset Mix and Charges: Target asset mix of the fund and details of all fund related charges shall be placed on the website of the life insurer and in the insurance policy documents issued to the policy-holder.
(c) Product Charges Structure and Unit Pricing Methodology: Details of the product charges structure and unit pricing methodology shall be disclosed to all policy-holders in the policy document.
(d) Individual Statement of Policy-holders Unit Account: The insurer shall provide the unit linked policy-holders with a statement of the policy-holders unit account as specified in Annexure 1 for the following reporting periods:
(i) Annual Statement within one month of the close of the financial year; and
(ii) Quarterly Statement within one month of the close of every quarter.
A life insurer may use a different format showing the movement of units for at least last policy year.
(e) Disclosure regarding Deduction of Rider’s Charges: All insurers shall explicitly disclose the rider’s charges at the time of sale of the policy through Illustration and policy schedule and every year through “statement of policy holder’s account” if these charges are deducted by redemption of units from the clients' account value.
(2) In case, the disclosures made to the insurance policy-holder by the insurer or an agent of the insurer under sub-rule (1) above are misleading or incorrect in any material particular, the same shall be treated as misleading or deceptive conduct under Section 76 of the Ordinance.
7. Insurance Need Analysis Document.–No life insurance policy which is a unit linked product shall be sold through any distribution channel unless the agent has carried out an Insurance need Analysis of the prospective policy-holder as per the format set out as Annexure 2. A life insurer may use a different format with additional information.
UNIT LINKED FUNDS
8. Funds Governance.–(1) Where the insurer establishes a Unit Linked Fund, it shall constitute an investment committee comprising of the following persons at minimum:
(a) Appointed Actuary and/or Internal Actuary;
(b) Chief Financial Officer
(c) Chief Executive Officer; and
(d) Two members of the Board:
Provided that for the purpose of sub-rule (1) above, the internal actuary shall be a person being the Fellow or Associate member of the Pakistan Society of Actuaries, the Institute of Actuaries in England or Society of Actuaries in the United States of America; or such other body as may be recognized by the Commission for the purposes of this rule after obtaining views of the Pakistan Society of Actuaries:
Provided further that the Internal Actuary shall have at least 36 months' post Fellowship/Associateship experience with any insurer.
(2) Investment Committee: The investment committee shall be responsible for management of all Unit Linked Funds, which shall include the following:
(a) Investment Policy: The Investment Committee shall formulate a documented investment policy for each fund which shall be approved by the Board and shall include, as a minimum:–
(i) Allowable Exposure to Various Asset Classes: the proportion of investments to be held in various asset classes (asset classes, for this purpose, being listed equities, unlisted equities, government securities, term finance certificates, mutual funds, real estate, short term deposits, sukuks and other instruments of redeemable capital).
(ii) Allowable Exposure in Single Entity: the maximum proportion of the fund which may be invested in each entity (e.g., shares and TFCs of a particular company).
(iii) Minimum Rating/Other Investable Criterion: the investment policy should state the minimum rating requirement for rated instruments as well as other criterion for non-rated instrument.
(iv) Ineligible Asset Classes/Securities: the investment policy shall explicitly mention broad ineligible asset classes and securities.
(v) Monitoring Frequency: the investment policy shall state the frequency of performance measurement, monitoring the asset mix and mechanism used for portfolio balancing.
(vi) Allowable Exposure in Related Parties: the investment policy shall explicitly state the maximum allowable investment limit in related parties such as associated companies, subsidiary companies etc.
(b) Fund Pricing Methodology and its Implementation: The investment committee shall document and monitor the unit pricing methodology and its implementation.
(c) Investment Processes Documentation: The investment committee shall document all procedures relating to investment decisions, investment transactions, accrual and receipt of investment income, pricing and preparation of statements set out in Rule 13.
(3) Good Investment Practices: The Investment Committee shall also, as good practice:
(a) identify those responsible for day to day investment decisions in line with the investment policy;
(b) identify all risks to which the fund may be exposed and for formulating, monitoring and management of the risk manage-ment process; and
(c) require that the accounting records of the fund be automated.
(4) Role of Appointed Actuary for the Investment Processes: The Appointed Actuary shall certify annually that he/she is of the opinion that the investment policy for a fund is suitable for all insurance policies which will be linked to the fund. The Appointed Actuary shall also sign the document outlining the fund’s pricing arrangements and shall, at least once in every six months, carry out a detailed review of each fund’s pricing to ensure that the documented pricing arrangements are being followed.
(5) Role of Shariah Board/Advisor’s: In case of takaful companies the investment policy shall also be approved by the Shariah Board/Advisor.
(6) Internal Audit and Compliance Function: The internal audit and compliance function of the insurer shall include, in their scope, the adherence to the above policy and procedures and shall report any findings ultimately to the Board. The statutory auditors of the company shall, during the course of their audit, ensure that the pricing arrangements are appropriate and shall also carry out test checks on the determination of prices during the period under review.
(7) Outsourcing of Investment Functions: The Board may decide to out-source the management of investments. Where this is the case, the Board shall ensure that appropriate systems and controls are in place, including regular and reliable management information, to ensure that they can fulfill their responsibilities to policyholders. Any outsourcing arrangement shall not, however, absolve the Board of its responsibility to ensure that investments are appropriate and properly managed.
9. Unit Linked Fund Operation.–
(1) Unit-Linked Fund Creation: A life insurer shall file the following documents at the time of creation of a Unit Linked Fund:
(a) The name of the fund and of the statutory fund of which it will be a part
(b) Date of launching of the fund
(c) Seed money, if any
(d) Investment policy (certified by the Appointed Actuary)
(e) Rules of the fund including net asset valuation methodology
(f) Bid and Offer Prices at the beginning
(2) Explicit Fund Related Charges: The explicit fund related charges levied by a life insurer on the Unit Linked Fund shall include:–
(a) a Bid Offer spread is a difference between prices at which units are allocated to (acquired by) a policy and at which units are encashed (redeemed) respectively;
(b) an investment management charge is a periodic charge levied on the fund, which could either be:
(i) a proportion of the net asset value of the fund;
(ii) a fixed amount;
(iii) a varying proportion or fixed amount based on fund performance; or
(iv) a combination of any of the above.
The above charges shall be clearly defined in the policy documents.
(3) Implicit Fund Related Charges: Implicit fund related charges are effectively rounding differences between the conversion of money values into units and vice versa. The mechanism adopted by the life insurer shall ensure that rounding off should be done up to the fourth decimal place. For example unit prices of 100.00015 and 100.00014 shall be used as 100.0002 and 100.0001 respectively.
(4) Permitted Expenses: Expenses permitted to be debited from a fund include the following:–
(a) permitted explicit fund management charges;
(b) costs paid to a third party directly related to the acquisition or sale of a particular investment, including brokerage costs, any related taxes/government levies and bank charges;
(c) costs paid to a third party directly related to collection of investment income as well as any non-recoverable taxes or other levies on investment income;
(d) taxes which may be appropriately attributable to the investment income or gains of the fund (e.g., taxes on foreign investments which are not capable of being set off against any tax levied on the shareholders' fund of the company) including direct taxes on income of such investments (e.g. final tax regime or turn over tax);
(e) provision for or write off of any asset; and
(f) Custodian charges (for example CDC charges).
(5) Where the fund has invested in property, expenses directly related to the maintenance of the property and related taxes may also be debited from the fund.
10. Unit Linked Fund Transaction.–(1) Investment Related Transactions: Any transaction to acquire or dispose of any assets in a Unit Linked Fund shall be at arm’s length, where such assets are listed securities traded on any of the country’s stock exchanges, the transaction shall be through a transaction with an external entity. For other assets the transaction shall either be through an external entity or shall be required to be specifically certified by the Company’s statutory auditors as having been transacted at fair value.
(2) Inter-fund Transfer of Policy-holders' Unit Account Value
(a) All life insurers are required to provide an option to their policy-holders to transfer whole or part of a policy-holders' unit account value from one Unit Linked Fund to another Unit Linked Fund at least once in a policy year.
(b) A life insurer shall not charge bid-offer spread on the above transfer of policy-holders' unit account or any charge, by whatever name, that is based on a percentage of the unit account value. However a fixed amount per transfer may be charged.