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“Prospects of ILAS in Hong Kong” ECON 310 Group 2.

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Presentation on theme: "“Prospects of ILAS in Hong Kong” ECON 310 Group 2."— Presentation transcript:

1 “Prospects of ILAS in Hong Kong” ECON 310 Group 2

2 Members list 033154 Lee Hiu Ching Rachel 033155 Chu Man Yin Phoebe 033160 Wong Ho Man Gabriel 033186 Tsang Po King Toro 033189 Wan Kwai Choi Toni

3 Agenda 1.What is Investment-linked assurance schemes(ILAS) 2.Risks of investing in ILAS 3.Development of ILAS in well established countries - United Kingdom - United States 4.Market Performance of ILAS in Hong Kong 5.Trend and development of ILAS in Hong Kong 6.Examples of authorised investment products in HK 7.Advices to investors 8.Conclusion 9.References

4 What is ILAS? Toni

5 What is ILAS? hybrid investment products combine life insurance with fund investment benefits linked to the performance of fund(s) selected longer-term investments, usually more than 5 years Toni

6 What is ILAS? If you die within the term of your scheme, beneficiary will receive the death benefit. Toni

7 Differences between ILAS and traditional whole life insurance Toni

8 Differences between ILAS and traditional whole life insurance major difference: degree of flexibility ILAS 1.addition or deletion of coverage and amount of insurance 2.increase or decrease the policy’s savings component 3. additional “dump-in” of funds, withdrawal of savings, and stopping premium for a certain Toni

9 Risks of investing in ILAS Toni

10 Risks of investing in ILAS funds is not guaranteed, and may ↑ or ↓ ILAS directly related to the performance of investments Toni

11 Risks of investing in ILAS time factor to be considered usually at least 5 years, fees and charges are heavy at the beginning period early redemption will be subjected to very high encashment Toni

12 Development of ILAS in well established countries Toro

13 Development of ILAS in well established countries Thought of : - “newest” & “most advance” product (new millennium) In fact : - 1960’s: insurance products (i.e. Equity-linked endowments)  existed in Europe - 1980’s: “interest sensitive” whole life insurance  marketed in North America Toro

14 Development of ILAS in well established countries Review : 2 bigger insurance markets United Kingdom United States Toro

15 Development of ILAS in 1957: - unit-linked policies  1st introduced In 1958: - single premium unit-linked life business - better way of lump sum investment (than units trusts ) Since then - unit-linked insurance market  FAST growing In 1993: - constituted about 66% (individual new life business) Toro

16 Popularity ↑  main factors: 1) ↑ economic trends (favor of unit-linking) 2) consumers finding  product attractive 3) sales environment of aggressive marketing 4) limited regulation on sales methods 5) growth of computerization Development of ILAS Toro

17 Development of ILAS Mid-seventies: - universal life (UL) & variable life (VL)  1st introduced - gained modest success - variable life:  help offset adverse effects of inflation (on life insurance policy death benefits) early 1980s: - variable universal life (VUL)  1st introduced In 1991: - VUL remained in last position  occupying only 8% (of life insurance market) Toro

18 Development of ILAS Limited development of VUL  Due to complicated regulatory structure - subject to individual state Insurance Commissioners - subject to federal securities law, and - regulated by Securities and Exchange Commission  Because of this classification, - insurance sales agents MUST be registered as broker-dealers Toro

19 Development of ILAS However, since 1991: - VUL  its market share In 1996: - occupying ≥ 20% (of life insurance market) - VUL: dominant form of investment-linked life insurance products in US Reasons (significant growth): - good performance of equity investments - popularity of mutual funds Customerinterest Toro

20 Market Performance of ILAS in HK Phoebe

21 Market Performance 2005 General insurance –gross premiums:  1.7% to HK$23,888 million –net premiums:  2.7% to HK$17,033 million Long term in-force business –total revenue premiums  16.9% HK$116,983 million –Investment-linked assurance Phoebe

22 a need for the life insurance in Hong Kong for both investment-linked and non-linked assurance Source : Office of the Commissioner of Insurance Quarterly Release of Provisional Statistics for Long Term Business Phoebe

23 Market Performance Revenue premiums Fast growth rate Individual Life and Annuity (Non- Linked) –  17.3% to HK$66,473 million Individual Life and Annuity (Linked) –  20.6% to HK$ 30,159 million HK people now more willing to buy investment-linked insurance Phoebe

24 Market Performance Source: Office of the Commissioner of Insurance - I Lens Newsletter No. 21 Phoebe

25 Source : Office of the Commissioner of Insurance Quarterly Release of Provisional Statistics for Long Term Business Phoebe

26 Market Performance Optimistic future of investment-linked assurance In the near future: ILAS possess greater share of revenue premium Phoebe

27 Trend and development of ILAS in HK Rachel

28 Trend of ILAS in Hong Kong Introduce ten years ago fastest grow life insurance product –Economic grow –increase customer demand –Higher return –by 2005 increase 14.5% –85.38 hundred million HK dollars –Market grow 20%-30%(every year) Rachel

29 Trend of ILAS in Hong Kong(Cont ’ d) Interest rate increase Investment atmosphere prosperously Continually double grow in market nearly 50% of total insurance premiums Rachel

30 Development of ILAS in Hong Kong  29 insurance companies  Provide 130 ILAS products  E.g.American International Assurance Company (Bermuda) Limited –six types of authorized ILAS Rachel

31 Examples of Authorized Investment Products in HK Rachel

32 American International Assurance Company (Bermuda) Limited Name of product Authorization Date AIA 10-Year Interest Plus Annuity Account 友邦 10 年定息年金戶口 11-08-2003 AIA Asset Accumulator 財庫之選投資計劃 24-06-2003 AIA Asset Accumulator (Enhanced Death Benefit) 友邦財庫之選投資計劃 ( 卓越保障 ) 20-07-2004 AIA Wealth Maximizer Investment Linked Plan 友邦創富投資連繫計劃 21-06-2001 AIG Capital Builder by AIA AIG 資本薈萃友邦投資計劃 18-06-2002 AIG Capital Saver by AIA 09-12-2002

33 AIA Asset Accumulator Flexible investment saving scheme –Ranging from 11-30 years A comprehensive range of fund managed by professionals –More than 70 international funds Policy fee refund –Monthly policy fee(at maturity) Rachel

34 AIA Asset Accumulator Flexibility to adjust regular premium –Adjust regular premium at anytime –Minimum US150$ per mouth for each increase Death benefit –Securing the future against uncertainties Source: Rachel

35 Advices to investors Gabriel

36 Advices to investors 1.Look Clearly Illustration Document before signing 2.Carefully choose ILAS with with-profits funds 3.Gearing up ILAS investments after your consideration Gabriel

37 Look Clearly the Illustration Document before signing on it illustration document - personalized or standardized demonstrates the projected surrender values over the term of the policy the actual return rate may differ from the hypothetical rates used Gabriel

38 Carefully choose ILAS with with- profits funds With-profits funds funds managed by the insurance company through a system of bonuses, determines the return of with- profits funds by reference to the performance of the underlying assets and a number of other factors Gabriel

39 Carefully choose ILAS with with- profits funds Aim of with-profits funds 1.provide a smoothed return over the medium to long term safeguard the interests of remaining investors the amount available to those who withdraw early will be reduced by applying the "Market Value Adjustment" (MVA) or an adjustment of a similar nature Gabriel

40 Carefully choose ILAS with with- profits funds Effect of an Market Value Adjustment the investment risks - borne by the policyholders due to application of the MVA - still nevertheless lose part of your capital in most cases, MVA does not apply to withdrawals from the with-profits funds due to death or maturity of the policy Gabriel

41 What is gearing up ILAS investments borrowing money to increase their investment in investment- linked assurance schemes (“ILAS”) expecting returns could be magnified through leverage Gabriel

42 Types of gearing up ILAS investments 1.Borrow from a lender 2.Loan in a different currency Gabriel

43 1. Gearing up ILAS Investments- Borrow from a lender (e.g. a bank) required to pledge investment (e.g. ILAS) as collateral for the loan Need to pay interest, handling fees, and charges on the credit facility As ILAS are mostly longer-term investments → usually > five years, financing costs on a medium to long term loan may be enormous Apart from annual renewal fees and loan interest payments, investors may also be required to pay a break fee if the loan is repaid before maturity Gabriel

44 1. Gearing up ILAS Investments- Borrow from a lender (e.g. a bank) Pay attention that the value of your pledged ILAS may fall below a level investors will receive margin calls from the lender demanding them to top up additional collateral when : 1.the value of the funds selected under investor’s ILAS drops significantly from large market declines 2.investors have selected a with-profits fund under their ILAS and a “Market Value Adjustment” (MVA) has been applied to the with-profits fund by the insurance company Gabriel

45 1. Gearing up ILAS Investments- Borrow from a lender (e.g. a bank) Failing to meet margin calls → pledged ILAS may be terminated long before maturity, triggering early redemption penalties The loan will then be repaid out of the encashment proceeds investors must bear both investment losses and loan charges Investors may even be required to make an extra payment if the value of the terminated ILAS cannot fully cover the loan all insurance policy benefits will be assigned to the lender until the loan is paid off. Gabriel

46 2. Gearing up ILAS Investments - Loan in a different currency you will be fully exposed to currency risk (exchange rate risk) if the currency of your loan sharply appreciates against the currency of your pledged ILAS, you may receive margin calls from the lender demanding that you top up the security or collateral provided for the loan, potentially for substantial amounts. Gabriel

47 Advices to investor of gearing up ILAS Investments particularly risky must pay interest on the loan and may even face margin calls under certain scenarios If the investment securing the loan and the loan itself are in different currencies, you will also be subject to currency risk before borrowing to invest in ILAS, consider whether gearing fits your current financial profile, investment objectives and risk tolerance level Read the ILAS principal brochure and, if applicable, the gearing arrangement agreement, to learn all about characteristics and risks before investing consult your investment adviser if you have any doubts Gabriel

48 Conclusion Gabriel

49 Conclusion careful considerationILAS investment needs your careful consideration X may have to pay huge fees and charges for terminating the scheme before maturity important to think carefully about your needs and investment period before taking out ILAS. investors also need to consider which insurance company and which scheme is most suitable for them. Gabriel

50 References 1.ING Website 2.What are Investment-linked Insurance Policies? 3.Hong Kong a market for investment-linked insurance 4.HK a potential market for investment-linked insurance 5.Insurance Intermediaries Quality Assurance Scheme 6.Insurance Commissioner warns of risks of investment-linked insurance products 7.Insurance watchdog warns on investment-linked sales 8.Professional Actuarial Specialty Guide 3007243?%5Fencoding=UTF8&p=S00A&checkSum=aBptOUREhj8tffuwbGjS5Xn2EqkqAUEFB%2F2sNDy %2FTCo%3D#reader-page 10.Variable Universal Life Insurance: Is it Worth it? 11.American General Life Insurance Company$file/CorporateAmerica.pdf

51 THE END Thank you for your attention!!

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