Unit-linked in­sur­ance prod­ucts are a type of pooled in­vest­ment of­fered by in­sur­ance com­pa­nies through their life or pen­sion poli­cies. The mar­ket for unit-linked in­sur­ance prod­ucts rep­re­sents one of the fastest grow­ing seg­ments in the glob­al in­sur­ance in­dus­try. Since 1990, the de­mand for unit-linked in­sur­ance prod­ucts has been in­creas­ing in the Caribbean and the mar­ket is pro­ject­ed to ex­pand. By 2024, unit-linked life in­sur­ance con­tracts sold in T&T were val­ued at ap­prox­i­mate­ly $6.3 bil­lion, up from $2 bil­lion in 2008, an in­crease of 194 per cent in 16 years.

In con­trast, the de­mand for tra­di­tion­al poli­cies is grow­ing at a slow­er pace. The val­ue of or­di­nary life con­tracts was re­port­ed to be $6.6 bil­lion in 2024, up from $3.3 bil­lion in 2008, a 100 per cent in­crease in 16 years.

The life in­sur­ance mar­ket in T&T is dom­i­nat­ed by Guardian Life of the Caribbean and Sagi­cor Fi­nan­cial Com­pa­ny.

This ar­ti­cle fo­cus­es specif­i­cal­ly on the mar­ket for unit-linked life in­sur­ance plans (ULIPs) in T&T be­cause of the risks as­so­ci­at­ed with in­vest­ing in this prod­uct. More im­por­tant­ly, the do­mes­tic mar­ket for ULIPs re­mains un­der-reg­u­lat­ed which in­creas­es the risks faced by cus­tomers. There­fore, it is im­por­tant for the Gov­ern­ment to bring do­mes­tic reg­u­la­tions for the mar­ket for ULIPs in line with in­ter­na­tion­al stan­dards.

Risks as­so­ci­at­ed with ULIPs

What is a unit linked life in­sur­ance plan ? A unit-linked life in­sur­ance plan is a hy­brid prod­uct, which com­bines a life in­sur­ance pol­i­cy with an in­vest­ment com­po­nent. A por­tion of the pre­mi­um pro­vides in­sur­ance cov­er­age against the risk of death while the re­main­ing pre­mi­um is in­vest­ed in an un­der­ly­ing fund com­prised of a pool of as­sets.

Un­der a tra­di­tion­al life in­sur­ance pol­i­cy, the in­sur­er pays a guar­an­teed cash val­ue at the ma­tu­ri­ty of the pol­i­cy. In the case of ULIP, the ac­cu­mu­la­tion of val­ue is de­pen­dent on the mar­ket val­ue of the un­der­ly­ing as­sets. In some ju­ris­dic­tions, the fea­tures of ULIPs have been ex­pand­ed to give the in­di­vid­ual more in­vest­ment op­tions and greater flex­i­bil­i­ty. The in­di­vid­ual can choose the type of fund (eq­ui­ty, fixed in­come or hy­brid funds) based on their risk ap­petite.

Oth­er in­no­va­tions in­clude the abil­i­ty to switch be­tween funds, ac­cess loans, an ear­ly with­draw­al op­tion, tax ben­e­fits or the in­clu­sion of a guar­an­teed pay­out at ma­tu­ri­ty. While the struc­ture of ULIPs may vary, the com­mon fea­tures are:

(i) The re­turn on ULIPs is linked to the per­for­mance of a mu­tu­al fund or a port­fo­lio of mu­tu­al funds; and

(ii) The pol­i­cy­hold­er bears 100 per cent of the risk of the in­vest­ment. This sug­gests that per­sons in­vest­ing in ULIPs should be sub­ject to the same pro­tec­tion pro­vid­ed to in­vestors in oth­er mu­tu­al funds.

In the wake of nu­mer­ous com­plaints by cus­tomers, ULIPs have come un­der greater scruti­ny by reg­u­la­tors in some ju­ris­dic­tions and cus­tomers’ dis­sat­is­fac­tion has al­so led to lit­i­ga­tion. A re­port pre­pared by the Nether­lands Au­thor­i­ty for the Fi­nan­cial Mar­kets (AFM) in 2005 stat­ed, unit- linked poli­cies are com­plex and not trans­par­ent; that the pro­vi­sion of in­for­ma­tion about the prod­uct was in­com­plete, in­suf­fi­cient and not even al­ways right and that an im­por­tant part of the sum paid in, was not in­vest­ed, but cov­ered the (ad­min­is­tra­tive) costs, com­mis­sion and pre­mi­um.

A sub­se­quent in­ves­ti­ga­tion by the Dutch Fi­nan­cial Ser­vices Om­buds­man re­vealed:

—The in­vest­ment risk, costs charged or the risk pre­mi­um were not, or not suf­fi­cient­ly, made clear to the cus­tomer;

—The prod­uct costs charged on ini­tial sale and on an on­go­ing ba­sis were so high that the ex­pect­ed re­turn on in­vest­ment was not re­al­is­ti­cal­ly achiev­able;

—The prod­uct sold to the cus­tomer con­tained spe­cif­ic risks that were not, or not suf­fi­cient­ly, made clear to the cus­tomer or was not suit­ed to the cus­tomer’s per­son­al cir­cum­stances;

—The in­sur­er owed the cus­tomer a du­ty of care which it breached; and

—The in­sur­er failed to warn of the risk of not re­al­is­ing the pro­ject­ed pol­i­cy val­ues.

The find­ings of the re­port led to the suc­cess­ful lit­i­ga­tion of in­sur­ance com­pa­nies in the Nether­lands for un­fair prac­tices, which ul­ti­mate­ly re­sult­ed in the com­pen­sa­tion of af­fect­ed pol­i­cy­hold­ers. The EU Court of Jus­tice af­firmed that in­sur­ance com­pa­nies were oblig­ed to dis­close to cus­tomers all the risks as­so­ci­at­ed with ULIPs pri­or to the cus­tomer en­ter­ing the con­tract and over the life of the pol­i­cy and that they had a du­ty of care to their cus­tomers.

Harm­ful prac­tices in the T&T mar­ket

In T&T, the unit-linked life in­sur­ance plan is mar­ket­ed as a prod­uct that of­fers the pol­i­cy­hold­er an op­por­tu­ni­ty to earn a high­er re­turn by in­vest­ing in a pool of as­sets while si­mul­ta­ne­ous­ly pro­vid­ing life in­sur­ance cov­er­age. These prod­ucts have failed to de­liv­er the promised high­er re­turns as high costs and low re­turns have erod­ed cus­tomers bal­ances re­sult­ing in sig­nif­i­cant loss­es or the loss of their en­tire in­vest­ment by the time of ma­tu­ri­ty.

The sit­u­a­tion is com­pound­ed be­cause in­sur­ance com­pa­nies in T&T are not trans­par­ent in their ad­min­is­tra­tion of ULIPs nor do they pro­vide time­ly re­ports on the per­for­mance of the un­der­ly­ing fund or funds. The pol­i­cy­hold­ers are, there­fore, un­able to un­der­take on­go­ing as­sess­ment of the risks as­so­ci­at­ed with in­vest­ing in the prod­uct.

Fur­ther, in­sur­ance com­pa­nies have en­gaged in what can be char­ac­terised as harm­ful prac­tices in the mar­ket for ULIPs. These in­clude the levy­ing of ex­ces­sive charges; the non-dis­clo­sure of the al­lo­ca­tion of the pre­mi­um for in­sur­ance cov­er­age ver­sus the in­vest­ment; the fail­ure to dis­close as­sets in the un­der­ly­ing fund and the lack of re­port­ing on the per­for­mance of the fund.

The ab­sence of ro­bust reg­u­la­tion has cre­at­ed a sit­u­a­tion where there is lit­tle or no ac­count­abil­i­ty to the pol­i­cy­hold­er with re­gard to charges im­posed or de­duc­tions made from their in­vest­ment. In one in­stance, the val­ue of an in­ter­est-free loan was de­duct­ed from the client’s bal­ance al­though the in­sur­er si­mul­ta­ne­ous­ly took a first charge on the pol­i­cy there­by se­cur­ing the loan whose val­ue had al­ready been de­duct­ed. This ac­tion runs counter to the in­dus­try prac­tice of hold­ing the pol­i­cy as col­lat­er­al and de­duct­ing the val­ue of the loan from the cash val­ue at ma­tu­ri­ty.

An­oth­er con­cern is that the in­sur­er’s ac­tion may not be con­sis­tent with its fidu­cia­ry re­spon­si­bil­i­ty as a fund man­ag­er. All de­duc­tions from a cus­tomer’s in­vest­ment must be au­tho­rised and dis­closed by the fund man­ag­er in ac­cor­dance with ap­pro­pri­ate reg­u­la­tions.

More im­por­tant­ly, the in­sur­ance com­pa­ny’s ac­tion of re­duc­ing the pol­i­cy­hold­er’s ac­cu­mu­lat­ed bal­ance at the time the loan was grant­ed ef­fec­tive­ly robbed the pol­i­cy­hold­er of the fu­ture earn­ings on her in­vest­ment.

Emerg­ing best prac­tices for reg­u­lat­ing ULIPs

With the grow­ing aware­ness of the risks of in­vest­ing in ULIPs, coun­tries have sought to in­crease the pro­tec­tion to cus­tomers pur­chas­ing ULIPs, es­pe­cial­ly where 100 per cent of the risk of in­vest­ment is borne by the pol­i­cy­hold­er and the in­vestor is a nat­ur­al per­son.

Sev­er­al coun­tries, in­clud­ing the EU mem­ber states, the UK, In­dia, Cana­da and oth­er coun­tries have strength­ened the reg­u­la­to­ry frame­work for ULIPs to es­tab­lish high­er stan­dards of dis­clo­sure, trans­paren­cy and ac­count­abil­i­ty in or­der to pro­tect pol­i­cy­hold­ers and to re­store pub­lic con­fi­dence.

Most im­por­tant­ly, laws were passed or amend­ed to bring ULIPs un­der the regime gov­ern­ing mu­tu­al funds and col­lec­tive in­vest­ment schemes.These laws ap­pro­pri­ate­ly treat ULIPs as in­vest­ment prod­ucts and not in­sur­ance con­tracts. How­ev­er, the ef­fec­tive su­per­vi­sion of in­sur­ance com­pa­nies that sell ULIPs and strong en­force­ment ac­tion by reg­u­la­tors are crit­i­cal for en­sur­ing the fair treat­ment of cus­tomers.

The fol­low­ing are some of the best prac­tices which have emerged in the reg­u­la­tion of ULIPs:

* The in­sur­ance com­pa­ny must es­tab­lish sound mea­sures for the gov­er­nance and ad­min­is­tra­tion of the fund. The in­sur­er is al­so re­quired to treat its cus­tomers fair­ly;

* Cus­tomers must be pro­vid­ed with in­for­ma­tion re­gard­ing the prod­uct in the pre-con­trac­tu­al stage and over the life of the pol­i­cy in­clud­ing the prepa­ra­tion of Key Fact State­ments de­tail­ing the risks as­so­ci­at­ed with the prod­uct;

* In­for­ma­tion pro­vid­ed to cus­tomers must be easy to un­der­stand;

* Cus­tomers must be ad­vised of the amount of the pre­mi­um to be paid for in­sur­ance cov­er and the amount that will be al­lo­cat­ed for in­vest­ment pur­pos­es;

* All fees and charges should be dis­closed to the cus­tomer pri­or to im­ple­men­ta­tion. Charges to the pol­i­cy should match their de­scrip­tion in pol­i­cy doc­u­ments and oth­er pub­lished ma­te­r­i­al pro­vid­ed to cus­tomers;

* In­for­ma­tion to be dis­closed on the na­ture of the un­der­ly­ing as­sets. Pro­ce­dures should be in place to pro­vide time­ly in­for­ma­tion on the per­for­mance of the un­der­ly­ing fund;

* The in­sur­er must dis­close the method­ol­o­gy for the pric­ing and val­u­a­tion of the un­der­ly­ing as­sets. Funds should typ­i­cal­ly be val­ued and priced on each work­ing day and the pric­ing should be done in a trans­par­ent man­ner;

* Where the fund is man­aged in­ter­nal­ly, the firm should es­tab­lish man­date agree­ments out­lin­ing the ob­jec­tives and per­for­mance cri­te­ria; and

* Er­ror and breach events should be rec­ti­fied in a prompt and ef­fi­cient man­ner. The in­sur­er has a du­ty to re­im­burse af­fect­ed cus­tomers;

The in­sur­er must es­tab­lish arrange­ments for han­dling cus­tomer com­plaints. Where the cus­tomer is not sat­is­fied with the com­pa­ny’s re­sponse, the cus­tomer must be able to seek re­dress through an al­ter­na­tive dis­pute res­o­lu­tion such as the Of­fice of the Fi­nan­cial Ser­vices Om­buds­man or the courts.

The reg­u­la­tion of ULIPs in Trinidad and To­ba­go has lagged be­hind the progress made glob­al­ly in im­prov­ing the su­per­vi­sion of ULIPs, al­though the do­mes­tic mar­ket faces the risks as­so­ci­at­ed with ULIPs in oth­er ju­ris­dic­tions. Pol­i­cy­mak­ers in Trinidad and To­ba­go have not put in place a ro­bust regime to pro­tect per­sons who in­vest in ULIPs. Con­se­quent­ly, there ap­pears to be a gap in the reg­u­la­to­ry frame­work for ULIPs.

At present, ULIPs fall un­der the purview of the Cen­tral Bank of T&T, which is re­spon­si­ble for reg­u­lat­ing in­sur­ance busi­ness and the mar­ket con­duct of fi­nan­cial in­sti­tu­tions. How­ev­er, ULIPs are treat­ed as in­sur­ance con­tracts, and it does not ap­pear that the Cen­tral Bank reg­u­lates the ULIP as an in­vest­ment prod­uct.

On the oth­er hand, the Trinidad and To­ba­go Se­cu­ri­ties and Ex­change Com­mis­sion, which is re­spon­si­ble for reg­u­lat­ing in­vest­ments and cap­i­tal mar­ket ac­tiv­i­ty, is not the des­ig­nat­ed su­per­vi­sor for ULIPs. Fur­ther, the Of­fice of the Fi­nan­cial Ser­vices Om­buds­man is on­ly charged with han­dling com­plaints of cus­tomers of fi­nan­cial in­sti­tu­tions. None of the reg­u­la­to­ry agen­cies in the fi­nan­cial sec­tor ap­pear to have di­rect re­spon­si­bil­i­ty for reg­u­lat­ing the in­vest­ment com­po­nent of ULIPs and safe­guard­ing the in­ter­est of cus­tomers who in­vest in these prod­ucts.

Con­clu­sion

Weak reg­u­la­tion and bad prac­tices tend to stymie the im­mense po­ten­tial for the growth of the mar­ket for ULIPs. More im­por­tant­ly, the lack of ef­fec­tive over­sight of this prod­uct can cause pol­i­cy­hold­ers to suf­fer sig­nif­i­cant loss­es on their in­vest­ment.

There­fore, pol­i­cy­mak­ers need to act ur­gent­ly to re­form the reg­u­la­to­ry frame­work for ULIPs to en­sure that in­vestors in these plans re­ceive the same lev­el of pro­tec­tion as oth­er in­vestors.

A re­view of the ad­min­is­tra­tion of ULIPs should be con­duct­ed with the ob­jec­tive of de­vel­op­ing ap­pro­pri­ate leg­is­la­tion to reg­u­late ULIPs as an in­vest­ment prod­uct. In ad­di­tion, the in­ves­ti­ga­tion should as­sess whether cus­tomers have been ad­verse­ly im­pact­ed by the con­duct of in­sur­ance com­pa­nies; the ex­tent of the loss­es suf­fered and if cus­tomers should be com­pen­sat­ed.

The best prac­tices, which have been im­ple­ment­ed in ad­vanced coun­tries, can serve as a blue­print for Trinidad and To­ba­go in de­vel­op­ing a ro­bust le­gal and reg­u­la­to­ry frame­work for ULIPs.