Ce­cila Melville

Dur­ing the 1990s in­vest­ment or unit-linked life in­sur­ance prod­ucts and an­nu­ities were sold by in­sur­ance com­pa­nies in T&T to thou­sands of pol­i­cy­hold­ers. These prod­ucts be­came the flag­ship prod­uct for a lead­ing in­sur­ance com­pa­ny. The in­vest­ment-linked in­sur­ance prod­uct was tout­ed as in­no­v­a­tive be­cause it of­fered pol­i­cy­hold­ers the op­por­tu­ni­ty to ben­e­fit from in­vest­ing part of their pre­mi­um in an un­der­ly­ing fund that was backed by a pool of as­sets man­aged by pro­fes­sion­al fund man­agers. The ba­sis of this ap­proach was the “un­bundling prin­ci­ple” which al­lowed the pre­mi­um to be split in­to sep­a­rate com­po­nents name­ly a por­tion to cov­er the ex­pens­es of the pol­i­cy and an in­vest­ment por­tion. Pol­i­cy­hold­ers were led to be­lieve that peo­ple who pur­chased an in­vest­ment-linked in­sur­ance prod­uct would not on­ly be in­sured against dis­abil­i­ty, crit­i­cal ill­ness and death, but would al­so en­joy a high­er ac­cu­mu­lat­ed bal­ance than pro­vid­ed by a tra­di­tion­al in­sur­ance pol­i­cy. The prod­uct be­came very pop­u­lar be­cause of this added ben­e­fit promised by the ser­vice provider. How­ev­er, to­day it is clear that these prod­ucts have not de­liv­ered the tout­ed ben­e­fits.

Peo­ple who pur­chased these in­vest­ment linked prod­ucts have been se­ri­ous­ly dis­ad­van­taged be­cause of the ap­par­ent mis­rep­re­sen­ta­tion of the prod­uct, ex­or­bi­tant fees and weak in­vest­ment re­turns. Fees and charges as­so­ci­at­ed with these poli­cies have grown ex­po­nen­tial­ly, in many cas­es sur­pass­ing pre­mi­um pay­ments and con­sis­tent­ly erod­ing their ac­cu­mu­lat­ed bal­ance. I have pre­sent­ed be­low two ex­am­ples that show the im­pact of the dra­mat­ic in­crease in risk charges and pol­i­cy fees in re­la­tion to gross pre­mi­um.

In the first ex­am­ple, a life in­sur­ance pol­i­cy with an as­sured val­ue of $300,000 was is­sued in 1995 for a month­ly pre­mi­um of $285 and a ma­tu­ri­ty at 65 years. In 1999, to­tal month­ly charges were ap­prox­i­mate­ly 44 per cent of the month­ly pre­mi­um. By 2024 these charges had grown to al­most 200 per cent, with the dif­fer­ence de­duct­ed from the client’s ac­cu­mu­lat­ed bal­ance. Risk charges, which ac­count for a dis­pro­por­tion­ate share of month­ly fees, jumped al­most 500 per cent over the pe­ri­od. By the time the pol­i­cy was sur­ren­dered in 2024, to­tal fees and charges amount­ed to $90,315, rep­re­sent­ing 92 per cent of to­tal gross pre­mi­ums paid. The sur­ren­der val­ue of this pol­i­cy was just over $45,000. The sur­ren­der of this pol­i­cy was a log­i­cal op­tion since the ex­or­bi­tant charges were can­ni­bal­is­ing the ac­cu­mu­lat­ed client bal­ance which at ma­tu­ri­ty would like­ly have been ze­ro or neg­a­tive.

The sec­ond ex­am­ple is of a pol­i­cy­hold­er who took out a pol­i­cy at age 24 for an as­sured sum of $100,000 with a month­ly pre­mi­um of $170 and a ma­tu­ri­ty at 65 years. In 1995, month­ly fees and charges ab­sorbed 37.25 per cent of the gross pre­mi­um, but by 2024 this had risen to 108 per cent and is ex­pect­ed to con­tin­ue in­creas­ing, large­ly due to es­ca­lat­ing risk charges. This means that the month­ly gross pre­mi­um is not suf­fi­cient to cov­er the fees. The rise in fees has been phe­nom­e­nal with to­tal fees in­creas­ing by over 200 per cent dur­ing the pe­ri­od 1995 to 2024. Risk charges alone rose by al­most 300 per cent. The pol­i­cy fee, which is an ad­min­is­tra­tive fee, in­creased four-fold over the same pe­ri­od. The pol­i­cy has an ac­cu­mu­lat­ed bal­ance of $34,077 but with es­ca­lat­ing fees the val­ue is ex­pect­ed to de­cline sub­stan­tial­ly at ma­tu­ri­ty. The in­crease in fees tends to have a greater neg­a­tive ef­fect on in­di­vid­u­als who pay low­er pre­mi­ums as they are gen­er­al­ly per­sons of mod­est means.

The terms of these in­vest­ment-linked pol­i­cy con­tracts pro­vide for a por­tion of the pre­mi­um to be in­vest­ed over time. The con­tract al­so states that the ac­cu­mu­lat­ed amount may be dis­bursed through a cash pay­out or as an an­nu­ity at ma­tu­ri­ty. The pre­sump­tion is that the in­vest­ment-linked prod­uct would amass sig­nif­i­cant val­ue from in­vest­ing in the un­der­ly­ing fund, which would in turn en­hance the client’s bal­ance. The re­quire­ment to in­vest a por­tion of the pre­mi­um is there­fore a le­gal oblig­a­tion of the com­pa­ny. How­ev­er, it ap­pears that the fee struc­ture has been de­signed so that it de­pletes the in­vestible por­tion of the pre­mi­um and by ex­ten­sion re­duces the in­sur­ance provider’s li­a­bil­i­ty to the pol­i­cy­hold­er as rep­re­sent­ed by the ac­cu­mu­lat­ed fund val­ue. The pol­i­cy and prac­tice of im­pos­ing high fees and charges which de­plete pre­mi­ums run counter to the stat­ed ob­jec­tive of the in­vest­ment-linked in­sur­ance prod­uct to pro­vide a high­er re­turn than tra­di­tion­al in­sur­ance prod­ucts. To com­pound the sit­u­a­tion, there are no caps or re­stric­tions on the fees or charges im­posed on the client’s ac­count, which leaves pol­i­cy­hold­ers at the mer­cy of the in­sur­ance provider. In fact, the fee struc­ture has re­duced the in­vest­ment-linked in­sur­ance pol­i­cy to noth­ing more than a term pol­i­cy in which all val­ue evap­o­rates on ma­tu­ri­ty. More­over, giv­en that the poli­cies are front-loaded, mean­ing that in­sur­ance providers re­coup all ex­pens­es from pre­mi­ums paid over the first two pol­i­cy years, there is no jus­ti­fi­ca­tion for the ag­gres­sive in­crease in fees.

While the above dis­cus­sion fo­cus­es on in­vest­ment-linked in­sur­ance prod­ucts, the same con­cerns ap­ply to in­vest­ment-linked an­nu­ities where the pre­mi­um is in­vest­ed in the un­der­ly­ing fund. The amount to be in­vest­ed (i.e. the net pre­mi­um) has al­so been dra­mat­i­cal­ly di­min­ished by ex­or­bi­tant fees and charges. The weak per­for­mance of the un­der­ly­ing fund has fur­ther erod­ed the val­ue of these in­vest­ments. What is even more con­cern­ing is the lack of ac­count­abil­i­ty and trans­paren­cy with which the in­sur­ance com­pa­nies con­duct their af­fairs re­gard­ing the man­age­ment of these unit-linked prod­ucts. There is lit­tle or no dis­clo­sure to the pol­i­cy­hold­ers re­gard­ing the ex­pens­es, risks or the per­for­mance of the fund in which their monies are in­vest­ed.

Al­though the in­vest­ment-linked in­sur­ance poli­cies are in­vest­ment prod­ucts, there ap­pears to have been lit­tle or no reg­u­la­to­ry over­sight of this as­pect of the in­sur­ers’ op­er­a­tions. Pol­i­cy­hold­ers of these prod­ucts are in fact in­vestors and should be ac­cord­ed the same pro­tec­tions as oth­er in­vestors. Un­for­tu­nate­ly, in­sur­ance com­pa­nies of­fer­ing these in­vest­ment prod­ucts are not held to the same reg­u­la­to­ry stan­dards as oth­er fi­nan­cial in­sti­tu­tions op­er­at­ing in the cap­i­tal mar­ket.

For ex­am­ple, pol­i­cy­hold­ers are not pro­vid­ed with fi­nan­cial in­for­ma­tion on the per­for­mance of the fund or the rates of re­turn over the life of the pol­i­cy. In ad­di­tion, ex­pens­es are not pub­licly dis­closed and mon­i­tored. The risk charges, which in­cludes mor­tal­i­ty charges, are a black box. What is in­ter­est­ing is that mor­tal­i­ty rates are usu­al­ly pro­ject­ed at the time the pol­i­cy is is­sued. Where con­di­tions have changed, the in­sur­er is re­quired to make rec­om­men­da­tions to the pol­i­cy­hold­er re­gard­ing any ma­te­r­i­al change in the con­tract terms, in­clud­ing risk charges. Fur­ther, there has been no com­mu­ni­ca­tion to pol­i­cy­hold­ers ad­vis­ing what is dri­ving the es­ca­lat­ing costs or re­gard­ing ma­te­r­i­al risks such as when the ex­pens­es be­gin to ex­ceed gross pre­mi­ums. An­oth­er area of con­cern is the tim­ing of the ap­pli­ca­tion of pre­mi­ums. This is im­por­tant be­cause de­lays in ap­ply­ing pre­mi­ums ad­verse­ly im­pact the re­turns that can be earned and ul­ti­mate­ly the pol­i­cy­hold­er’s ac­cu­mu­lat­ed bal­ance.

In more ad­vanced ju­ris­dic­tions, the con­cerns with unit-linked in­sur­ance prod­ucts have been ad­dressed by im­ple­ment­ing more ro­bust mar­ket con­duct regimes. In 2015, the Dutch gov­ern­ment im­ple­ment­ed a law to ad­dress the lack of trans­paren­cy, weak dis­clo­sure stan­dards, low re­turns and high costs. The law re­quires the in­sur­er to pro­vide pol­i­cy­hold­ers with de­tailed in­for­ma­tion about their pol­i­cy, the ex­pect­ed val­ue and to pro­vide guid­ance on how to make de­ci­sions about their pol­i­cy. In In­dia, caps have been set to con­trol the ex­po­nen­tial in­crease in fees and charges. Giv­en that mor­tal­i­ty rates are a key dri­ver of risk charges, some coun­tries have re­quired in­sur­ance com­pa­nies to dis­close the mor­tal­i­ty rate sched­ule in con­tracts at the time of is­sue. The in­sur­er must al­so pro­vide the pol­i­cy­hold­er with ma­te­r­i­al in­for­ma­tion con­cern­ing risks and fac­tors that ad­verse­ly af­fect re­turns over the life of the pol­i­cy. More im­por­tant­ly, reg­u­la­tors have re­quired in­sur­ers to com­pen­sate pol­i­cy­hold­ers for the ex­or­bi­tant fees im­posed on these prod­ucts.

In T&T, more ef­fec­tive over­sight is clear­ly re­quired of the mar­ket for unit-linked in­sur­ance prod­ucts. Giv­en the pop­u­lar­i­ty of these prod­ucts in the 1990s, there is like­ly to be a large num­ber of per­sons who have been neg­a­tive­ly im­pact­ed. The rel­e­vant au­thor­i­ties need to take ac­tion to pro­tect the rights of such pol­i­cy­hold­ers who in­vest­ed in these prod­ucts, in­clud­ing man­dat­ing com­pen­sa­tion where ap­plic­a­ble.

The au­thor­i­ties should al­so strength­en the reg­u­la­to­ry regime to en­sure more ef­fec­tive reg­u­la­tion of all fi­nan­cial prod­ucts. Giv­en that in­vest­ment-linked in­sur­ance prod­ucts have both an in­sur­ance and in­vest­ment com­po­nent, there is the need for joint su­per­vi­sion by the Cen­tral Bank, which su­per­vis­es in­sur­ance com­pa­nies and the T&T Se­cu­ri­ties and Ex­change Com­mis­sion (TTSEC), which reg­u­lates the cap­i­tal mar­ket.