2. In recent years we have witnessed accelerated product innovation in the insurance sector in order to meet the needs of
increasingly sophisticated customers. The associated complexity of insurance products has brought many challenges to the
industry that need to be overcome, not least of which is the fair dealing with customers.
It is widely recognised in the industry that achieving public trust and customer confidence is one of the most important issues
for insurers. The challenge, however, lies in the proper sales conduct and sound communication to customers given the ever-
increasing complexity of insurance products — the very products that have been engineered to satisfy the growing demands
for financial security by modern-day policyholders. The lack of a robust “Conduct risk framework” has exacerbated this issue
for many insurers and has led to severe consequences in certain well-documented cases.
The Guidance Note on Underwriting Long Term Business (Other than Class C Business), referred to as GN 16, issued by the
Office of the Commissioner of Insurance in Hong Kong, is a significant regulatory development in this area and is expected to
bring about far-reaching impacts on the way insurers carry out their sales activities.
Jonathan Zhao
Asia-Pacific Insurance Leader
EY
3.
4. In July 2015, the Office of the Commissioner of Insurance in
Hong Kong (“OCI”) issued a “Guidance Note on Underwriting
Long Term Insurance Business (other than Class C Business)”
(“GN 16”). With GN 16, the OCI is looking to strengthen
policyholder protection for all long term business sold in the
region. It intends to do so by expanding the scope of the previous
Guidance Note 15 (“GN 15”) which was limited to Class C
Business only. This is a clear and decisive response to the global
call for more ethical business practices branded as and referred
to hereafter as Treating Customers Fairly (“TCF”).
The financial services sector, including the insurance sector,
is characterised by information asymmetry, i.e. the complexity
of products sold by companies creates a virtual ‘black box’
of information, only a fraction of which is shared with the
customer. This places great power in the hands of those who
control information that customers might really require in order
to make informed purchasing decisions. Customers must
therefore be confident that they are dealing with firms where
the fair treatment of customers is central to their corporate
culture.
Over the past few years, the global financial markets have
witnessed some significant failures in addressing this
asymmetry:
• In the UK, the questionable point of sale behavior and
continued selling of high volume of policies with unsustainably
high guarantees brought one of the insurers to demise
• The failure of proper disclosure of Payment Protection
Insurance not only resulted in significant compensation
in the UK but also virtually ended the credit card insurance
market
• In Europe, the mis-selling of defined contribution pension
products in place of defined benefit schemes resulted in
large-scale compensation by European insurers
• In Asia, we witnessed the effects of the global scale
manipulation of LIBOR by investment banks
In the wake of the above, regulators throughout the world
have placed business conduct supervision at the forefront of
their supervisory regimes. There is also an increased emphasis
on prevention through a renewed focus on ethical conduct.
As Martin Wheatley, former Chief Executive Officer of the HK
Securities and Futures Commission, wisely said, “This is
a new environment, with more regulatory interest in ethics
over rules, more focus on prevention rather than low-value
clean up, and more focus on key issues”
In this publication, we provide a summary of the requirements
of GN 16 as well as the key challenges for implementation.
Towards treating customers
fairly — a global perspective
5. “This is a new environment, with more regulatory
interest in ethics over rules, more focus on
prevention rather than low-value clean up, and
more focus on key issues”
Martin Wheatley
Former Chief Executive Offer of
HK Securities and Futures Commission 2014
6. 6 | Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong
GN 16
— the requirements
Principles and areas of focus
The purpose of GN 16 is to promote and encourage proper standards of conduct, and sound and prudent
business practices amongst insurers. In particular, the fair treatment of customers encompasses:
• Developing and marketing products in a way that pays due regard to the interests of the customers
• Providing customers with clear information before, during and after the point of sale
• Reducing the risk of sales which are not appropriate to customers’ needs
• Ensuring any advice given is of a high quality
• Managing the reasonable expectations of customers
Responsible parties and their duties
GN 16 applies to all authorized insurance companies underwriting long-term business (other than Class C)
in Hong Kong. The responsible parties within each insurer include:
• The controller — to ensure that GN 16 requirements and all other relevant Insurance Core Principles (ICP)
promulgated by IAIS are observed throughout the life cycle of all long-term (except Class C) insurance
policies
• The Board of Directors — to maintain general oversight over the implementation of GN 16 and ultimately
responsible for ensuring customers are being treated fairly
• The appointed actuary — to adopt reasonable assumptions in policy illustrations, to use best estimate
assumptions in product design processes, and to advise the Board on his/her interpretation of policyholder
reasonable expectations (PRE)
Effective dates for the implementation of GN 16
GN 16 applies to both new and inforce products:
1. For new products, GN 16 is effective from 1 April 2016
2. For new and existing policies of current products, GN 16 is effective from 1 January 2017
7. Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong | 7
The GN 16 requirements
GN 16 covers many aspects of the product lifecycle and will impact pre-sale, sale, and post-sale activities as well as remuneration
practices. While GN 16 places emphasis on participating products and universal life products, it should be noted that GN 16 is
also applicable to other businesses such as health, annuity, and non-participating business, such as term insurance. PRE for these
miscellaneous products must also be well-established and documented.
A summary of the GN 16 key requirements and challenges is provided below.
• To perform a diligent review of GN 16
requirements to ensure that existing products
meet the “fair treatment of customers” principles
• In performing the diligent review, insurers should
take a holistic view of the suitability of the
distribution channel to the complexity of the
product
• Insurers are required to monitor the product after
it is launched
• Fees and charges paid by the customers should
be fair and commensurate with the insurance
protection offered
• Surrender penalties should be clearly disclosed;
customers should be alerted to potential
financial loss
• Determination of pricing assumptions should be
based on best estimate assumptions
• Are policies designed to meet the needs of
policyholders and are they in the best interest of
policyholders?
• Does the firm’s strategy for business growth take
into account the “fair treatment of customers”?
• Are there policies and controls in place to ensure
that needs and affordability for target customers
are met?
• Are product distribution channels appropriate
and tailored to the product type? (e.g. products
with complex features may not be suitable for
distribution through the online channel)
• Are fees and charges supported by expense
studies and benchmarked against peers?
1. Product design
Requirements Key challenges
1. Product design
5. Appropriate
remuneration
structure
6. On-going monitoring
7. Post-sale control
4. Advice to customers
3. Suitability assessment
Pre-sales Sales Post-sales Remuneration
2. Provision of adequate and clear information
8. 8 | Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong
The GN 16 requirements (continued)
Requirements Key challenges
• Customer needs should be properly assessed
before advice is given through the use of
a Financial Needs Analysis ("FNA")
• Customers should be presented with the different
insurance options that are available
• A suitability assessment should be carried out
whenever there are changes to the circumstances
of the customer
• Insurers have a duty to verify all available
information and assess the suitability of
the products during the sales and underwriting
processes
• Insurers should reduce the risk of sales that
do not meet a customer’s needs
3. Suitability
assessment
• For the FNA, are the current assessments
sufficient to meet the GN 16 requirements?
• The company needs to establish internal controls
and protocols to ensure the FNA and other
assessment information are properly conducted
and approved
• Clear, adequate and appropriate information
must be provided before, during and after the
point of sale
• Product information should be bilingual, clear
and succinct
• Key product risks should be clearly outlined in the
product brochure and marking materials
• The product benefits illustrated, particularly for
participating and universal life policies, must be
comprehensive and not misleading
• Factors that significantly affect the determination
of policyholders’ dividends/bonuses (e.g. claims,
interest income, market risk, expenses, and
persistency) must be disclosed
• Disclosure of the non-guarantee dividends/
bonuses fulfillment ratios (for participating
policies) and the historical crediting interest rates
(for universal life policies) for each product series
which has recently issued new policies
2. Provision
of adequate
and clear
information
• How well are firms communicating with customers?
Clear communication is a key component of a
firm's approach to TCF. All sales and marketing
materials must be reviewed to ensure compliance
with GN 16
• How ready is the firm’s administration system
and data for generating the inforce illustration?
• How to set up the reasonable assumptions for
the illustration at point of sale and for annual
communication with customers?
• Insurers and intermediaries should discharge
their duties in a way that can be reasonably
expected from a prudent person
• Advice given to a customer goes beyond the
provision of product information and relates,
specifically to the provision of a recommendation
on the appropriateness of the product, to the
disclosed needs of the customers
• Customers should be properly appraised of all
the product features, including fees, charges and
product risks
• Follow the sales process which involves completion
of the FNA (if applicable), confirmation of needs,
comparison of different insurance options, and
explanation of the key product features/
exclusions, etc.
4. Advice to
customers
• Typically, the quality of advice given to customers
depends on the quality of advisors. Is there
a robust training and competency regime/
framework for advisors?
• Is the quality of advice monitored? Is there any
Management Information (“MI”) available to
assess the quality of advice given to customers?
• TCF places more onus on agents, which may
demand more time for client meetings and
potentially slow down the entire sales process.
Will sales tools for agents be updated to ensure
compliance needs can be met in the most
efficient and effective manner?
9. Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong | 9
Requirements Key challenges
• Proper control systems to achieve TCF and
monitor that TCF policies and procedures
are adhered to
• Audio-recorded post-sale confirmation calls to
all vulnerable customers
• Identify possible cases of intermediaries abetting
customers to evade controls
• Proper documentation systems for quality control
and future monitoring
7. Post-sale
control
• Are there systems in place to aid senior
management in ensuring that fair treatment
of customers is being delivered throughout
the firm?
• Post-sale disclosure should not be overlooked.
How effective are the post-sale communications
to make customers aware of product performance
throughout the product lifecycle?
• How are intermediaries prevented from
circumventing post-sale control protocols?
• Any potential conflict of interest is to be monitored
and managed before concluding an insurance
contract
• A policy must be serviced to the point at which all
obligations under the policy have been satisfied
• Disclosure of contractual changes and further
relevant information during the life of the
contract is required
• On-going communication with policyholders
should be maintained at least annually
• Non-guaranteed benefits must be disclosed
• Provision of inforce benefits to be illustrated
• Insurers should monitor the products after
launch (e.g. complaints, design flaws, etc.)
6. On-going
monitoring
• Identifying, collecting, and using MI for TCF can
be challenging. Is there relevant MI to monitor
products after launch to ensure that they
continue to meet the needs of customers?
• Illustration of the provision of inforce benefits will
require systems capable of providing
up-to-date information to enable annual refreshes
• Disclosure of non-guaranteed benefits will require
systems to assess dividend/bonus payouts
• What would be a good early warning system?
• Need to establish a task force to address
malpractice and follow-up with customers
• Remuneration for intermediaries should be
aligned with TCF principles
• Indemnity commissions, or any arrangements
that offer advance payment of commissions,
are strictly prohibited
• Clawback mechanisms should be in place to fully
recover all commission paid in proven fraud/
money laundering/mis-selling cases
5. Appropriate
remuneration
structure
• Are remuneration policies for intermediaries
properly aligned with the TCF principles and
are there clawback mechanisms in place to deter
mis-selling activities?
• What is the definition of misaligned remuneration?
How do we judge?
10. 10 | Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong
EY’s proposed approach
— TCF change programme
GN 15/16 requires firms to take a holistic view of their policies, systems and controls across the entire
organization. Our proposed approach covers all the major areas of the Guidance Notes, including I. Pre-sales,
II. Sales, III Post-sales, and IV. Remuneration as well as all the major sub-processes within each of these key
work streams using a process and control framework.
We propose the following approach for firms to roll out their TCF programmes:
Establish GN 16
programme governance 1.
Assess
Implementation
cycle
2.
Gap
analysis
3.
Remediate
4.
Sustain
Agreement on final scope and
extent of assistance to be provided
by EY
Project sponsorship and
engagement should be
at the Board level. Close
coordination will be required
amongst compliance, internal
audit, actuarial, finance,
IT systems, and business.
We will agree with you on the
detailed scope and extent of
assistance required before
commencement of the project.
EY can help with numerous
aspects of GN 16 implementation.
Please refer to ‘How EY can
help?’ at the end of this
document for further details.
Pre-sales Sales Post-sales Remuneration
11. Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong | 11
1.1 TCF questionnaire
• Gather information from senior management on current
state of TCF
1.2 Know Your Agents (KYA) analytics diagnostic
• Apply analytics, statistics, mathematics, linguistics and
the experience of insurance industry professionals to look
back at agent behavioural patterns which are potentially
in breach of TCF principles
• Provide damage assessment
1.3 Perform current state risk assessment
• Catalogue and identify key processes and controls in place
to mitigate TCF threats
• Review existing documentation and perform walkthroughs
of key processes and controls in scope for TCF
• Identify areas of risk for GN 15/16 compliance
2.2 Prioritize improvement opportunities
• Prioritize the improvement opportunities using a defined
criteria such as cost, time, scope, etc
2.1 Define gaps
• For key areas of risk identified in current state risk
assessment, identify key controls and processes required to
mitigate risks
• Perform benchmarking analysis with industry best practice
Activities EY accelerators
1. Assess
2. Gap
analysis
12. 12 | Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong
A sustained response to GN 15/16 is required to ensure that these Guidance Notes are treated as more than
a "tick-the-box" exercise. The broader impact on risk culture, with an emphasis on conduct risk management,
must be considered. We recommend that firms re-evaluate and strengthen their risk governance frameworks.
For instance, new board-level committees may be established to more closely monitor business ethics and
conduct. Additionally, current management committees may be streamlined and integrated or new committees
and functions added to break down silos and close the gaps in risk oversight and control.
Broader than regulatory compliance
• Developing and embedding a Conduct risk framework will enable firms to demonstrate that TCF change
programmes are driving higher standards and better customer outcomes. Please refer to “Conduct risk
framework — overview” for further details.
Regulatory
compliance
• Remedial — address
deficiency as and when
it arises
• Adherence to rules
Conduct risk
management
• Pre-emptive — attempt to
identify deficiency earlier
• Broader application
• Board led strategy
implemented by risk
function
3.1 Update key controls and systems
• Update key controls and build internal management
information and key performance indicators for ongoing
monitoring of GN 16 compliance
• An improvement opportunities roadmap can be used to
outline the duration of each of the initiatives identified,
dependencies and key milestones
Activities EY accelerators
3. Remediate
4. Sustain
13. Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong | 13
Regulatory engagement framework
Risks systems
People & culture
Cycle of risk management
Identification
Identifying
conduct risk
Measurement
Measuring the
firm's exposures
against risk
appetite
Assurance
Ensuring proper
governance/
practices are put
in place
Monitor & report
Monitoring &
reporting of risks
against appetite
Group audit
committee
Board-executive
risk forum
Compliance
committee
Governance
External data
sources
Internal data
sources
Conduct risk appetite
Policy framework
FoundationDeliverymechanism
Reportinganddecisionmaking
Enablers
Management
information
Assurance capability
Conduct risk profile heat maps Assurance plans
Issues & action management
Firms increasingly need to capture conduct risk at an earlier stage — to turn lagging indicators of customer
related deficiency into leading indicators, thus enabling earlier action to take place. Rather than reacting
to incidences, insurers should establish a robust Conduct risk framework with ongoing monitoring systems
and post-sale controls such as trigger points and early warning systems to proactively alert the business of
potential non-compliance with the TCF principles.
The key elements of a Conduct risk framework include:
• Focus on definition of conduct risk and corresponding risk appetite
• Focus on culture and evidencing the right behaviours are being embedded throughout the organisation
• Embedding customer needs within strategy and planning
• Assessment of governance framework
• Re-evaluation roles and responsibilities
• Re-evaluation of metrics to focus on specific conduct risks
• Assessment of "control" environment to ensure focus on product governance, distribution risk assessment
and sales process controls
• Improving root cause analysis capability and establishing read-across processes to ensure lessons are learnt
from past mistakes
• Consider how to manage the conduct risk impact from the change/cost agenda
Key themes
• Pre-empt rather than react. Focus further up the value chain increases the emphasis and need for
leading indicators to predict potential TCF breaches.
• TCF principles to be at the heart of the business. A fundamental shift in focus, driving at the heart
of firms’ business models; creating the need to make strategic cultural changes to promote
good conduct.
• A firm’s culture should be about doing the right thing. Regulators are increasingly looking at
“what the insurer should be doing” rather than “what they have to do”.
Conduct risk framework
— overview
14. 14 | Treating customers fairly: an in-depth look at GN 16 and its implications for Hong Kong
How EY can help?
Methodology
• Assist with the implementation of the GN 16 requirements
• Provide support in making appropriate decisions where GN 16 requires careful use of judgment
• Evaluate the assessment of key components in the policy lifecycle
• Develop remediation plans
• Test the fairness criteria for new business
• Help formulate the fairness criteria between policyholders and shareholders
Information/systems and controls
• Design and advise on the implementation of processes, systems and changes to internal controls to
produce inforce benefit illustrations, to track non-guaranteed benefits for par products, and capture
the management information necessary to comply with the new GN 16 guidance
Industry knowledge and training
• Tailor support to implement changes e.g. training, documentation development, organization design,
process reengineering, etc
• Help to understand how GN 16 impacts your business, enabling you to make an informed decision around
how to implement change
• Provide insights from your peers and feedback on your implementation progress relative to your peers
Review and validation
• Help review and validate the compliance of the GN 16 requirements including the governance policy,
implementation plans and process, ongoing communication and sales/marketing materials, etc
The EY difference
• We have significant experience in regulation in particular in reviewing regulatory guidelines related to the
TCF principles
• EY has a team of professionals, in actuarial, risk and compliance, and data/systems and controls, as well as
in distribution, who possess extensive experience in responding to regulatory change and are fully
equipped with proven skills to provide support in different areas such as, project management, operating
models changes, regulatory interpretation support, IT impact assessment, process re-engineering, etc
How EY can help?
15. Contacts
Christine Wen
Manager
+852 2629 1932
christine-j.wen@hk.ey.com
Risk and Compliance
Jayshree Luthra
Manager
+852 2849 9125
jayshree-p.luthra@hk.ey.com
Data/Systems and Data Analytics
Joel Lim
Partner
+852 2629 3097
joel.lim@hk.ey.com
Jack Jia
Partner
+852 2846 9002
jack.jia@hk.ey.com
Eric Wang
Director
+852 2629 3936
eric-y.wang@hk.ey.com
Actuarial
Tze Ping Chng
Partner
+852 2849 9200
tze-ping.chng@hk.ey.com
Asia-Pacific Insurance Leader
Jonathan Zhao
Partner
+852 2846 9023
jonathan.zhao@hk.ey.com
Angelo Wang
Director
+86 10 5815 3740
angelo.wang@cn.ey.com
Vincent Tsang
Executive Director
+852 2629 3802
vincent.tsang@hk.ey.com
Steve Cheung
Consulting Actuary
+852 2846 9049
steve.cheung@hk.ey.com
GN 16 Solution Leaders
Jeff Malatskey
Partner
+852 2849 9308
jeff.malatskey@hk.ey.com
Brendan Kerr
Director
+852 2629 3038
brendan.kerr@hk.ey.com
Florence Ng
Senior Manager
+852 2849 9189
florence-sh.ng@hk.ey.com
