Download Code on Policy Quotations

CODE ON POLICY QUOTATIONS
1. PREAMBLE
This Code relates to all policy quotations for individual policies issued by member offices.
Each member office must ensure that all policy quotations that it issues to obtain new business, comply
with the Code. Each member office must take whatever steps are necessary to ensure that intermediaries
also comply with the Code when product quotations are made to the public.
The Code is an industry agreement and is not legislation. Offices should therefore not attempt to exploit
possible loopholes in the wording of the Code and should strive to comply with the letter and the spirit
of the Code
The current requirements of the Code come into force on 1 January 2009.
Previous major revisions of this code are as follows:
Effective date
1 January 2009
1 July 2005
1 January 2005
31 May 2002
1 March 2000
1 August 1997
1 April 1997
1 August 1994
1 July 1983
22 May 1981
Comment / changes made
Removal of projected maturity values
Including reduction in yield
Code on Policy Quotations
Upper projection rate 10% pa
Lower Projection rate 4% pa
Upper projection rate 10% pa
Lower Projection rate 5% pa
Upper projection rate 12% pa
Lower Projection rate 6% pa
Upper projection rate 12% pa
Lower Projection rate 9% pa
Illustration of early surrender values
Taxed business
Upper projection rate 12% pa
Lower Projection rate 9% pa
Untaxed
Upper projection rate 14% pa
Lower Projection rate 11% pa
Code on Benefit Illustration
Upper projection rate 15% pa
Lower Projection rate 12% pa
Code of Practice : Projected Values
Upper projection rate 15% pa
2. OBJECTIVES
The Code is intended to ensure that policyholder expectations of benefits and premium rates, created
by quotations presented in the sales process, are reasonable (given the economic environment and
policy charging structure) and do not damage the industry’s image.
Specific objectives with the Code are to:
 regulate the use of projected values
 demonstrate the consequences of early termination
 show the effect of all expense charges on the overall investment return
 show the expected impact of premium rate reviews after the expiry of the guaranteed term.
3. SCOPE OF THE CODE
The Code relates to all with profit and linked individual policies, including living annuities, where the
benefits are dependent upon unknown future performance of the underlying investment portfolios.
Section 8 of the Code relates to individual risk policies.
The Code includes all composite products involving individual policies. Member offices shall ensure
that each product component of such composite products comply with the Code, if applicable.
True group schemes, where the individual member does not enter into the negotiation, do not fall
within the Code scope. Group schemes based on individual policies (possibly issued at preferential
rates) clearly fall within the Code. Schemes may have elements of both types, and the office must
take the nature of the scheme into account when deciding whether it falls within the Code or not.
4. PROJECTED VALUES
4.1.
No projected benefits (including but not limited to maturity, income, death, disability
or (partial) surrender benefits) will be quoted for a policy where benefits depend on future
unknown investment performance, other than the optional attachment of Annexure II to the
quote and to meet the requirements under section 8 of this code.
4.2.
Early termination charges must be disclosed (e.g. on full or partial surrender, premium
alteration or early maturity). Where these depend on future unknown investment
performance this illustration must be done using the same gross return as for the RIY
calculation (see section 5). The projected early termination charges must make allowances
for all initial and ongoing policy charges, early termination charges (e.g. for unrecouped
expenses or for any other reason) and the cost of mortality and morbidity. All of these must
be on a best estimate basis in the opinion of the valuator, and not less than those actually
used for the policy concerned.
4.3.
Any guaranteed values must be included in the quotation.
5. REDUCTION IN YIELD
5.1.
In the case of a savings or investment or living annuity policy contract, the office must
calculate the Reduction in Yield (RIY) associated with the full actual expense charges
applicable to the policy. The RIY must similarly be calculated on the savings element of a
policy that provides a combination of risk and savings benefits or a policy that is sold
predominantly as a savings policy. This includes all policies where the savings premium can
be identified separately and the risk premium is a predetermined fixed amount. (Universal
life policies, where varying risk premiums are recouped from the investment fund, are
excluded from these RIY requirements.)
5.2.
The RIY must be calculated using a gross return (before expenses but after tax) of
10% effective per annum.
5.3.
All charges and fees (including performance fees, distribution, advice, commission,
administration, asset management and any other) in what ever way they are expressed
(including as percentage of premiums or investment fund, as monetary amount, as buy-sell
spread, as reduction in units, or any other way) must be included in the calculation of the
RIY.
Where the expense charges can vary, for example with a choice of different portfolios, the
average RIY must be shown.
5.4. Some detailed requirements for the calculation of the RIY are as follows:

Term
For recurring premium policies the RIY must be calculated over a term not longer than the
commission term of the policy or the term to the contractual maturity date. For single
premium investment policies the RIY must be calculated over a term not longer than 10 years
or the term to the contractual maturity date. The RIY for a living annuity contract must be
calculated over a maximum term of 15 years.

Asset management fee
For a policy with multiple investment funds, the asset management fee in the RIY calculation
must be the weighted average of the asset management fees for all the funds, in proportion to
the premiums invested in each fund.
In the case of multi manager funds, fund of funds, wrap funds, hedge funds, etc., all of the
tiers of management charges that reduce the gross return earned on the ultimate underlying
asset pools, must be included in the asset management fee and used in the RIY calculation.
Where the proportion in the underlying funds varies frequently so that an accurate calculation
of the total annual management fees cannot be done, then the best and worst possible RIY,
must be shown.
 Performance Fees
Where any type of performance fee is payable, the impact of this must be shown. The RIY
should include performance fees calculated at each fund’s actual benchmark. (Note that this is
NOT the performance fee hurdle rate.) It should be calculated for each fund individually and
then be aggregated across all funds, weighted by the premiums invested in each fund. The
performance fee should be fully disclosed, including the following statements:

the level of the performance fee included in the RIY, and the benchmark for
each fund at which it was determined

that the actual RIY could be higher or lower depending on the performance
of the fund (and the related performance fee levied)

the minimum and maximum (if capped) performance fee (for each fund). If
the performance fee is uncapped this must be clearly stated.

Guarantee Loadings
Any fee in respect of guarantees provided within the asset pool, must be included in the total
RIY. However, these fees and their impact on the RIY can be shown separately as they are
fees for a specific benefit rather than for expense recovery. The suggested format is to
disclose a RIY net of guarantee costs and a RIY gross of such costs.

Bonus Funds
For bonus funds, the RIY must include all fees for smoothing and guarantees, as used by the
actuary in calculating the bonus to be declared. Where these fees vary from declaration to
declaration, then the office must use the average from the last five annual declarations. As
above, these fees and their impact on the RIY can be shown separately. The suggested format
is to disclose a RIY net of guarantee costs and a RIY gross of such costs. Transfers to or
from smoothing reserves, that merely alter the timing of the participation of the client in the
investment performance should not be included in this calculation.

Structured Products
The RIY does not need to be calculated for the so-called structured products, for example
policies that provide absolute guarantees that are fully linked to an index.
6. PRESENTATION OF INFORMATION
6.1. All quotations must comply with the requirements of the General Code of Conduct in terms of
the Financial Advisory and Intermediary Services Act and where applicable Long Term
Insurance Act and the Policyholder Protection Rules in terms of the Long-term Insurance
Act. The additional requirements of the Code are intended to ensure that information is
clearly communicated and explained.
6.2. The RIY must be shown prominently in the quotation. Recommended layout and wording are
set out in Annexure I
6.3.
Full disclosure of all charges is required in terms of the General Code of Conduct in
terms of the Financial Advisory and Intermediary Services Act and where applicable in terms
of the Policyholder Protection Rules in terms of the Long-term Insurance Act. This
disclosure must be done together in one section under an appropriate heading. All the
charges included in the RIY calculation must be described and quantified in this section.
6.4.
If the policy provides any guarantees these must be clearly disclosed. If applicable, the
quotation must also indicate instances in which the guarantee does not apply, when the
guarantee expires, and what the implication of that on the policy will be.
6.5. Each policy quotation must include statements to the effect that:
6.6.

actual benefits will depend upon the rate of actual investment return and the actual
expense charges over the lifetime of the policy.

policy benefits should be measured against the purchasing power of money when
benefits are paid, and the real return is the rate of return in excess of inflation.

investment returns are subject to tax (and an indication of the effective tax rates of
various portfolio types must be included).
Quotations for retirement annuities must include a statement that the benefits after
retirement will be taxable in terms of the Income Tax Act, as follows:

a maximum of one-third of the retirement fund may be taken in cash and the balance
must be used to purchase an annuity;

the cash lump sum is tax free within certain limits and that amounts in excess of these
limits are taxable;

the annuity is fully taxable as income;
6.7. Quotations for provident fund policies must include a statement that the benefits on retirement
will be taxable through the Income Tax Act, as follows:

the cash benefit is tax free within certain limits and that amounts in excess of these limits
are taxable as determined in terms of the Income Tax Act;
6.8. Any other relevant qualifications (e.g. that calculation bases will remain unaltered, or that cover
will remain level only if assumed bonus rates are at least maintained, etc.) must be stated.
7. REPORTING OF ACTUAL PERFORMANCE
When actual past investment performance is provided with a policy quotation, it must be presented
in a responsible manner:

All information must be accurate and must be provided in the correct context, and the office
must be able to substantiate all claims.

A statement must be included that past performance cannot be extrapolated into the future and
is not always an indication of future performance.

The extent to which the investment returns allow for tax and expenses must be described. If
gross investment returns are provided, it must be clearly stated that the returns are before any
deduction of expenses and tax.

Past performance figures should never be presented in such a way that intermediaries would be
inclined to use them as projected performance figures for the future.
8. PREMIUM REVIEWS OF RISK POLICIES
This section relates to policies providing risk benefits, where the premiums are guaranteed for a
limited term shorter than the full policy term. Please refer to annexure III for suggested wording for
the disclosures.
Affected products are those that cover life risk only, for example death, disability and critical illness.
The following two product structures need to be considered:

Products where premiums are priced lower than would be required to maintain a given level of
cover for the whole duration of the contract, and where the premiums are expected to increase
during the term of the contract.

Products priced to last for the whole contract but where premiums are only guaranteed for a
limited period.
The two structures are related in the sense that both give rise to the risk that policyholder
expectations may not be met if premiums increase during the term of the contract. The difference is
that in the former there is a clear intention to increase premiums beyond the pricing term, whereas in
the latter, the office only reserves the right to increase premiums should expected experience at the
time prove this to be necessary. Both situations require adequate disclosure at the time of sale, but in
the first case, disclosure should be focused on the likely future level of increases and in the second
case on what reviewability means, and under what circumstances premiums could increase.
8.1. Product priced for less than the full term
The office must disclose the expected impact of the planned premium increase during the term of the
contract. This must allow for the ageing of the policyholder, the value of the reserves, the actual
method of review to be applied, and any other factor that will be relevant at the future point. If the
premiums are only guaranteed for a certain term, then the disclosures raised in 8.2 must also be
covered.
8.2. Products priced for the full term, but with a limited guarantee period

These products are priced for the full term of the policy, which may be whole of life, and the
intention is that the premium will not increase (except for scheduled increases1) unless the
expected experience on the whole book, or a specific sub set of business worsens. It should be
noted that premiums could also decrease if experience is particularly favourable.
Section 8.2 covers situations where the product is priced for the full term, and premiums are not
expected to increase unless there is a “significant” worsening in the assumptions underlying the
pricing. This is in contrast to Section 8.1 which covers situations where the premiums are expected to
increase during the term of the contract. However, there is also a “grey” area of products which are
priced for the term, that is, they should be covered by Section 8.2, but due to aggressive assumptions
used in the pricing, it is likely that the premium will increase at the end of the term. The statutory
actuary must, in these instances, make it clear that it is likely that the premiums will increase and the
expected level of increase should be illustrated.
1
Scheduled increase could have the following forms, for example:
 premiums increase every year by CPI, sum insured stays the same,

premiums increase every year by 5%, sum insured stays the same,

premiums increase every year by 5%, sum insured increases every year by 3%,

premiums increase every year based on the policyholder’s age each year and the increases are predetermined and can be
shown to the policyholder.
9.
ABRIDGED REQUIREMENTS FOR PROMOTIONAL MATERIAL
Where advertisements and promotional material provide projected values of a general nature, which do
not provide information sufficiently specific to be considered a policy quotation for concluding a sale, all
the conditions in this Code need not be observed. Specifically, it must comply with the conditions as
outlined in paragraphs 2, 3, 4, 5 and 7.
10. MONITORING OF THE CODE
1.1. Standing Committee on Products (SCOP) is responsible for maintaining this Code, and the
Board of Directors may amend the projection rates in paragraph 5.2, upon the recommendation of
SCOP.
1.2. Matters relating to the interpretation of the Code will be decided upon by SCOP, who will issue
interpretative notes as required. Where SCOP is unable to agree on an interpretation, the matter
shall be referred to the Board, whose decision shall be final and binding.
1.3. At the request of SCOP the Board may instruct all member offices to provide to SCOP the
calculation basis and sample calculations of the early termination charges (as set out in section 4),
RIY (as set out in section 5) and sample calculations of premium reviews (as set out in section 8)
for specific policies, to ensure that all offices interpret and apply the requirements consistently.
1.4. Formal complaints of non-compliance with this Code by a member office will be dealt with under the
LOA Disciplinary Provisions as adopted by the Board of Directors.
11. ANNUAL CERTIFICATE
The Statutory Actuary of every member office shall submit an annual certificate to the LOA 14 (fourteen)
days prior to the annual general meeting of the LOA containing a written and signed statement that the
Statutory Actuary is satisfied that the calculation basis for the early termination charge, RIY and the
calculation basis of the projected premiums conform to the requirements of the Code.
ANNEXURE I
LAYOUT AND WORDING
It is recommended that projected early termination charges be provided in a table as follows:
Term/Date
Early termination charge as a
% of the fund / Rand amount
1
2
3
4
The RIY disclosures should be presented as follows, immediately below the expense disclosures.
Effect of expenses
The reduction in yield (RIY) shows the extent to which the return on the assets will be eroded due to
expenses charged against the policy.
Assumed gross return
Reduction in Yield
Return after expenses
10%
4.1%
5.9%
The gross investment return assumed in the table above is not guaranteed, but merely used to illustrate
the impact of expenses. The actual investment return earned on premiums paid in, will depend on the
gross investment return earned on the assets and the extent to which this return is reduced by taxation
and expenses.
Note on performance fee
The above RIY figure includes a performance fee levied on the underlying funds. This amount assumes
that the fund return is the same as that of its benchmark, as disclosed……. The actual performance fee
could be higher or lower depending on the performance of the underlying fund, ranging from X% 2 to a
maximum of Y%2.
Effect of inflation
The gross investment return will depend on financial market conditions and the rate of inflation during
the policy term. Inflation has a major impact on investment returns, and in general higher inflation leads
2
X% and Y% will differ by fund. The minimum and maximum performance fee of each fund should be substituted for X% and Y% in this note.
If the fund has no maximum performance fee, then the note should state clearly that the performance fee for that fund is “UNCAPPED“.
to higher investment returns and lower inflation leads to lower investment returns. Real rates of return
(the excess of the investment return over the inflation rate) give a more meaningful indication of how the
investment has performed.
Effect of taxation
Depending on the type of policy, insurance companies pay different rates of tax on investment returns.
The effective tax rates may also differ between insurance companies, based on their level of expenses.
Typically, the effective rate of tax (on income and capital gains) on the gross investment returns will be
about 7% for equity funds, 14% for balanced funds and 30% for money market funds.
(In the case of retirement annuity and preservation fund policies, the above percentages change to 0%,
3% and 9%).
ANNEXURE II
OPTIONAL ATTACHMENT TO THE QUOTE
The following can be attached to the quotation, not as part of the quotation but as an information sheet
to assist with financial planning. It is mainly aimed at intermediaries who do not use an electronic needs
analysis package and require a paper-based tool to use in the needs analysis process. The Annexure must
be included as is, i.e. it is a standard attachment that will be identical for all life offices.
ILLUSTRATION OF THE EFFECT OF COMPOUND INTEREST
Term
5
6
7
8
9
10
15
20
25
Projected value of R100 per month, at various growth rates
2%
4%
6%
8%
10%
R 6,300
R 6,600
R7,000
R7,300
R7,700
R 7,700
R 8,100
R8,600
R9,200
R9,800
R 9,000
R 9,700
R10,400
R11,200
R12,000
R 10,400
R 11,300
R12,300
R13,300
R14,500
R 11,800
R 13,000
R14,200
R15,600
R17,200
R 13,300
R 14,700
R16,300
R18,100
R20,100
R 21,000
R 24,500
R28,800
R34,000
R40,200
R 29,500
R 36,500
R45,600
R57,300
R72,400
R 38,900
R 51,100
R68,000
R91,500
R124,300
ILLUSTRATION OF THE EFFECT OF PREMIUM INCREASES
Term
5
10
15
20
25
Projected value of R100
Projected value of R100 p.m. increasing
p.m.
annually at 5%
Monthly
6% Growth
Monthly premium
6% Growth rate
premium
rate
R100
R7 000
R122
R7 700
R100
R16 300
R155
R20 100
R100
R28 800
R198
R39 300
R100
R45 600
R253
R68 600
R100
R68 000
R323
R112 200
Please note the following:
The tables above are standard tables that bear no relation to the actual quotation to which it is attached.
They serve merely as an illustration of compound interest for financial planning purposes and do not
take into account the details of the actual product that will be invested in.
The growth rates in tables serve as an illustration only and are not guaranteed. The actual growth rates
will depend on the gross investment return earned on the assets and the extent to which this return is
reduced by taxation and expenses. The actual growth rates can be negative, depending on the type of
portfolio the assets are invested in.
ANNEXURE III
EXAMPLE WORDING FOR DISCLOSURE OF PREMIUM REVIEWS
Product priced for a specified term
Your premium for the next <ten> years is guaranteed to be <Rx> per month. Should
you choose to extend your policy by another <ten> years, your new premium will
increase. Although the actual premium will only be determined at that time, it is
projected to be at least <Ry> per month.
Products priced for the full term, but with a limited guarantee period
Your premiums are reviewable. This means that the assumptions we have used to
calculate your premium have been adopted to cover the whole period of the policy but
will be reviewed as set out below. We will not change your premium before the <fifth>
anniversary of the policy commencement date. We will review your premium and it
may change on the <fifth and then every subsequent > anniversary of the policy
commencement date.
At a review we look at the assumptions relating to [here insert the relevant assumptions
that may be reviewed3]. In reviewing our assumptions we will analyse <our claims
experience for similar policies, industry claims experience and the impact of future
medical advances and practices>. We will compare the assumptions that are applicable
at the time of the review with those that were previously used and, by reference to that
comparison, use a fair and reasonable method of calculating any change in your
premium. Your premium may therefore increase or decrease at each review as a result of
the revised assumptions. However, if the premium resulting from a review is within
<X%> of your existing premium then we will not change your premium as a result of
the review. There is no upper limit to the increase or decrease that may apply.
Changes in premium will not depend on your individual circumstances, for example
your health, at the time of the review.
Any change in your premium will take effect from the relevant policy anniversary
commencement date and we will tell you at least <60> days before we make any
change. If we advise you of an increase to your premium as a result of a review, then
you can choose to continue paying the previous amount and your cover will be reduced
proportionately. To do this you must tell us at least <10> days before the change
would otherwise have taken effect, and your reduced cover will apply from that date.
3
Examples of assumptions that the insurer could change for valid reasons at a review are: the insurer’s expectation of
future claims; expectation or experience of investment returns on premium income; the incidence of taxation on the insurer;
the cost of reinsurance. It is for the individual insurer to determine which assumptions that were taken into account in
fixing the initial premium will or will not be open to review and to insert them as appropriate. The list must be complete.