New but Hardly Improved: ILAS Policies Are Still Toxic after Indemnity Commissions Have Been Banned

Pulsar II - Brochure Cover

The cover of the principal brochure of AXA’s new Pulsar II Investment Insurance Plan.

Last year, the Office of the Commissioner of Insurance (OCI) banned insurance companies from paying indemnified commissions to their sales force. The new regulations went into effect on January 1st, 2015, a little more than a week ago.

Many people, including myself, had speculated that this would result in insurance companies eliminating their massive, upfront charges, as these charges existed primarily to secretly pay massive indemnified commissions (often equivalent to more than one year of a policyholder’s savings).

The Securities and Futures Commission (SFC) authorizes all new ILAS products, and it publishes many of the principal brochures on its website. As of today (Jan. 9), four brochures of newly authorized ILAS policies have been published. Three of them are single premium policies, and, of special interest, is one regular premium policy: AXA’s Pulsar II Investment Insurance Plan.

A pulsar is the remains of a dead star that has exploded after gravitational collapse. AXA chose a good name for its policy, because the policy will surely collapse on most of the investors who are conned into buying it.

Pulsar

The Vela Pulsar. Source: NASA website.

The Pulsar II has a 10 to 12 year lock-in. If the victim tries to exit beforehand, he or she will be subjected to a penalty of up to 65%. In other words, the victim is guaranteed to have a large negative return on investment for many years.

Pulsar II - 65 Percent Exit Penalty

Since 93% of ILAS policyholders are estimated to exit early, most Pulsar II policyholders are likely to lose money, probably lots of money.

This sounds awful. However, it is admittedly a small improvement over AXA’s Pulsar I, which had a lock-in of up to 30 years and an exit penalty of up to 100%.

Both Pulsars are radioactive, but the new one is less so.

The Fees Are Larger than the Life Protection

The Pulsar II’s death benefit is an extra 5% of the account value. However, the annual fees are as follows:

  • Account Maintenance Fee: 5.5% deducted from initial units
  • Administration Charge: $600 HKD per year deducted from initial or accumulation units
  • Account Service Fee: 1% deducted from initial and accumulation units
  • Insurance Charge: A complicated formula which is to hard to summarize
  • Early Encashment Charge: A complicated formula, but can be as high as 65% of initial units
  • Underlying Fund Active Management Fees: ~1 to 2%, but can be less or more.

When OCI banned indemnity commissions, it also issued the following statements and regulations:

OCI Comments on Fair Treatment of CustomersAnyone can conclude after just a quick glance at the fees and insurance content of AXA’s Pulsar II that the product does not come close to being in compliance with OCI’s new requirements. The 5.5% Account Maintenance Fee is by itself larger than the amount of life protection that Pulsar II offers.

This raises an important question: Why did SFC authorize a product that is not compliant with present regulations?

I think AXA should be held accountable for violating regulations, BUT SO SHOULD SFC FOR LETTING AXA DO IT!

AXA’s Pulsar II Should Not Exist

According to regulations issued by HKMA, HKFI, and OCI, insurance intermediaries are not allowed to sell ILAS policies to clients who have no insurance needs.

Before an ILAS policy is recommended, it must be documented that a client has BOTH investment and insurance needs. Here is the statement issued by OCI last July:

OCI - Do Not sell ILAS to Clients without Insurance Needs

The life protection offered by AXA’s Pulsar II is only 5% of the account value, which is less than the annual fees. Mathematically, there is arguably no life protection, since the fees cancel it out.

Consequently, Pulsar II should never be recommended to anyone with insurance needs, as it will not be suitable to meet those needs.

However, Pulsar II is not suitable for anyone with pure investment needs, as regulations forbid that it be sold to anyone with pure investment needs.

To summarize, Pulsar II shouldn’t be sold for pure insurance purpose, for pure investment purposes, or for combined insurance and investment purposes.

Simple logic shows that Pulsar II is not suitable for anyone, and it should therefore not exist. It should not have been authorized by the SFC.

I am Filing a Complaint Against the SFC with the Office of the Ombudsman

I am forwarding the above information to the Office of the Ombudsman to file a complaint against the SFC for negligence. The SFC should not be facilitating insurance companies’ regulatory violations.

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