New Sustainability Act and Its Impact on Initial Insurance Premiums


      The recent legislative changes have introduced a new requirement for insurance policies to be sustainable, mandating the provision of sustainability reports to policyholders. While this act aims to protect policyholders by ensuring long-term stability and coverage, it also contributes to the rising costs of insurance premiums. Let's delve into the details of this act and its implications on both insurers and insured individuals.

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Understanding the New Sustainability Act


**Mandating Sustainability Reports**:

- **Transparency and Accountability**: The new act requires insurers to provide detailed sustainability reports to policyholders. These reports must outline how the policy is designed to remain viable and sustainable over the long term, particularly up to age 99.

- **Long-Term Protection**: By mandating sustainability, the act aims to ensure that policyholders are covered well into their later years, reducing the risk of policies lapsing or becoming underfunded.


**Impact on Premiums**:

- **Increased Costs**: Ensuring that policies are sustainable for such an extended period inevitably leads to higher premiums. Insurers must account for the increased financial risk and longer coverage duration, which translates into higher costs for policyholders.

- **Age 99 Coverage**: The requirement for policies to be sustainable up to age 99 means that premiums need to cover the potential for increased healthcare needs and other expenses associated with aging, further driving up the cost. 99 is just a number pluck from the sky, it could be 70, 80, 90, 100.


 The Role of Investment-Linked Insurance


**Investment-Linked Policies**:

- **Premium Allocation**: In investment-linked insurance policies, a portion of the premium is allocated towards insurance charges, while the remainder is invested in various funds. The insured benefits from potential investment growth, but there are associated risks and costs.

- **Higher Premiums**: Due to the sustainability requirements, the proportion of premiums allocated to insurance charges reduces. This leaves a bigger portion available for investment, yet commision structure remain at the same level for insurance charges and investment premium, potentially diminishing the overall growth of the policyholder's account.

Policy owner need to know that there are other form of insurance such as traditional life insurance, endowment, term coverage, pure personal accident insurance, pure critical illness insurance, etc. aim to address different needs of policy owner, as insurance undeniably a crutial part in financial planning.


Commission and Fees


**Unfair Commission Structures**:

- **Disparity in Charges**: A significant concern with investment-linked policies is the commission structure for insurance agents. Currently, commissions are often charged at the same level for both insurance charges and the invested premium. This is not equitable because the nature and purpose of these charges are different.

- **Higher Insurance Charges**: Commissions on the insurance charges can be quite high, often ranging from 30% to 40%, depending on the term and type of insurance. This is because insurance coverage involves ongoing risk management and support.

- **Investment Premium Charges**: For the investment portion of the premium, the commission should be lower, ideally up to 5%, which aligns with industry standards for mutual funds and similar investment products.


**Policyholder Impact**:

- **Inequitable Costs**: When the same commission rate is applied to both the insurance charges and the investment portion, policyholders end up paying disproportionately high fees. This reduces the amount allocated to their investment accounts and diminishes the overall value of their policies.

Separate Commission Structures: To address this disparity, commissions should have separate structures. For example, if 30% of the premium goes towards insurance charges, only this portion should be subject to the higher commission rate. The remaining 70%, allocated for investment, should have a lower commission rate, capped at around 5%.


Governing the Commission Structure


**BNM's Role in Regulation**:

- **Appropriate Insurance Charges**: Bank Negara Malaysia (BNM) should govern the commission structure by ensuring that appropriate amounts are charged for insurance coverage. This would involve limiting the charges to the premiums allocated for investment.

- **Preventing High Commission Products**: By regulating the commission structure, BNM can help prevent agents from upselling investment-linked insurance as a high-commission product. This practice can lead to policyholders paying more than necessary, reducing the overall value of their policies. There are dedicated investment product with much lower charges on investment. For sustainability prupose, policy holder should opt for such dedicated investment product.

https://kxlog.blogspot.com/2024/07/dedicated-investment-product-with-much.html

**Agent Training and Ethical Selling**:

- **Sufficient Training**: Insurance agents typically undergo extensive training and possess the knowledge to plan effectively for their customers. However, there is still a risk of unethical behavior where agents may upsell policies for higher commissions.

- **Unethical Practices**: Unscrupulous agents might prioritize their commissions over the best interests of their clients. This can lead to policyholders being sold more expensive products with higher fees, rather than those that best meet their needs.

- **Financial Literacy**: The financial literacy level in Malaysia is still developing. Many policyholders may not fully understand the complexities of insurance products, making them vulnerable to exploitation.


Addressing Unfair Practices


**Policyholder Protection**:

- **Regular Reviews**: Policyholders should be encouraged to regularly review their insurance policies to ensure they are getting the best value. This can help identify any unfair practices by agents.

- **Damage Control**: When policyholders discover unfair practices, they often face financial losses if they cancel their policies. This situation is unfair and highlights the need for stronger consumer protections.

- **Improving Financial Education**: Increasing financial literacy and understanding of insurance products among consumers is crucial. This can empower policyholders to make informed decisions and avoid being misled by unethical agents.


Conclusion


The introduction of the new Sustainability Act reflects a significant shift in the insurance industry, emphasizing long-term protection and transparency for policyholders. While the act aims to safeguard policyholders by ensuring that policies remain sustainable up to age 99, it also results in higher premiums and additional costs associated with investment-linked insurance policies. Regulating the commission structure and enhancing consumer education are essential steps to protect policyholders and ensure they receive fair value. Addressing these challenges is crucial to ensuring that quality healthcare remains accessible and affordable for everyone.

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