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Life Assurance
Sunday, January 1, 1989
Ensuring order

In the life assurance industry competition is fierce and every possible advantage is exploited to the fullest. A few years ago competition largely centred around the projected values of future policy benefits hut some intermediaries began quoting projected values on wildly optimistic assumptions. Policies were judged and compared on the values rather than on the actual performance of the companies.
Too much emphasis was placed on these values which were not consistent and could easily he misinterpreted.
Members of the Life Offices’ Association (LOA) were concerned about this situation as it conflicted with the assurance industry’s projected image of providing sound financial advice. Authorities felt that the practice was not in the interests of the public and began contemplating legislation.
To avoid more onerous and less flexible legislation, members of the LOA entered into a voluntary agreement on July 1 1983 called the Benefit Illustrations Agreement (BIA).
The main purpose of this, which has been amended on numerous occasions, was to ensure that all prospective policyholders and clients were given adequate and honest information regarding the kind of policies they were effecting. It also ensured that the basis of projected values were assumptions that had reasonable expectations of being fulfilled. This prevented life offices and intermediaries from using extremely optimistic assumptions when calculating projected values of future benefits.
The BIA specified the manner in which projected values may be calculated. The basis in the 1983 agreement was related to actual performance or bonus rates of the office and the actual expense structure of the policy. For a time this worked well and took the heat out of competition and deterred the temptation to rig figures.
But life offices found various ways of increasing projected values within the constraints of the agreement.
The result was that projected values gave the impression of being a fact rather than a quote, and were used to compare policies from different companies.
In March 1988, the BIA was redrafted. In terms of the new agreement. ‘‘projected value” has been replaced by ‘‘benefit illustration’’, more aptly implying an idea of the possible range of benefits gained from a policy, without being a spec i tic inferred promise.
It was agreed that life offices use a standard way of calculating possible policy benefits. The illustrative value is now calculated on Iwo alternative rates of growth - 12% and 15% per annum.
The intention of the new BIA is for offices to compete on the grounds of past performance, levels of service and other matters that clients should consider important. The standard figure, in respect of future values, encourages the client to focus on actual historical pay-outs when he weighs up the relative merits of different companies’ policies. The code of the BIA stipulates that cautionary statements be included in policies to the effect that illustrative values are just that, merely illustrations and not guaranteed values.
Even so, this does not curb some of the more exuberant sales ploys adopted by some intermediaries. The client is wrongly led to believe that the illustrative values are guaranteed. It is not made sufficiently clear that benefits eventually paid out depend on results actually achieved. Obviously they could be worse than those illustrated.
It is difficult to say whether the new agreement will be successful. For as Theo Hartwig, chief actuary of Old Mutual says, “Life offices are still finding clever ways of increasing the benefit illustrations and therefore perpetuating the habit of basing inter-office comparisons on projected values.”

Copyright © Insurance Times and Investments® Vol:2.1 1st January, 1989
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