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Policyholders of unit-linked life insurance products pay an agreed sum for the unit-linked insurance to the insurance company, as a regular premium, or in one lump sum. These payments cover the life insurance component as well as the investment, administrative costs, contracting fee and the commissions. The "total cost charged" ("TCC") is an indicator – calculated in line with the rules of Hungarian insurance regulations – showing all costs charged on life insurance policies having a savings element, reflected as a percentage value. The regulation of the TCC in Hungary has been amended effective 1 January 2017.
Up until now, insurance companies could charge most fees in the early years of the lifespan of an insurance policy. Therefore, an insurance company had little interest in maintaining an insurance policy, since they had already profited significantly during the first years. The latest amendment to the Hungarian insurance act sets a limit to the minimum amount which can be charged on the insurance premium, to be utilised for investment during the initial years of the policy. This percentage is a minimum 20% of the insurance premium (minus risk element) for the first year, 50% for the second, and 80% for the third year.
Due to the complexity and risks of unit-linked life insurance policies, the Hungarian National Bank ("HNB") also introduced new rules to increase the transparency of the cost elements of unit-linked life insurance, and to restore the confidence of consumers in such policies. In order to achieve this objective, the new provisions set out rules and limitations for the TCC for unit-linked life insurances, and the obligation to provide clear information to consumers regarding the related costs and risks. The HNB intends to limit the percentage of the TCC depending on the term of the insurance policy in recommendation no. 8/2016 (VI.30.), effective as of 1 January 2017 (the "Recommendation"). The general percentage of the limitation is 4.25% for insurance policies with a lifespan of 10 years, 3.95% for a 15 year policy, and 3.5% for a policy which expires after 20 years. If the insurance policy contains a complex portfolio, a higher insurance risk, equity or return guarantee, then the limitation may increase by 1.5% respectively. The Recommendation also limits the percentage of the TCC for insurance policies payed in one single sum at 3.5%. The terms and conditions of the insurance policy will contain all costs and fees that may be deducted in a quantitative way in order to avoid hidden and unpredictable costs. The costs will also be simplified and fixed without any unnecessary and confusing cost divisions.
The new rules are aimed at making unit-linked insurance products more transparent, trustworthy, and thus more popular. The result will, however, depend on the application of the new regulations in the years to come.
Co-Author: Roland Szebényi