Unit-linked insurance policies: projected return capped at 8 percent

The Securities and Exchange Commission of Pakistan (SECP) has capped the maximum return to eight percent for the insurance companies effective from February 1, 2004 to curb the tendency of these companies offering unrealistic rates to boost their sales of units-linked policies.
"While publicising their unit-linked policies, the insurance companies, in order to attract their prospective policy-holders, have been projecting expected rates of return as high as 14 percent", said the release of SEC issued on Thursday.
These rates are not sustainable in the present scenario because of falling yields on corporate and government bonds where these insurance companies invest the funds so collected.
To check this practice and bring uniformity and make projections more realistic, the SEC has capped the maximum illustrative return for all-marketing illustrations (or publicity material) at eight percent with effect from February 1, 2004.
The SEC will, from time to time, based on the movement in interest rates and other investment options, review the projected/illustrative return.
The SEC after reviewing the publicity material of the insurance companies issuing units-linked policies felt the need for using an appropriate rate of growth instead of the growth rates used by them in their publicity materials and illustrations.
The units-linked life insurance policy, a new concept in Pakistan, was introduced first time by the private life insurance companies after 1992. The distinguishing feature of a units-linked policy is that the maturity benefits under the policy are determined by the number of units credited to the policy-holder and the price of the units at the date of payment.
The life insurance companies, in their illustrations for the prospective policy-holders, project different rates with which the price of unit would grow based on the investment performance of the fund.
Although the companies indicate that the illustrations do not represent a guarantee regarding the future returns, the prospective policy-holders may not be equipped enough to understand this aspect.