Guidance Note for Licensed Insurers on Unit Linked Pricing

Summary

This Guidance Note from the Guernsey Financial Services Commission sets out expected standards of conduct for licensed insurers in pricing units within Life Assurance Unit Linked Funds. It describes the minimum pricing controls the Commission expects to see in place, and clarifies when pricing errors require compensation to policyholders or reporting to the Commission.

Pricing controls expected

• Actuary oversight: The Actuary must be satisfied that unit allocation, de-allocation, creation and cancellation prices are equitable, that compensation for pricing errors is equitable, and that the bid/offer pricing basis is appropriate, confirming annually that pricing procedures have been reviewed in the preceding 12 months.
• Minimum checks: Insurers must maintain reliable pricing sources, retain responsibility for pricing even where delegated to a third party, review delegate systems at least annually, reconcile records with custodian records at least monthly, confirm deals promptly, maintain cut-off procedures, review illiquid/unquoted stock valuations, monitor investment and borrowing power breaches, account for dividends and expenses appropriately, review dealing expenses at least quarterly, set investigation limits for key valuation elements, reconcile cash at every valuation point, and send valuation copies to external investment advisers/managers at least monthly.
• Demonstrating compliance: Licensed insurers must be able to demonstrate compliance with these minimum control requirements; persistent errors favouring the insurer make this harder to demonstrate and may require compensation.

Handling pricing errors

• Below 0.5% error: Compensation is not normally required for pricing errors of less than 0.5% of the unit price.
• 0.5% or more error: Compensation to policyholders is required unless exceptionally inappropriate; creation/cancellation transactions at incorrect prices are normally corrected with money paid into or out of the fund.
• De minimis payment threshold: Individual compensation sums under 10 pounds (or currency equivalent) need not normally be paid, though insurers may pay smaller amounts if they wish.
• Reporting duty: All pricing errors of 0.5% or more must be reported to the Commission, recorded in a register available to the Commission on request, and summarised annually alongside the annual return.

Key obligations

• Ensure the Actuary confirms annually, as part of the annual report, that unit pricing procedures have been reviewed during the preceding 12 months
• Carry out the minimum pricing checks set out in section 2, including maintaining reliable pricing sources, reconciling records with custodian records at least monthly, reviewing delegate pricing systems at least annually, and setting investigation limits for key valuation elements
• Report all instances of incorrect pricing amounting to 0.5% or more of the unit price to the Commission as and when they occur
• Maintain a register of all pricing errors of 0.5% or more and make it available to the Commission on request
• Submit a summary of pricing errors greater than 0.5% to the Commission annually together with the annual return
• Compensate policyholders for pricing errors of 0.5% or more of the unit price unless compensation is exceptionally inappropriate
• Be able to demonstrate compliance with the minimum control requirements set out in the Guidance Note

Applies to

licensed insurers

Deadlines

• annually, with the annual return: A summary of pricing errors greater than 0.5% of the unit price must be submitted to the Commission annually together with the annual return
• as and when they occur: Pricing errors greater than 0.5% must be reported to the Commission as they occur
• at least monthly: Insurer records, including debtors and creditors, must be agreed with the Custodian's records at least monthly
• at least annually: Outputs from a delegated pricing system should be reviewed at least annually and on any significant system change
• at least quarterly: Justification for dealing expenses and commissions in the price should be reviewed at least quarterly for each market