Reduction to Participating Policy Rates from 01st July 2021

All participating plans policy benefits are currently required to be illustrated under at least two investment return scenarios; an upper investment return scenario (IIRR) and a lower investment return scenario.  This is to provide clients with a reasonable potential range of the level of benefits. 

At present, for Singapore dollar denominated policies, the Life Insurance Association of Singapore (LIA) sets a cap on the upper investment internal rate of return. The lower investment internal rate of return is set to be at least 1.5% per annum lower than the upper rate.  The table below illustrates the current and new IIRR caps.

The following are answers to some possible questions clients will have about this, from AIA Singapore. 

1. What are Participating policies?

Participating policies are policies that provide both guaranteed and non-guaranteed benefits.  The premiums are invested together with other participating plans in the insurer’s participating fund.  Policyholders of participating plans get a share in the profits of the participating fund in the form of non-guaranteed returns, which are dependent on the actual experience of the participating fund.  The key factors affecting the performance of the participating fund are investment returns, mortality and morbidity experience, lapse, and surrender experience, expense risk and business risk.  These non-guaranteed benefits are provided either in the form of reversionary or terminal bonuses; or annual cash or terminal dividends. 

2. What does the illustrated investment rate of return (IIRR) in the policy illustration mean?

The policy illustration is meant to illustrate the potential level of the policy benefits – both guaranteed and non-guaranteed benefits.  One of the key factors affecting the non-guaranteed policy benefits is investment returns, which can vary from year to year.  Insurers are expected to provide clients with an illustration of policy benefits under two investment return scenarios – an upper investment return scenario, and a lower investment return scenario.  The two illustrated scenarios are meant to provide clients a reasonable potential range of the level of policy benefits. 

For each participating product, insurers determine the projected investment return for the upper IIRR scenario based on its asset mix and the expected return of each asset type.  The upper IIRR should not be higher than the insurer’s view of the investment returns achievable over the lifetime of the participating policies.  The upper IIRR should also not exceed the caps set by the Life Insurance Association of Singapore (LIA). 

Currently, for Singapore dollar-denominated policies, the cap set by LIA for the IIRR is 4.75% p.a.  The lower IIRR is to be at least 1.5% p.a. lower, meaning the resulting cap for the lower IIRR is 3.25% p.a.  These rates have been applied since the 01^st July 2013.  With effect from 01^st July 2021, the caps on the upper IRR will be revised to 4.25% p.a., and the lower IIRR is to be at least 1.25% p.a. lower, meaning capped at 3.00% p.a. going forward.  This change will apply to new Singapore dollar-denominated participating policies applications submitted to all insurers from 01^st July 2021 onwards. 

The IIRRs used are purely for illustrative purposes in the policy illustration.  They are not a reflection of the actual returns of both existing and future participating policies.  The actual returns received from a participating policy will depend on the actual experience, including investment performance, of the participating fund that will develop over the lifetime of the participating policy.  Actual investment returns in the future will depend on future economic conditions, actual asset class returns, and asset allocation of the participating fund.  Eventual actual returns received by policyholders may be higher or lower than those reflected in the policy illustration.  These caps on the upper and lower IIRR are reviewed by LIA Singapore on an annual basis to ensure their ongoing relevance and appropriateness. 

3. Do the upper and lower IIRRs represent the upper and lower limits of the investment performance of the insurer’s participating fund?

No.  The upper and lower IIRR are used purely for illustrative purposes only, and do not represent the upper and lower limits of the investment performance of the insurer’s participating fund. 

4. Does the upper and lower IIRRs refer to the maximum or minimum return or yield on the participating policy?

The rates used in the policy illustration are not a reflection of the actual returns of both existing and future participating policies.  The actual returns received from a participating policy will depend on the actual experience, including investment performance, of the participating fund that will develop over the lifetime of the Participating policy.  Actual investment returns in the future will depend on the future economic conditions, actual asset class returns, and asset allocation of the participating fund.  Eventual actual returns received by policyholders may be higher or lower than those reflected within the policy illustration. 

5. How will this change impact existing participating policies?  If so, will there be any bonus reductions?

There will be no impact to existing participating policies which were purchased prior to 01^st July 2021.  AIA shall be maintaining the bonus scale for all current inforce policies this year.  clients will be notified in June or July as part of the annual participating fund update.  The process for inforce bonus declaration follows the usual process, and is not affected by the industry’s change in cap for illustration.  More information from the “Your Participating Fund Update for 2020” brochure will be uploaded on the AIA website on the 08^th June 2021. 

The rates used for the policy illustration are purely for illustrative purposes only and will not affect the actual returns, and thus bonuses, of existing and future participating policies.  The actual returns received from a participating policy will depend on the actual experience, including investment performance, of the participating fund that will develop over the lifetime of the participating policy.  Actual investment returns in the future depends on the future economic conditions, actual asset class returns and allocation of the participating fund.  Eventual actual returns received by policyholders may be higher or lower than those reflected within the policy illustration. 

AIA Singapore is committed to managing the long-term performance of its participating fund for policyholders.  It is also focused on ensuring the security and solvency of the participating fund, and seek to maximise returns on the participating fund’s investments to provide stable benefits to our policyholders. 

6. Are Participating plans still an attractive insurance product solution for clients?

Participating plans continue to be a suitable product solution for clients who want a plan that provides stable returns, including some form of guaranteed cash value coupled with the potential for upside through its non-guaranteed bonuses or cash dividends. 

Participating plans provide both guaranteed and non-guaranteed benefits.  They allow policyholders to share in the profits of the participating fund which come in the form of bonuses or cash dividends.  These bonuses and cash dividends are non-guaranteed and depends on the actual experience of the participating fund. 

Participating funds typically invest a significant proportion of their funds in more stable assets such as fixed income securities, and relatively smaller proportion in risk assets to provide upside, such as equities which are typically more volatile although they have higher potential for higher return.  If the current low interest rate environment continues, the yield on fixed income securities is low, and as a result, longer term participating fund returns are expected to be affected.  Other investment instruments providing clients stable returns would likely also be similarly affected by low interest rates.  For instance, bank deposit rates are mostly under 1% p.a. currently.  As such, participating policies still compare favourably with products with similar objectives and similar level of stability. 

For higher potential returns, clients with higher risk appetite may consider investing in higher risk financial instruments, for example consider investment-linked policies, which have funds investing in more equities.  A detailed risk assessment and profiling is important for determining suitable investment approaches to appropriately meet the risk tolerance or investment objective of clients. 

7. When will the new Singapore dollar-denominated participating plans be launched?

New Singapore dollar-denominated participating plans which will be launched on, or after 01^st July 2021, which will comply with the revised LIA guidelines on IIRR caps.

The following are answers to some possible questions clients will have about this, from LIA Singapore. 

1. Why have the caps on the illustrative investment returns in the policy illustration of participating policies been revised downwards?The downward revision to the caps on the illustrative investment returns in the policy illustration for participating policies is primarily in consideration of the sustained low interest rate environment.  The (LIA Singapore’s objective for this downward revision is to provide consumers with a more realistic range of projected investment returns for individuals to make better informed financial decisions. 

Life insurers are expected to illustrate at least two scenarios; an upper investment return scenario and a lower investment return scenario to provide a reasonable potential range of the level of benefits.  For each participating product, the life insurer is to determine the upper illustration rate to be used in the policy illustration based on its asset mix and the expected return of each asset type.  Life insurers’ illustration rates should not be higher than the insurer’s view of the investment returns achievable over the lifetime of the participating policies. 

2. How are the caps on illustrative investment returns used in the policy illustration determined?

The caps on the illustrative investment returns are reviewed by the LIA Singapore annually to ensure ongoing relevance and appropriateness, considering recent and potential future economic market dynamics.  The caps are determined after considering views of the Association’s member companies on a number of factors including the typical asset class mix that participating funds invest in, such as equities, bonds and property, in the industry and the projected long-term returns on each asset class.  These long-term return assumptions are determined taking into account historical asset class performance as well as global economic outlook.  Both the upper and the lower illustration rate are purely for illustrative purposes and do not represent upper and lower limits of the investment performance of an insurer’s participating fund. 

3. When was the last revision to the caps on illustrative investment returns used in the policy illustration?The last revision of caps on illustrative investment returns used in the policy illustration was in 2013 where the cap was reduced from 5.25% p.a. to 4.75% p.a. for the upper illustration rate.  The lower illustration rate was set to be at least 1.5% p.a. lower than the upper illustration rate. 

4. How frequent will the caps on the illustrative investment returns used in the policy illustration be reviewed and revised?

The Association reviews these caps annually to ensure its ongoing relevance and appropriateness, considering recent and potential future economic market dynamics.  The annual review factors in any changes to the long-term outlook of economic markets, to determine if the caps still reflect a realistic range of projected investment returns going forward for individuals to make better informed financial decisions.  LIA Singapore will revise the caps when the realistic range of projected investment returns have shifted materially.  Such reviews have been conducted annually since the last change in 2013. 

5. Are the revised caps standardised across the life insurance industry?

Yes, all companies across the life insurance industry are required to comply with the caps, meaning they must not illustrate above the revised caps for all Singapore dollar-denominated participating policy applications submitted to the company from 01^st July 2021 onwards.  Life insurers are still able to illustrate at various illustrative investment returns that are below the caps.  In particular, the life insurers’ upper illustration rate should not be higher than the life insurer’s view of the investment returns achievable over the lifetime of the participating product, if this is lower than the cap set by the Association. 

6. Are existing participating policies affected?  If so, will there be any bonus reductions?

The caps are applicable to the illustrations for all new Singapore dollar-denominated participating policy applications submitted to the company from 01^st July 2021 onwards.  The rates used for the policy illustration are for illustrative purposes only and will not affect the actual returns, and thus bonuses, of existing and future participating policies.  The actual returns received from a participating policy will depend on the actual experience, including investment performance, of the participating fund that will develop over the lifetime of the participating policy. 

Actual investment returns in the future depends on the future economic conditions, actual asset class returns and allocation of the participating fund.  Eventual actual returns received by policyholders may be higher or lower than those reflected within the policy illustration.  Life insurers will still follow their existing processes to review the performance of the participating fund in order to determine the bonuses they would declare for the year on existing policies. 

7. Does this indicate that the future investment returns will be lower?

The Association revised the caps on illustrative investment returns downwards taking into account the current low interest rate environment.  The objective of this downward revision is to provide consumers with a more realistic range of projected investment returns for individuals to make better informed financial decisions.  However, it should be noted that the rates used for the policy illustration are for illustrative purposes only and will not affect the actual returns, and thus bonuses, of existing and future participation policies.  The actual returns received from a participating policy will depend on the actual experience, including investment performance, of the participating fund that will develop over the lifetime of the participating policy. 

Actual investment returns in the future depends on the future economic conditions, actual asset class returns and allocation of the participating fund.  Eventual actual returns received by policyholders may be higher or lower than those reflected within the policy illustration. 

8. What are the factors contributing to the eventual returns on participating policies?

Actual participating fund performance depends on many factors, such as claims, surrender, expense experience, business risk, with investment performance being one of the key factors.  The actual returns received from a Par policy will depend on the actual experience of the participating fund that will develop over the lifetime of the participating policy.  In particular, actual investment returns in the future will depend on the future economic conditions, actual asset class returns and asset allocation of the participating fund.  Eventual actual returns received by policyholders may be higher or lower than those reflected within the policy illustration. 

9. How does this change in caps on participating products’ policy illustration affect the benefits and premiums of new policies?

The illustrations of participating products that are currently showing illustrative investment returns above the new caps will need to be changed to illustrate at the new cap or lower, meaning illustrations for new policies for such participating products will be changed from 01^st July 2021 onwards.  It is expected that the illustrated non-guaranteed returns will be lowered in such instances. 

Some life insurers may take the opportunity to also review and re-design the product features of their product offering since they have to make changes to the policy illustration, and accordingly policy benefits and premiums may be changed for new products going forward. 

10. What are the considerations for me if I were to explore purchasing participating policies after 01^st July 2021?

We strongly encourage individuals to engage with your financial adviser representative to decide on policies that are aligned with your personal needs and risk profile.  Caps on the illustrative investment returns in the policy illustration have been revised downwards in view of the current low interest rate environment.  This will provide consumers a more realistic range of projected returns for individuals to make better informed financial decisions.  The upper illustration rate and lower illustration rate shown in policy illustrations are used purely for illustrative purposes and do not represent upper and lower limits of the investment performance of an insurer’s participating fund. 

Additionally, these rates are not a reflection of the actual returns of both existing and future participating policies.  The actual returns received from a participating policy will depend on the actual experience, including investment performance, of the participating fund that will develop over the lifetime of the participating policy.  As such, it does not mean that the eventual actual return for a participating policy purchased before 01^st July 2021 will necessarily be higher than that for a participating policy purchased from 01^st July 2021 onwards.  Actual investment returns in the future will depend on the future economic conditions, actual asset class returns and asset allocation of the participating fund.  Eventual actual returns received by policyholders may be higher or lower than those reflected within the policy illustration. 

11. Is MAS aware or has it endorsed the changes in caps on illustrated investment returns in the policy illustration by LIA Singapore?

The life insurance industry, through the LIA Singapore, sets and reviews the caps on illustrative investment returns used in the policy illustration.  MAS has been informed of the downward revision to the caps on the upper illustration rate and lower illustration rate in the policy illustration.  LIA Singapore’s priority is to provide consumers a more realistic range of projected investment returns for individuals to make better informed financial decisions.