Life insurers lower range of projected investment returns for policies

• The Life Insurance Association (LIA) said that the new caps will be 4.25 per cent for the upper range and at least 1.25 percentage points less for the lower range
• The change is being made to better reflect what policy buyers may expect to receive going forward
• The caps were last adjusted in 2013
• “Policy benefits and premiums may be changed for new policies going forward” as life insurers may review their product offerings, said LIA

SINGAPORE — From July 1, the range of projected investment returns that can be used to illustrate the benefits of buying participating life insurance policies will be adjusted downwards to better reflect what policy buyers may expect to receive going forward.

The Life Insurance Association (LIA) in a press release on Wednesday (June 2) said that the cap for the upper investment return scenario will be set at 4.25 per cent per annum, down from the current 4.75 per cent per annum.

The cap for the lower investment return scenario, meanwhile, must be at least 1.25 percentage points lower than the upper cap. This would mean the lower cap would be 3 per cent if 4.25 per cent per annum is used in the illustration.

LIA president Khor Hock Seng said the changes were made in consideration of the sustained low interest rate environment.

“Our objective in doing so is to provide consumers a more realistic range of projected investment returns so individuals can make better informed financial decisions,” said Mr Khor, who is also the group chief executive of insurance firm Great Eastern Holdings.

LIA introduced the illustrative caps in 1994 to ensure consistency among insurers and reviews these caps every year to keep them relevant to prevailing market conditions.

They were last adjusted in 2013 owing to the low interest rate environment then as well.

The latest adjustment comes as Singapore Government Securities and US Treasuries yields experienced a sharp drop last year even as they had trended downwards over the past 15 years.

Notwithstanding the change to the caps, Mr Khor stressed that consumers must recognise that the upper and lower rates used in marketing the policies are “for illustrative purposes only”.

Changes to how they can be presented “will not affect the actual returns of existing and future participating policies”, he said.

Participating policies, also known as “par policies”, are plans that let policyholders share the profits insurers make upon investing the pooled premiums in the form of dividends.

Participating funds typically invest a significant proportion of the assets in fixed income securities for a relatively more stable return.

These policies are the most commonly bought types of plans, forming 46 per cent of the insurers’ new business in individual life and health policies in the first quarter of this year.

Non-participating policies account for 30 per cent while investment-linked policies account for the remaining 24 per cent.

As a general rule of thumb, insurers are expected to illustrate at least two scenarios to provide a reasonable potential range of the level of benefits.

The upper illustration rate should not exceed their view of the investment returns achievable over the lifetime of the participating product.

LIA added that the upper and lower illustration rates do not represent the upper and lower limits of the investment performance of an insurer’s participating fund.

It said that a participating policy’s actual returns will depend on how the fund develops over the lifetime of the policy, and actual investment returns in the future depend on the future economic conditions, actual asset class returns and asset allocation of the fund.

Therefore, eventual actual returns received by policyholders may be higher or lower than those reflected within the policy illustrations, it pointed out.

“Consumers should not need to feel pressurised to purchase new par policies before July 1 because revisions to these caps have no impact on actual returns of existing and future par policies,” LIA reiterated.

On how the new caps will affect the benefits and premiums of new policies, LIA said that some life insurers may review and redesign the features of their product offerings, so “policy benefits and premiums may be changed for new policies going forward”.

Insurance companies could not say for sure whether they would be increasing or decreasing policy premiums, or leaving them unchanged, or how they would amend policy benefits, when TODAY approached them for comment on their next steps.

AIA Singapore said that it has taken this opportunity to “refresh and streamline” its product suite to meet the evolving protection and long-term saving needs of its customers.

Great Eastern said that it is unable to share more details at this point, but added that it is likely that the new caps will have an impact on premiums for new policies across the industry.

Prudential Singapore declined to comment except to refer TODAY to the part of LIA’s statement that states that benefits and premiums may be changed for new policies.