Smoothing Of Returns On Par Policies

Despite strong returns among life insurers' participating funds in 2019, three insurers have opted to cut bonuses or dividends for some policyholders. The bonus cuts by AIA, AXA and Tokio Marine Life Insurance Singapore (TMLS) illustrate the mechanism of "smoothing'' of returns that applies to par policies. That is, bonus payouts may be maintained in a poor year, but may be cut following a year of good returns.

Most insurers achieved double-digit returns for their par funds in 2019, but were mostly negative in 2018.

Par policies share in the investment experience of the life fund. The total return for par policies comprises guaranteed and non-guaranteed components. Bonuses are part of the non-guaranteed return. But once declared, bonuses form part of a policy's guaranteed benefits.

Tokio Marine - The cuts mark a first for TMLS (formerly Asia Life) which had proudly maintained a history of no bonus cuts. Two products are affected - Asia Hi-Saver and Asia Education plan - comprising around 2,000 policies, which had "weak trends of performance''. The firm said in a statement in June that after the bonus revision, the projected annual maturity yields remain attractive in today's low-rate environment. This revision affects less than 2 per cent of our par portfolio, it is also the first time TMLS has taken to revise the bonus rate.

AIA - in its par fund update said it is revising the bonus and dividend rates for a "small block of policies'', while the majority of policies are maintained "at the same scale'' as the previous year. Overall, AIA expects to pay out S$527 million in par fund bonuses for 2020, the same level as 2019. Its net investment return for its par fund has averaged 5.4 per cent over 10 years to end-2019. AIA last bonus/dividend cut was in 2009 during the global financial crisis. In 2010 the bonus/dividend scales for most plans were partially raised. In 2018 it also increased the bonus scale for some products, and the increased scale was higher than illustrated at point of sale. This affected 4 per cent of par policyholders, but were maintained for the "vast majority'' of clients.

Life Insurance Association (LIA) - is reviewing the standard illustration rates for par policies of 3.25 and 4.75 per cent, to "ensure their relevance and appropriateness''. The review is an annual exercise, but sources believe it is increasingly warranted against the backdrop of a lower-for-longer interest rate environment. Global central banks have unleashed unprecedented monetary and fiscal stimulus in efforts to cushion the deeply recessionary impact of the Covid-19 pandemic. The crisis has deepened risk aversion among investors and spurred the pursuit of yield, driving the yields of higher quality bonds ever lower.

Capital raised for par policies is pooled together in the life fund for investment and insurers are hard pressed to find high-quality Singapore dollar fixed income assets with attractive yields to meet longer term liabilities.

LIA determines a benchmark asset portfolio for the year, taking into account the industry's average allocation into each asset class in the past year and the future market outlook. The benchmark asset return under the negative scenario forms the basis for the benefit illustration's lower assumed rate of return of 3.25 per cent, and the central scenario is used for the higher assumed return of 4.75 per cent.

Over the past few years, Income's portfolios have seen a shift from sovereign to corporate bonds, while at the same time we have also been more active in our investment strategies. The recent market volatility also brought out the importance of selecting the right active managers.''