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2017 a bumper year for insurance par fund returns


But returns this year likely to be more modest amid trade spats and rate hike expectations

 

By Genevieve Cua
[email protected]
Singapore

 

2017 has turned out to be a robust year for policyholders of traditional participating (par) policies. But they are likely to have to brace themselves for a more modest performance this year.

Wen Research’s latest compilation of the net investment returns of Singapore insurers’ life funds finds a one-year average return of 9.55 per cent. The 12- year average return (2006-2017) is 4.65 per cent.

Par policies are those where premiums are pooled together and invested collectively in a life fund, and surpluses are distributed in the form of bonuses. A smoothing mechanism is applied so that policyholders experience a stable return. That is, not all surpluses are distributed in a good year, to create a cushion for distributions in a poor year.

Benefit illustrations of par policies carry two projected rates of return – 3.25 and 4.75 per cent. The projections are net of investment expenses but before other deductions such as cost of insurance and distribution.

For the particular duration of 12 years (2006-2017), all nine insurers managed to exceed the lower projected return of 3.25 per cent. But less than half or only four firms managed to beat the higher projected rate of 4.75 per cent. The actual experience of policyholders, however, may still fall short as total deductions may eat up a significant portion of returns.

2017’s outstanding performance has lifted the industry average performance by duration. In terms of the group average, all durations captured exceeded the lower 3.25 per cent projection. As for the higher 4.75 per cent rate, five out of 12 durations (including one-year period) outperformed.

Over the 12-year period, Prudential remains the most consistent; it has the greatest number of top quartile (top 25 per cent) performance by duration. This is followed by AIA and Manulife.

Wen Research calculates the average net returns using geometric mean. It said this standardised approach removes differences in formulae that may be used by insurers for their published returns.

For the 2017 performance, policyholders have generally benefited with bonus adjustments this year. AIA, for instance, announced an upward revision of its bonus scale for 70,000 policyholders. Prudential also raised terminal bonus rates for 165,000 policies.

However, compared to the first half of 2018, the outlook for the second half is far less optimistic as trade tensions between the US and China have muddied the waters. Higher expected interest rates and tighter financial conditions also weigh on Asian markets.

Lena Teoh, Prudential Singapore chief investment officer, said the firm has moved from a positive to a neutral view on risky assets such as equities, as the upward momentum since the middle of 2016 appears to have peaked. “Over the last six months, we observed significant and divergent performances across many asset classes. Conditions could remain challenging for most markets on the back of US dollar strength, rising US interest rates and the widening of credit spreads across the board.”

She said the firm applies a strong risk management discipline to deliver consistent returns for clients. “While keeping a longer-term view of the market, we also identify short-term opportunities to bolster returns.’’

AIA chief executive Patrick Teow said the group has consistently delivered one of the strongest returns, outperforming industry averages over the last decade. “We are confident that our par fund is well-placed for sustainable, long-term growth.’’

Khoo Poh Huat, Manulife Singapore’s chief financial officer, said the firm aims to ensure “stable benefits’’ over the life of customers’ par policies, and is committed to delivering “consistent and optimal returns to our customers over the long- term’’.

Par products typically account for the largest share of over 50 per cent of new business weighted premiums. In the latest first quarter data by the Life Insurance Association, however, par products’ share slipped to 47 per cent, compared to 55 per cent in Q1 2017.

 

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Footnote:

* Source: The Business Times © Singapore Press Holdings Limited. 2017 a bumper year for insurance par fund returns, published on 19 July 2018. Permission required for reproduction.