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
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)
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
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-
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.
* 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.