Thursday, April 9, 2009

Participating Policies in Economic Recession

MAS has stipulated in March 08 that insurers have to make known the performance of their par funds for the last three years in the benefits illustration. The investment expense ratio and asset allocation of these par funds shall also be indicated in it. I'd posted some info about Par Fund in my previous blog link below:

Just to summarise. The money from these par funds normally comes from par policies which are typically sold as Whole Life or Endowment Plans. The premiums from these policyholders are then pooled and invested collectively in a diversified portfolio, which can include government and corporate bonds, equities, fixed income, properties and other assets.

Policyholders will then beneft through a combination of guaranteed and non-guaranteed bonuses, which provide them with medium to long-term returns. Bonuses are usually determined on an annual basis and are an additional to the guaranteed benefits.

From the media release by LIA on 26th March, we can expect several insurers to revise their bonuses for 2008 due to the poor investment climate. This revision will affect the non-guaranteed benefits in the Benefit Illustrations as projected in your policy document.

From the past 2 weeks, I know that NTUC Income and TM Asia Life are not cutting their bonuses and HSBC Life will be. In the latest Benefit Illustrations I seen from NTUC Income, they declared their Life Participating Fund performance to be -11.1%. It seems quite commendable considering that global equities dropped as much as 40% and bonds ~10% in 2008.

As far as possible, Insurers will certainly be reluctant to cut bonuses and try apply smoothing of Returns to ensure that they are able to maintain bonuses in good and bad times. However, in my opinion, those insurers whose par funds did not perform during the economic boom shall have a higher chance of bonus reduction in 2008 because they probably have lesser profits held back in reserve during good times from 2004 to 2007.
The insurers who did not perform well are AIA, Aviva, UOB Life and HSBC Life. HSBC Life is the first one to cut bonuses. Who shall we see next?

3 comments:

Anonymous said...

Adrian,

NTUC Income has already cut their annual bonus last year by delaying the bulk of their bonuses declarations as terminal bonuses. So actually only TM Asia Life truely had not cut their bonus.

Anonymous said...
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dsea said...

AIA had been cutting their RBs since abt 5-6 years ago. Never hit their illustration of 1% ever....