Questions on the insurance benefit illustration investment returns revision

You may have read the announced change in Projected investment returns used in insurance quotation by the Life Insurance Association of Singapore and have some questions on your mind.

Here is the list of FAQs that LIA Singapore prepared on the matter.

LIFE INSURANCE INDUSTRY TO REVISE THE INVESTMENT RETURNS

ASSUMED FOR SALES ILLUSTRATION (W.E.F. 1 JULY 2013)

FREQUENTLY ASKED QUESTIONS

1. Why is the investment returns used in the Participating (“Par”) products' Benefit Illustration reduced?

With effect from 1 July 2013, the LIA has adopted a set of lower investment returns - 4.75% p.a. and 3.25% p.a. – for use in the Benefit Illustrations for Singapore-dollar denominated Participating (“Par”) policies. This is a reduction from the 5.25% p.a. and 3.75% p.a., which were in use before 1 July 2013.

The set of lower rates used in the illustration reflects the current low interest rate environment.

These two rates are used purely for illustrative purposes and do not represent upper and lower limits of the investment performance of the Participating (“Par”) Fund. The change in illustration will not affect the actual values of both existing and future Par policies.

The actual returns you can receive from your policy will depend on the actual experience of the Par Fund.

2. How are the investment returns used in Benefit Illustration determined?

The investment returns used in the Benefit Illustration of Par products are determined after considering the views of LIA member companies on a number of factors, including the typical investment mix of asset classes that Par Funds invest in (such as equities, bonds and property) and the long-term returns on each asset class. Long-term return expectations are in turn determined taking into account historical asset class performance and global economic outlook.

Going forward, these returns used in illustration will be reviewed on an annual basis to ensure its ongoing relevance and appropriateness.

3. When was the last time the investment returns used in Benefit Illustration revised?

The last revision of the investment returns used in Benefit Illustration was in 2002 where the maximum illustration interest rate was reduced from 6% p.a. to 5.25% p.a.

4. How frequent will the investment returns used in Benefit Illustration be reviewed and revised?

The LIA will review the investment returns used in Benefit Illustration annually.

5. Are the revised projections of Benefit Illustration at 4.75% p.a. and 3.25% p.a. for Singapore-dollar denominated policies standardised across the life insurance industry?

Insurers can choose to illustrate based on a set of investment returns lower than 4.75% p.a. and 3.25% p.a. if their view of the investment returns achievable over the lifetime of the par policies are lower than 4.75% p.a. and 3.25% p.a.

6. Are existing Participating policies affected? If so, will there be any bonus reductions?

The two rates are for illustration purpose and do not represent upper and lower limits of the investment performance of the Par Fund. Bonuses that existing Par policies can expect to receive on their policies will depend on the actual experience of the Par Fund as well as the long term expectation of the returns.

7. Does this indicate that the future investment returns will be lower?

The Benefit Illustration is meant to illustrate the level of policy benefits assuming the Par Fund earns a certain level of returns. This new set of lower rates used in the illustration reflects the current low interest rate environment.

Actual investment returns in the future may vary from the illustrated rates depending on the economic conditions, asset class returns and allocation of the Par Fund.

8. How does the change in illustration rates affect the benefits and premiums of new policies?

The illustrated benefits at the lower investment returns after 1 July 2013 is likely to be lower as compared to the benefits illustrated prior to 1 July 2013.

In conjunction with the lower investment returns used in the illustration, insurers may choose to review and enhance their existing products, and thereby product features and premiums. You are advised to speak to a qualified representative of the respective insurers to find out more.

9. Is the MAS aware or has it endorsed the rate changes by LIA?

The life insurance industry through the LIA has a good working relationship with the Monetary Authority of Singapore (MAS). LIA sets and reviews the investment returns used in the Benefit Illustration. The MAS has been consulted on the methodology and revision. 

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