Lower guaranteed benefits likely under new insurance rules

ILLUSTRATION: ISTOCKPHOTO

New stricter regime will require insurers to set aside more reserves

Consumers should brace themselves for life insurance products that will offer lower guaranteed benefits as insurers face upcoming tougher rules that may require some of them to set aside more reserves as a buffer.

More offerings of less capital-intensive products, such as term, investment-linked insurance policies (ILP), and personal accident plans are also likely to go on the market.

That is because these products require insurers to set aside less capital to ensure solvency, for example.

The trend for such products is emerging as more insurers are tweaking their product offerings in the face of upcoming stricter risk requirements for insurers, under a more robust capital framework for insurers. One effect is consumers who buy a life plan may see less of the traditional reversionary bonus structure, and be offered a non-guaranteed dividend paying plan.

A reversionary bonus is a non-guaranteed bonus usually added annually to the policy's sum assured or guaranteed benefit once it is declared. While this is good news for the policyholder as it means they get more that is guaranteed, the insurer's liability is increased in the long-term, which means the insurer has to set aside more cash to support the guarantee.


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On the other hand, cash dividends are non-guaranteed but when given, do not add to the sum assured. And depending on the product design, may be given annually only after the insured reaches a certain age or upon a claim or surrender. This is less capital-intensive for the insurer.

A revised, risk-based capital framework, known as RBC 2, seeks to reflect the relevant risks insurers face. It is part of the Monetary Authority of Singapore's drive to make the industry more resilient.

A revised, risk-based capital framework, known as RBC2, seeks to reflect the risks insurers face. It is part of the Monetary Authority of Singapore's drive to make the industry more resilient.

Introduced in 2004, the framework adopts a risk-focused approach to assess capital adequacy and reflects risks faced by insurers. The RBC 2 is expected to be rolled out in 2017.

NEW RULES A 'WELCOME DEVELOPMENT'

Tokio Marine Life Insurance Singapore chief executive Lance Tay, said the RBC 2 review is a "welcome development" and is timely to ensure the financial strength of insurance companies, so they can continue to withstand significant shocks and uphold their long-term commitments to their customers.

As the RBC 2 calibration is still a work in progress, it is premature to predict its industry impact, said Tokio Marine and AIA Singapore.

"However, based on the first quantitative impact study, we see that there will be an increase in risk requirements, compared with the existing RBC framework.

"The emphasis on risk sensitivity may guide capital allocation towards safer assets with lower but more stable returns, such as bonds. Also, offering products with high guarantees will be more capital-intensive," said Mr Tay.

In a bid to manage its product offerings, Tokio Marine has recently expanded its range of protection offerings to include a new whole-life plan called TM Legacy LifeFlex, and a new personal accident plan called TM Protect PA.

TM Legacy LifeFlex is a whole-life protection-based plan, which does away with giving annual reversionary bonuses.

Instead, it offers a dividend-paying plan with non-guaranteed annual dividends, payable when the insured reaches 65, and a non-guaranteed terminal dividend upon a claim or surrender.

The annual dividends cannot be deposited with the insurer.

When contacted, a Great Eastern spokesman said it has been offering a comprehensive suite of products to meet customers' needs - and the strategy is expected to continue. "Nonetheless, the potentially higher asset risk requirement may result in some products lines being more capital-intensive under the new regime," he said.

NTUC Income chief actuary Lau Sok Hoon said that in preparation for the stricter upcoming risk-based capital regime, it has been strengthening its capital adequacy ratio and managing its product mix, including growing its ILP business over the last few years.

The Life Insurance Association said it is resolute in balancing the life insurance industry's commitment to continue providing "meaningful and reasonably priced, long-term insurance products to consumers with the adequate and appropriate level of capital to reflect risks undertaken by life insurers".

A version of this article appeared in the print edition of The Straits Times on October 21, 2015, with the headline 'Lower guaranteed benefits likely under new insurance rules'. Print Edition | Subscribe