Life insurers to lower caps on participating policy illustrations

Change gives consumers more realistic projections, will not affect actual returns: LIA

Life Insurance Association President Khor Hock Seng
Life Insurance Association President Khor Hock Seng

From next month, when life insurers in Singapore do policy illustrations for Singapore-dollar-denominated participating policies, they will have to abide by lower caps of illustrative investment returns.

The aim of the change is to provide consumers with a more realistic range of projected investment returns and will not affect the actual returns of existing and future participating policies, the Life Insurance Association (LIA) said yesterday.

The upper illustration rate will be capped at 4.25 per cent a year, down from 4.75 per cent, and the lower illustration rate will be capped at 3 per cent a year, down from 3.25 per cent.

As these are caps, the general rule for insurers is that the lower illustration rate must be at least 1.25 percentage points a year below the upper illustration rate.

Life insurers are expected to illustrate these scenarios to provide consumers with a reasonable potential range of the level of benefits.

LIA president Khor Hock Seng said the downward revision of the caps was made "primarily in consideration of the sustained low interest rate environment".

"Our objective in doing so is to provide consumers (with) a more realistic range of projected investment returns, so individuals can make better-informed financial decisions," he added.

"Importantly, consumers must recognise that these upper and lower illustration rates are for illustrative purposes only... We strongly encourage individuals to engage with their financial advisers to decide on policies aligned with their personal needs and risk profile."

The actual returns received from a participating policy will depend on the actual experience - including investment performance - of the participating fund that will develop over the lifetime of the policy, LIA said.

Actual investment returns in the future depend on future economic conditions, actual asset class returns, and asset allocation of the participating fund.

Eventual actual returns received by policyholders may be higher or lower than those reflected within the policy illustration.

The Monetary Authority of Singapore has been informed of the downward revision to the caps, LIA said.

The last revision of caps on illustrative investment returns used in policy illustrations was in 2013, when the upper illustration rate cap was reduced from 5.25 per cent to 4.75 per cent a year.

The lower illustration rate was set to be at least 1.5 percentage points lower than the upper rate.

The practice of having such illustration caps began in 1994.

LIA said it reviews these caps annually "to ensure (their) ongoing relevance and appropriateness, considering recent and potential future economic market dynamics".

The annual review factors in any changes to the long-term outlook of economic markets, to determine if the caps still reflect a realistic range of projected investment returns going forward.

The association said it will revise the caps "when the realistic range of projected investment returns has shifted materially".

A version of this article appeared in the print edition of The Straits Times on June 03, 2021, with the headline 'Life insurers to lower caps on participating policy illustrations'. Subscribe