Participating Insurance policies to be affected by changes in Risk-Based Capital (RBC) framework and decreasing bond yields. These polices have been used widely for savings purposes via endowment and annuities policies as well as life insurance policies.
In view of the actions undertaken by the insurers due to change in RBC framework and economic climate, the returns generated by the PAR Fund will likely result in a challenge to hit the 4.75% p.a. target. Hence, by 1st July 2021, all participating policies will revise downwards the upper illustrated investment rate of return from 4.75% to 4.25%.
Increase in Capital Adequacy Ratio
Under RBC 1 (year 2004 to 2020), all insurers are required to have a Capital Adequacy Ratio of not less than 120%. That is the minimum amount of capital that an insurer needs to set aside to support the various types of risk taken by the insurer (E.g., Asset risk, Credit risk, underwriting risk, off-balance sheet risk).
However, effective from March 2020, insurers are required to adopt RBC 2 which is a more comprehensive regulatory framework to enhance protection for par policyholders. Significantly, there are 2 key changes:
- Given the greater liquidity in the bond markets, the Monetary Authority of Singapore (MAS) expects the guaranteed cash flows from assets invested by the Par Fund to match the guaranteed insurance liabilities, i.e., the guaranteed benefits of the par policies.
- To implement these changes, since the start of 2020, insurers are switching short-term bonds to long-term bonds to match their guaranteed liabilities which are for many years later and in so doing reduce their capital requirements.
- Then came the whammy of COVID-19 in 2020 which pushed governments all over the world to cut interest rates to support their economies which resulted in lower yields for investment grade bonds. With lower yields, insurers are forced to set aside more of their capital to match their guaranteed insurance liabilities, hence reducing their ability to invest in higher yielding assets. Bond yield is at all time low now.
Some insurers may have had to sell off equities in the Par Fund at low prices if they did not have enough capital to support these investments.
- Risky assets such as equity and property also attract higher capital requirements from the insurers to reflect the greater volatility of these assets. MAS wants insurer to have enough capital in the Par Fund when market drops.
- 16% under RBC1, 25-50% under RBC 2
Are Participating Plans Still Relevant?
Despite these challenges, par plans remain needed and relevant to consumers like you as it can form the foundation of your financial planning needs especially in the area of protection and retirement-planning.
Taking reference to a news article titled “$300,000 or more”, (INVEST, The Sunday Times, 23rd May 2021); while senior citizens pay less for many things like public transport and movie tickets, medical insurance on the other hand gets costlier with every year you age. This article is a good wake-up call for those who still choose to be blind to the fact that a good retirement does not come cheap.
While medical insurance policies premiums are guaranteed to be escalating as ages goes by, how are you as a consumer saving for that necessity?
Will you be taking care of this premium needs through a wholly non-guaranteed portfolio of stocks, REITS, Unit Trust, and the likes of these (or) will you be including participating policies which provide a baseline of guaranteed returns to take care of these need?
With changes in participating policies underway now, you should act now and seek advice from a financial adviser representative who can recommend you and compare par plans across insurers. The financial adviser will be able to help you evaluate the plan based on total investment returns as well as guaranteed returns. In addition, the financial adviser can also help you to evaluate the financial strength of the insurer and its Par Fund to ensure your claims can be made.
We speak soon again. Be safe and take care for yourself and loved ones.
Pinnacle Wealth Advisory will see you in the next newsletter!