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CALLS have been made for the life insurance industry here to make it clearer for consumers to better determine if they are able to support the non-guaranteed bonus projections of participating (par) policies.
The calls come as aggrieved policyholders complain that their non-guaranteed benefits have dived over the years (see chart & table), even as some insurers still manage to deliver good returns.
The declining non-guaranteed benefits paid out to policyholders comes as no surprise as life insurers' investment returns shrink due to low interest rates, amid volatile markets and cost pressures.
On Nov 25, The Business Times published an article on whether the major life insurers here are able to pay out any non-guaranteed benefits at all for par policies. Based on the limited data publicly available, they have little excuse not to pay any such bonuses at all.
Reader and retiree Winston Foo believes that while companies are in the position to pay, they could still reduce bonuses upon maturity "as life insurers just need only to rely on the 'non-guaranteed' clause to defend the cuts and there is no recourse for buyers at all".
"This is especially true for endowment plans which had buyers crying foul over the shortfall on projected values. If comparative information on insurance companies' actual percentage payout of non-guaranteed bonuses against their projected non-guaranteed values upon maturity are available, it will greatly help consumers make informed choices."
One way to make it easier for consumers to gauge the ability of an insurer in delivering its non-guaranteed projections would be for insurers to provide the full bonus history of all par products on their websites, said an industry source. This is so that the declared bonus trends are clear.
Mr Foo shares the sentiment, saying that the history of bonuses paid out must not only be published, but should be made available for comparison similar to the government web portal CompareFirst.sg.
But Yeo Keng Leong, lecturer at the Nanyang Business School, pointed out that investment returns are inherently volatile. The flaw in this concept is believing what happened in the past will continue into the future, which may or may not be the case, he explained.
Others suggested that insurers provide the split between reversionary and terminal bonuses to improve clarity.
A reversionary bonus is paid annually and once declared, cannot be reduced, unlike a terminal one which is an additional loyalty bonus that may be paid out at the time of claim or when a consumer surrenders the policy after a certain number of years.
When asked, the Life Insurance Association Singapore (LIA) said that a split may not be more informative as the two types of bonuses are related.
"Terminal bonus is usually expressed as a percentage of declared reversionary bonus. Furthermore, both reversionary and terminal bonuses are non-guaranteed in nature, and are both dependent on the actual performance of the fund. On the other hand, the inclusion of the illustrated yields to maturity will give the consumer a sense of the total payout - that is, the combined effect of the two types of bonuses."
The association is looking at ways to enhance disclosures and has said that it would include two projected yields to maturity or net returns in the benefit illustration of par plans. The two projections will be based on the two projected investment rates of return (IRR) - at 4.75 per cent and at 3.25 per cent - listed in the benefit illustration.
The underlying issue remains though, as Dr Yeo shared - that the reversionary and terminal bonus rates may change, thus affecting the yield to maturity.
"Instead of giving 'hard numbers', the insurer could provide the breakdown of how total investment returns are split between reversionary and terminal bonus. For example, an insurer can state that their bonus policy is to give out 70 per cent of returns as reversionary bonus, retaining 30 per cent to give out as terminal bonus. This split is less likely to change over time, and will therefore reflect more accurately what may happen in future," he suggested.
Still, this would not provide policyholders with enough data to compute the yield to maturity or IRR since the expected investment return is not communicated, noted Dr Yeo.
Perhaps useful, shared the industry source, is for insurers to disclose the minimum investment returns required to support projected returns of those par products, and to compare them with the actual returns achieved, either in absolute or smoothed rates.