Par fund clarity - full bonus history is quite reasonable

IF there's any lesson to be learnt from the experiences of the United Kingdom about participating funds - also known as "par funds" - it is that too much transparency is likely to snuff the life out of the industry.

A few decades ago, measures aimed at introducing greater transparency in the UK was a key factor in unravelling the par fund business.

So it's not hard to see why the Life Insurance Association Singapore (LIA Singapore) is caught in a bind as it navigates the tricky terrain of improving disclosures while managing members' reservations about doing so. Yet, greater clarity is needed for consumers to make more informed choices.

And it's a step in the right direction as the government moves to build greater trust in the financial sector, amidst policyholders' complaints about the gap between projected and actual non-guaranteed bonus rates.

Recently, LIA said it intends to provide the illustrated yields to maturity of par products in the benefit illustration. It believes information disclosed in the product summary on par fund investment, as well as regular disclosure through the par fund updates, are sufficient in helping consumers understand the performance of the fund.

But do consumers truly understand the data provided?

As an industry longtimer put it: "It's doubtful that most consumers can truly understand the content of these documents and are able to make meaningful comparisons between insurers or products".

So, more needs to be done to educate consumers about par products as it would defeat the purpose of greater disclosure if the information provided is not well understood, or if the data isn't presented in an easily digestible package.

A more basic - and pressing - issue is this: Are insurers' projections of non-guaranteed benefits even realistic?

These projections - the key element insurers use in selling their products - are based on an insurer's opinion about future revenue streams.

Sure, the projections are tied to macroeconomic factors and fluid conditions like market volatility and interest rate movements so the actual benefits paid out can be less than what was illustrated. (Note: Insurers do factor in volatility and current and future interest rate scenarios.)

But if the projections are realistic, why is it that many policyholders (including people in the industry) are upset that their actual non-guaranteed bonuses fall far below the illustrations painted years ago by the insurers?

As for product summary and par fund updates - that's the least an insurer can do given that consumers have essentially parked their money with them for the long haul.

First, the product summary is given only at point of sale.

It conveys only the recent bonus track record of the insurer, and not the full history.

While par fund updates are more relevant than product summaries, they don't raise any flag, or give indications, that a cut in the bonus rate may be impending.

It's worth noting that a par fund's past returns are volatile and the minimum returns needed to support the projections also vary among insurers, which is why it is more useful to have insurers disclose the minimum investment returns needed to support the projected returns of their par products. This can then be compared with the actual returns.

And if this seems too onerous for insurers, then the full bonus history - which is not included in the product summary of a new product - is a more than reasonable compromise.

Full bonus history comparisons, unlike projections, will incentivise insurers to place more emphasis on delivering good returns to policyholders.

READ MORE: Life insurers urged to show they can meet bonus forecasts