All My Participating Policies Are DROPPING THEIR BONUSES: Why? [RBC2 and solutions]

MAYBE only older people would have noticed - especially the ones who frequent banks, but they could probably see that their policies have started to have weaker and weaker projected values.


Nobody likes an overpromiser and an underdeliverer, but some of these numbers have become so low that it was impossible not to notice.



What is a Participating Policy?


Participating policies are in essence, policies that are linked to the performance of the company's participating fund. The participating fund is linked to the company's business, such as payouts, investments, etc.


You can refer to my article here to know more about it, but the company's participating fund is basically good for several things:


a) Paying out conservative bonuses that are unaffected by investment volatility and having portions guaranteed by shareholders/the company.


b) Reducing conflict of interest between policyholders and the insurance company


Some examples of Participating Policies are your


1) Whole Life Plans

2) Savings Plans

3) Retirement Plans


...where there is an element of guaranteed and non-guaranteed Par Fund participation, such as this.


Unfortunately, some companies - and the majority, if not all companies - moving forward, will experience RBC2 changes, which will result in your table looking like this.




READ ALSO: How to Choose a Participating Fund (and a good savings, retirement or insurance plan)


How did this happen?


It's about RBC2.


What is RBC2?


RBC2 stands for Risked Based Capital (Assessment) 2 - it's an assessment by MAS that affects insurers in Singapore across the board to reflect the risks that they face, such as:


a) Default Risk: The potential for the insurance company to go bust, like how a bank has the capacity to go bust if they loan more money than they actually have.


b) Payouts: Business Operations of Insurance Companies require them to pay out large quantities of money upon claim.


They also have to do it quickly and reasonably, which is a very hard thing to do: if they set too lenient policy conditions they might have to raise costs on everyone else, but if they're harsh they could face personal and public backlash.


c) Operational Costs and Acquisition Costs: These are expensive.


d) Business Expansion and Hiccups: These happen to all companies.


For insurance companies, it's often expanding into a new market [e.g. a general insurance company expanding into Life Insurance, or a Life Insurance Company entering into Health Insurance] that causes the most hiccups historically.


e) Evolving Market Developments [as quoted from articles]:


Bond averages have decreased, the SNP500 average (across 25 years) is certainly a lot lower than its historical yields. Volatility for real estate and stocks are a bit less predictable than they were growing up in Singapore in the 1980s.


Whole Life Insurance policies now have limited premium payments, and you can't get charged 9% on a sales charge for an ILP anymore. Naturally, insurance companies need to adapt to the changes locally and in consumers.


f) Better practices and higher international standards [as quoted from articles]:


I can really only theorize, but Singapore is one of the few countries that still has guaranteed components attached to their par funds.


We often see complaints about insurance online but there are very few effective lifetime insurance policies with guarantees like in Singapore. It attracts quite an overseas crowd, and it's important that such trust is well-met.



So How Does This Contribute to my Policy Bonuses Dropping? [Capital Adequacy]


Contrary to popular belief, it hasn't always been the case that a Par Fund is 'not doing well' or is not being invested well.


In fact, there has been historical evidence of some par funds outperforming the SNP500 Total Return Index - otherwise known as your Top 500 US Stocks with all dividends reinvested.


Like so. And with less risk, too!

But it's clear from above that insurance companies face a multitude of challenges - including investment performance. The most pressing bottom line of addressing the majority of these challenges is capital adequacy - the ability to pay off it's debts/liabilities.


To quote one of the most recent reports: '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. Insurers are required to hold higher capital requirements if it is not the case.


Risky assets such as equity and property also attract higher capital requirements from the insurers to reflect the greater volatility of these assets.'



In other words, these changes are being implemented so that insurance for everyone moving forward is more sustainable - where you wouldn't face as many potential issues as listed above.


This is NOT the first time that such changes have been made so that insurance companies can function better in Singapore.


The original RBC was carried out in 2004 after being introduced and discussed as early as 2003 [in various MAS proposal [papers]. You can see the effects of projections across the last two decades:


a) Across the 20 years, Participating Policies dropped projections from 3.75% to 3.25% and from 6.75% to 4.75%.


Some of you may have policies from those in the 'middle', popular whole life plans such as PrimeLife (AIA) and Foundation (NTUC) which did 3.75% and 5.25%.


Old school examples

b) Investment Policies dropped projections from 5% to 4% and from 9% to 8%.

Projections
Adjustments

Not all adjustments have taken place yet, but it's likely to take place across all insurers in the following months once certain details are finalized.


Some Potential Implications



As mentioned earlier, ultimately these adjustments were not made to harm policyholders, or future policyholders (for that matter). But here are some potential implications:



1) Much older people will probably remain quite unaffected [with serious emphasis on MUCH], while younger people who get introduced to this at a young age without experience will probably not feel the loss [you can't miss what you never had]. Everyone else in the middle might be pretty disappointed.


2) There's a very decent chance the population and insurance companies will adapt. Insurance companies have faced cuts to their projections for years - but the implications of that were the same.


Some companies will double down on trying to produce the best versions of what they have left, while others will go in a different direction.


3) While participating policy projections have been cut over the years, participating policies have also gotten much better in structure. Insurance costs have also lowered tremendously per $1000 sum assured across the board in the last two decades.


It is my hope that these changes will have such a further impact on consumers.



Takeaways and QnA:


All my answers are solely based on my studies and personal opinion. They are not to be taken as financial advice or representative of any insurance company.


1) Will my existing policies be affected?


In my experience, I've only seen older policies continue to pay out bonuses that are proportional to the projections initially made, with very few exceptions.


At the very least, they do not adjust your policy projections manually [means they dont send you a revised PI on an old policy that says 3% and 4.25% when it originally said 3.25% and 4.75%].


I'm quite optimistic that they won't be from RBC2, outside of the risks that were affecting them to begin with.


2) Are Guaranteed values affected? [New Policyholder]


Some people have suggested that these are only projections, after all. Unfortunately, it appears that guaranteed values across the board should also be affected alongside the non-guaranteed projections.


This is on the basis that you purchased a new plan that has already adjusted to RBC2, NOT the older plans with guaranteed values. This shouldn't really come as a surprise, because capital adequacy requires more...well, capital.



3) What can I do to overcome some of these yield drops?


Wait and See: Honestly, RBC2 will have varying effects on insurers, so it'll be a while before we can see specifically how negative (and subsequently positive) the effect of these changes will be. I'm reasonably optimistic, even though I am not a big fan of change.


Invest: Investing continues to be my go-to towards beating inflation, as an investment specialist. The February correction opened up a lot of opportunities for undervalued investing and so you can still get a lot of good buys outside the US.


READ ALSO: What People Keep Getting Wrong About Annualized Returns (and why they can't get 8%)



Speak to your Consultant: I'm always available if you'd like to talk - but otherwise do speak to your own trusted consultant and continue to receive updates from him/her in relation to what actions you can take prior, and after these changes.


Do feel free to reach out to me if you have any further questions. This continues to unfold and so I would appreciate being updated if necessary (if some of my info needs updating) or corrected (if I have missed out or said something wrongly).


Thanks

Money Maverick Money Maverick is a Licensed Financial Consultant with MAS, who specializes in Investments and Critical Illness Insurance.


I would be happy to answer any emails and questions you may have, as I have been doing for my readers over the past few years - especially about Insurance and Investing, as it is my forte of personal and professional knowledge. If you have any such questions about the articles and how it may apply to your finances, you can feel free to leave a comment, or drop a message through any preferred medium (if you prefer privacy). Facebook: https://www.facebook.com/luke.ho.54 Whatsapp: 91769099 Do like and share my page, https://www.facebook.com/themoneymaverickofficial, if you enjoyed the article. You can also share the articles with your loved ones in the links below. The views on his blog are strictly of his own opinion and have no affiliation to any of the companies he works with. Here are some of my resources on: 1) Investing: Why you should invest aggressively NOW (and how you still can have peace of mind) 2) Insurance: The Newest, Rising Critical Illnesses in Singapore (2019) 3) Retirement and Leverage: Leveraging a Private Annuity, Pros and Cons (ft. Jamus Lim) 4) Spending and Saving: The Biggest Spending Mistakes You DIDNT Even Know you were Making (and how to avoid them) 5) Job Assessment: A Case Study on How a $6k/mth GIrl makes MUCH more money than a $10k/mth Guy 6) Financial Optimisation: How I Avoid the Largest 'Fees' of All



Sources:

https://www.proinvest.com.sg/blog/2021/covid19-impact-on-participating-insurance-policies/


https://home.kpmg/us/en/home/insights/2020/12/tnf-singapore-changes-risk-based-capital-framework-taxation-insurers.html


https://www.asiainsurancereview.com/Magazine/ReadMagazineArticle?aid=36291


https://www.mas.gov.sg/-/media/MAS/resource/publications/consult_papers/2003/RBCCP.pdf