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Bonus and illustrations matter to insurance buyers

LiveMint logoLiveMint 20-06-2017 Staff Writer

Participating (par) insurance products are a significant part of the life insurance business in many Asian markets, finds Participating Business in Asia, a research report by Milliman. Edited excerpts:

While the popularity points to some commonality across the region, each country has its own factors that contribute to the growth of par business. In many Asian countries, insurance statistics for par business are either unavailable, compiled at a high level or spread across different sources. To bridge these gaps, this report has combined secondary data from industry statistics and annual reports, merged with proxies where relevant; primary data from a survey of industry participants to add qualitative analysis and to plug gaps in the secondary data; and anecdotal information gained from consultants working across the region.

From the survey results, while many respondents in India and Hong Kong see a positive outlook for par business (likely driven by the more challenging regulatory environment for unit-linked business), many respondents from Malaysia and Sri Lanka expect par business to reduce. In India, about 10% of the respondents said they expect sales to decline in relation to the rest of the business, while about 55% said they expect sales to grow in line with the rest of the business. Around 35% said they expect the business to grow more than the rest. 

In India, regular and single-premium endowment and whole-life products dominate in the types of participatory products. Money-back options are also common. But as the proportion of par business at an industry level is dominated by the Life Insurance Corporation of India (LIC), which is almost entirely par, it is more helpful to consider private insurers only. Since statistics are not available for all companies, the survey considered seven companies that represent over 70% of the new business annualised premium equivalent (APE) written in FY16. LIC’s par individual assurance fund was Rs15 trillion (over $200 billion) at the end of FY16. It had around 280 million policies in its ‘Individual Assurance’ category—expected to be mostly par. 

For par business, investment performance is the top concerns for providers—both from the perspective of providing returns that can help to manage the bonus expectations, and also to help generate new sales through attractive illustrated returns. With par products needing to ‘stack up’ well against other retail investment products, the investment management challenge is complex. In India, the investment mix of the respondents show the exposure to equities and corporate bonds is capped at 35% of the par fund and investments in these classes is even lower than the cap. In the survey, more than 40% respondents said that 5-10% of the investment mix was in equity, property or other higher-risk investments. More than 20% said their proportion was 10-15%, while more than 30% said their share was in the range of 15-20%. However, aggregate investment returns are unknown. 

Many companies have internal documents detailing their interpretation of “Policyholders’ Reasonable Expectations” (PRE), and broad principles on which the par fund will be managed. These documents are, however, not publicly available, and the level of detail varies across companies. All of the companies in the survey reported having an internal governance policy. When asked which are the two most important influences on PRE, there is an agreement by insurers across the PREs are largely dominated by bonus rates, both illustrated and those declared by the insurer in the past. In India, insurers say that illustrations along with historic bonus or dividend rates are the most important influencers.

Excerpts from Participating Business in Asia, a research report by Milliman--

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