Illustrated Investment Rate of Return for Par Policies
The Policy Illustration (Pl) is meant to illustrate the potential level of policy benefits to policyholders, including the non-guaranteed elements. One of the key elements affecting the non-guaranteed policy benefits is investment returns which can vary from year to year.
Life insurers are expected to illustrate at least two scenarios; an upper investment return scenario and a lower investment return scenario to provide a reasonable potential range of the level of benefits.
For each Par product, the insurer is to determine the projected investment return for the upper investment return scenario (Upper Illustration Rate) to be used in the PI based on its asset mix and the expected return of each asset type.
Life insurers’ illustration rates should not be higher than the insurer’s view of the investment returns achievable over the lifetime of the Par policies, i.e. its projected best estimate investment return for the product.
At present - for Singapore dollar denominated policies - LIA Singapore sets a cap on the Upper Illustration Rate. Following the latest revision effective 1 July 2021, the Lower Illustration Rate is to be at least 1.25% lower. The revised cap is 4.25% p.a. for the Upper Illustration Rate, and the resulting cap for the Lower Illustration Rate is 3.00%.
If the projected best estimate investment return estimated by the insurer exceeds LIA Singapore’s cap for the Upper Illustration Rate, the insurer will only be able to illustrate at the cap, and is not able to illustrate above the cap.
The caps are determined after considering views of LIA Singapore’s member companies on several factors including the typical asset class mix that Par Funds invest in (such as equities, bonds and property) and the long-term returns on each asset class. These long-term return assumptions are determined by taking account of historical asset class performance as well as recent and potential future global economic market dynamics and outlook.
The Upper Illustration Rate and the Lower Illustration Rate are used purely for illustrative purposes and do not represent upper and lower limits of the investment performance of an insurer’s Par Fund.
In addition, rates used in the PI are not a reflection of the actual returns of both existing and future Par policies. The actual returns received for a Par policy will depend on the actual experience, including investment performance, of the Par Fund that will develop over the lifetime of the Par policy.
Actual investment returns in the future will depend on future economic conditions, actual asset class returns and asset allocation of the Par Fund. Eventual actual returns received by policyholders may be higher or lower than those reflected in the PI.
The caps on the Upper Illustration Rate and Lower Illustration Rate are reviewed by LIA Singapore on an annual basis to ensure their ongoing relevance and appropriateness.