The End of High Guaranteed Savings Insurance?

03 Dec 2020
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The End of High Guaranteed Savings Insurance?
Historically traditional participating whole life insurance products (with guaranteed and non-guaranteed returns) have been the most popular in the Hong Kong insurance market. With the on-going pandemic and quantitative easing by central governments around the world, interest rates continue to be at record lows. Coupled with the upcoming Risk Based Capital (“RBC”) regulatory change, insurance companies can no longer afford to offer products with high return guarantees. Going forward we expect to see these products replaced by low capital-intensive products with low guarantees.    
 
Only few remaining products with 30-year guaranteed IRR of over 2.0%

The whole life savings insurance products in the market can generally be classified into guaranteed return focussed and project return focussed. Projected return focussed products tend to invest more in growth assets like equities and can project higher long-term returns, but mostly non-guaranteed. Guaranteed return focussed products tend to invest more in conservative assets such as bonds, have lower total projected returns but the guaranteed component to the policyholder is higher. 10Life has compiled the products with the highest guaranteed returns (depending on premium payment period).   

Top Guaranteed Returns Whole Life Savings Insurance
(30 Year IRR > 2%)

Contribution period Insurance companies/ Products Guaranteed Returns IRR Projected Returns IRR
10 year 20 year 30 year 10 year 20 year 30 year
1-3 year
1 year AIA
Single Premium Whole Life AP - Par
1.0% 2.2% 2.4% 2.4% 3.7% 3.9%
3 year AIA
Executive Life
0.6% 2.0% 2.3% 2.8% 4.0% 4.2%
1 year Fubon Life
Fubon Brilliant Wealth Whole Life Plan
0.2% 1.6% 2.0% 0.8% 2.6% 3.2%
4-8 year
5 year China Taiping
Taiping EliteLife Protection Plan
2.9% 2.8% 2.7% 3.6% 4.6% 4.9%
5 year AIA
Executive Life
0.2% 1.9% 2.3% 2.7% 4.0% 4.2%
6 year FWD
Eternity Savings Insurance Plan 6
-7.2% 1.8% 2.0% -3.8% 4.2% 4.6%
9-12 year
10 year China Taiping
Taiping EliteLife Protection Plan
2.4% 2.6% 2.6% 3.0% 4.3% 4.7%
10 year AIA
Executive Life
-0.9% 1.8% 2.3% 1.5% 3.7% 4.0%
15-30 year
15 year AIA
Executive Life
-11.1 1.8% 2.3% -7.1% 3.7% 4.0%
20 year China Taiping
Taiping EliteLife Protection Plan
-15.4% 2.1% 2.3% -14.1% 3.9% 4.5%
Remarks:
1. Information above updated to 30 November 2020. All information is intended for general education purpose and reference only, and does not constitute any insurance purchase advice.
2. The insured is 35-year-old male, non-smoker; premium paid annually on time, with total premium of USD100,000; no policy loan, partial cash value and/or dividends/bonus (if any) redemptions made during the specified policy period.

As show in the table above, AIA’s Executive Life can offer 2.3% 30-year IRR under different premium payment terms. The latest market news is that this signature whole life product which has been in the market for over 10 years will finally be shelved at the end of 2020. Also worth noting is China Taiping’s 5-year premium term Taiping EliteLife Protection Plan which offers a 10-year guaranteed IRR of 2.9%, making it the fastest break-even product that can accumulate relatively high guaranteed returns.

While a 2% guaranteed annualised return may seem low to some people, bear in mind that hardly any investment or savings vehicles can provide such long term guaranteed returns these days. Besides these whole life savings insurance products also provide potential projected returns in the range of 4.0% to 4.9% p.a. (30-year IRR).

Prolonged low interest rates + RBC = Perfect storm for traditional life insurers?

In addition to the prolonged low interest rate environment, the Hong Kong Insurance Authority has been developing new regulations for insurance companies to meet new risk-based capital (“RBC”) requirements to better protect policyholders. The new regulations will require insurance companies to explicitly take into account the risks they are taking into the capital requirement calculations. This means that insurance companies may no longer afford to take investment risk by offering return guarantees in their products while investing in higher yielding risky assets.

With this double whammy, life insurance companies in Hong Kong are likely to shift their sales of traditional whole life products from guaranteed focussed to projected return focussed. To further reduce the capital requirements and maintain profitability, insurers may further switch to low capital-intensive products with no guaranteed cash values, such as pure protection and investment linked products.

The rebirth of investment linked insurance?

As traditional participating life insurance products become less profitable for Hong Kong insurers, some recent news suggests that the industry is in the process of re-introducing investment linked products. Investment linked products almost disappeared from the market in recent years due to the negative sales scandals and controversies. The Hong Kong Federation of Insurers (“HKFI”) has recently indicated that there will be a new generation of investment linked life insurance focussed on increased protection elements.

Protection element is essential to the insurance consumers. It can be in the form of life protection and/or asset protection. Traditional savings life insurance provides guaranteed cash values regardless of market volatilities, as well as life protection (with death benefit at minimum of premium paid). Let us wait to see what the protection element will be like in the new generation investment linked insurance. 
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