[US rate cut] Rate-cut wave hits—what has it got to do with savings insurance?

The US Federal Reserve cut interest rates by 0.5 percentage points at its September policy meeting, delivering its first rate cut in over four years. The dot plot shows that officials expect a further 0.5 percentage point cut over the remainder of the year. As the world’s largest reserve currency and a major trading currency, the US dollar means that a rate cut in the US will affect global capital flows, with significant implications for the equity, foreign exchange, bond and commodities markets, as well as the investment performance of insurance companies. 

Participating savings insurance products in the market include both “guaranteed returns” and “non-guaranteed returns”. The latter depends on factors such as the insurer’s policy asset portfolio, investment returns, claims experience and operating expenses. These products all involve fixed-income investments behind the scenes. Generally speaking, products with higher “guaranteed returns” tend to invest in relatively lower-risk assets, such as a higher proportion of bonds; conversely, products that place more emphasis on “projected returns” involve more assets with higher risk but greater potential for value appreciation, such as equities. Most long-term savings insurance products will state in the product brochure the proportions of fixed-income assets and equity-type assets. These fixed-income investments are highly sensitive to interest-rate changes.

Over the past two years, central banks around the world have raised interest rates aggressively to combat inflation, and bond yields have followed suit and surged. However, as Europe and the US have begun an interest-rate-cutting cycle, US Treasury yields had already started to come down, and insurers holding bonds have inevitably been affected as well. The Federal Reserve’s latest substantial rate cut is mainly aimed at stabilising the labour market, and the market is watching to see whether the US economy can achieve a “soft landing”. Equity market performance remains full of uncertainty, and these factors will, to some extent, be reflected in insurers’ investment returns. 

Following the US interest rate cut, major banks in Hong Kong have followed suit by lowering prime lending rates and deposit rates. Although the returns on savings insurance may not immediately reflect the changes brought about by the US rate cut, with the interest rate-cutting cycle now underway, insurers may, in the short term, reduce the generosity of discount offers. Many insurers have launched prepayment premium offers, but a market source has indicated that after the US rate cut at the end of September, insurers may scale back such promotions. 

According to 10Life’s internal statistics, at least eight insurers currently state that the prepayment premium offers on their savings insurance products will end at the end of September. The so-called prepayment offer means that if the policyholder pays the full premium for the entire policy term in one lump sum, the insurer will offer a higher guaranteed annual interest rate on the prepayment amount to earn interest, with some as high as 5%, or even 8%. The accumulated interest will be credited to the premium deposit account, effectively allowing the insured to pay a lower premium. However, as interest rates fall, returns on fixed-income products such as fixed deposits and bonds are highly likely to decline as well. From the insurers’ perspective, the basis for offering such promotions may also diminish. If insurers scale back these offers, how much difference could it make to the premiums? Read on for the calculation.

Assuming a HK$1 million savings plan insurance premium, with a 5-year premium payment term

Table 1 shows that, assuming a savings insurance policy with a sum insured of HK$1 million and a premium payment term of five years, if the premium is paid in one lump sum upfront, the insurer offers a guaranteed concessionary annual interest rate of 5%. This means the policyholder would actually need to pay only about HK$909,000 in premiums, effectively saving more than HK$90,000. If the insurer reduces the level of the concession and lowers the guaranteed concessionary annual interest rate to 3%, the premium payable would be about HK$943,000. The difference in premiums under the two offers is around HK$34,000. If policyholders want to lock in a high-interest return, in addition to paying attention to the internal rate of return of savings insurance products, they can also take advantage of insurers’ promotional offers.

Further reading: [US rate cuts] The end of the high-interest era: how should you position yourself to lock in high returns? 
Further reading: [2024 Short-Term USD Savings Insurance Comparison] How can you achieve a steady 4.61% annual return in a volatile market?  
Further reading: [2024 Short-Term HKD Savings Insurance Comparison] Which offers the best guaranteed return? Some 3-year products offer returns of up to 4.75%!
Further reading: [2024 Short-Term RMB Savings Insurance Comparison] Which offers the best guaranteed return? Three products offer returns of 3.5% or above 
 

As mentioned earlier, different savings insurance products offer different guaranteed and expected returns. Before taking out a policy, it is advisable to learn more, including reading the product brochure in detail, understanding the investment strategy behind the product, or reviewing the insurer’s historical investment performance and dividend realisation track record.

Further reading: Prudent financial management! The four essential steps you need to know when choosing savings insurance 
Further reading: [Dividend realisation ratio 2024] Compare the dividend realisation scores of major insurers  

If you want to compare different savings insurance products, consumers can visit the Product Decoder on the 10Life website:

• Compare short-term savings insurance (RMB) 
• Compare short-term savings insurance (USD) 
• Compare short-term savings insurance (HKD)
• Compare long-term savings insurance (USD)
   

This article was last updated on 19 September 2024.

This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.