Minimum returns for investment-linked products?

PETALING JAYA: A dire concern in the life insurance industry relating to investment-linked policies (ILP) – a minimum guaranteed sum as returns for such policies – is being sorted out.

A source from the National Association of Malaysian Life Insurance Field Force and Advisers (Namlifa), which had voiced its concern on the matter, told StarBiz that officials from Namlifa had informal talks with some officers from the central bank.

The source said they had highlighted the need to offer a minimum guaranteed sum to protect policyholders of ILPs against aggressive risk-taking by insurers in their investment strategies.

The minimum guaranteed sum which Namlifa is looking at is anywhere between the current fixed deposit rates and Employees Provident Fund (EPF) returns. This, the source said, was to ensure equitable protection and returns to policyholders.

ILPs or commonly known as investment-linked products have both life insurance protection and investment components. Investment-linked products are among the fastest growing products in the life insurance segment. In the first half of 2014, they grew by 59.4% to RM1.68bil and last year these products grew by 59.5% to RM3,26bil.

Some consumers prefer ILPs as they want more exposure to investments than other life insurance products, thus transferring the risk to the consumer.

The premiums are used to buy units in investment–linked funds of the policy-holder’s choice and used as cost of insurance for life insurance protection.

At the moment, ILPs usually do not have a minimum guaranteed cash value. The value of the ILP depends on the price of the units in the fund which in turn depends on the fund’s performance in the market. The cash value is further exhausted by the escalating cost of insurance at an older age.

According to the source, insurers should consider a minimum guarantee of return as ILPs are actuarially calculated, taking into account the uncertainties of the future including fluctuation of equities based on historical performances and inflation.

“We are of the opinion that the returns should be realistic, with a minimum guarantee on returns. Assurance should be given to the policyholder with a guaranteed protection and a reasonable return for holding on the policy for the long term.

On another matter, he said insurance companies were also now cutting down on bonuses on traditional products because of the higher costs of doing business due to poor market performances.

Some industry observers reckon the move by Namlifa will gain support from consumer associations and policyholders, and this will add pressure on the regulator to look seriously into providing a minimum guaranteed sum for investment-linked products. This is because these products are among the top-selling products of life insurance companies.

Meanwhile, Consumers Association of Penang (CAP) president S.M. Mohamed Idris said having a minimum guaranteed sum did not mean that consumers would be better off.

“What about limiting the relevant charges?” he asked. “Based on the many complaints that we have, consumers have not been made fully aware of how ILP works and the risk involved when the wrong product is chosen. Thus they end up making losses.

“Consumers who had no interest in getting another insurance policy were told that they would be investing their money only later to discover that it is an ILP.

“Life insurance is about protection for dependents. Thus we believe that investments and protection should be two separate issues. It is already difficult for consumers to understand regular policies like whole life and term, and ILP is even more complicated,” he said.

BY DALJIT DHESI