Albrecht says: “We are the fastest ever business unit in the history of the company to break even under IFRS 17, as opposed to IFRS 4. That’s the rate at which we’re growing and how sustainable we are. Under IFRS 17, we are reporting profit way into the future. We have really significant retained profits. We’re doing very, very well, and that’s partly because we have very compelling products that are very well designed, and we’re very, very tight on costs.”
For context, IFRS 17 replaces IFRS 4 and has been effective since Jan 1, 2023. According to S&P Global, IFRS 17 provides consistent principles for all aspects of accounting for insurance contracts. Its objective is to ensure that an entity provides relevant information that faithfully represents Insurance contracts. This information provides a basis for users of financial statements to assess the impact of insurance contracts on the entity’s financial position, financial performance, and cash flows.
The Contractual Service Margin (CSM) was introduced in IFRS 17. In a CSM, the unearned profit is expected to be recognised as the insurance contract services are provided. It is amortised over the remaining life of the contract and adjusted for changes in future cash flows.
Exercising caution
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MoneySense, Singapore’s national financial education programme, cautions: “You should only consider buying a universal life policy if you have the means to pay the premium without borrowing. This is to avoid losing insurance coverage. Your financial adviser may ask if you would like to take a loan from a financial institution to pay for the large sum of premiums — known as premium financing. Think twice before taking this up.”
UL policies often have two main components: lifelong insurance protection and a cash value that can grow over time. Policyholders pay premiums, from which the cost of insurance and administrative fees are deducted; any remainder is invested to build the cash value. A key feature of UL policies is their flexibility, allowing policyholders to adjust their premium payments and death benefit, with the ability to access the cash value through loans or withdrawals.
There are different types of UL products. In a standard UL, the cash value grows at a guaranteed minimum interest rate set by the insurer. In an indexed UL product, the cash value is linked to the performance of a major stock market index, such as the S&P 500, with a guaranteed minimum return and a cap on potential gains.
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A variable UL product’s cash value is invested in sub-accounts, similar to mutual funds. Such a product offers potential for higher returns but also carries a higher risk due to market fluctuations.
Some UL policies focus on wealth accumulation. These products offer lower protection benefits with lower premium outlay. These are known as savings-oriented universal life policies.
Moneysense warns buyers of UL products that they will have to incur fees at various points after purchasing a UL policy.
These include a premium charge, where the insurer deducts a percentage from the premium payment to cover its expenses, such as distribution and administration costs associated with offering the product. Some insurers charge a recurring fee for insurance coverage, which typically increases with the insured’s age. Customers may also have to pay administrative costs to the insurer.
Insurers are likely to charge a fee if the insured needs to withdraw the cash value of the policy, and the sum assured may also be reduced as a result. There could also be a surrender charge if the policy is terminated. Insurance and administration charges are typically deducted from your policy’s cash value on a monthly or annual basis.
Sun Life isn’t the only insurer offering UL products in Singapore. Manulife, Prudential, Great Eastern Holdings and HSBC also offer such products. The difference is that Sun Life only offers UL in Singapore, and no other products are available to the general public. UL products are targeted at ultra-high-net-worth individuals (UHNWI).
Albrecht believes that Sun Life’s differentiation is that “we make sure that we design our products well; we make sure that we do everything the right way, and that we have compelling products that clients want to buy, and we treat our partners very well. We provide them the absolute gold standard service. We are the number one for service.”
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A different channel
Unlike investment-linked products, life insurance and medical insurance, which are sold either through a bancassurance channel or the insurer’s own agency, or third-party financial consultants, UL is marketed by brokers to private banks, which in turn sell it to their private banking clients, according to Albrecht.
“For a true private bank, its clients must have a choice. It’s a very well-worn path, which is, you have the high-net-worth brokers who are highly established, and they have incredibly strong ties with the wealth teams’ private banks,” Albrecht points out.
Who are these insurance brokers? The largest insurance broker globally is none other than Marsh McLennan. Its subsidiary, Mercer Prestige Client Solutions, collaborates with private banks to provide wealth protection solutions, including UL insurance. Howden and Charles Monat Associates are well-known insurance brokers providing services similar to those of Mercer PCS.
Of course, insurance companies, if tied to a specific broker, work on a commission basis. “That’s how that entire industry works. They spread that commission between themselves and the introducing bank. That’s one way that some of the banks earn money,” Albrecht says.
“Those revenues that are paid [have commissions] built in as they are with every single product that is on the market. But it’s an interesting point. How would we increase our sales? Sometimes we’ll increase the commissions. That doesn’t work for the client. So, you’ve got to pay the people who are advising a reasonable amount of money to do their jobs, but [our strategy] is to say we need to offer the absolute top-flight service to those brokers, banks and clients. We are categorically number one in that, rather than trying to buy business by having increased commissions,” Albrecht says. “I consider the banks to be an extension of the broker.”
For the insurers themselves, UL requires more capital than the regular life insurance business. “Within about the next month or so, we’ll be able to offer US$270 million [$348 million] of coverage to an individual if they die. That’s not even the face amount. The face amount would be higher than that,” Albrecht says.
This is why UL providers must manage risk through relationships with reinsurers. In addition, any individual insured for such a substantial amount would need to undergo a thorough medical examination. The sums involved also indicate that life insurers are unlikely to offer UL without risk mitigants in place.
“In the high-net-worth space, it will be the very large insurance carriers, because the product lines that we manufacture require significant capital to underpin them. So the smaller, more bancassurance-related insurers tend not to have the capital that’s required to build these products,” Albrecht says.
In Singapore, the Monetary Authority of Singapore has its own set of rules on capital adequacy ratios (CAR). Albrecht points to Sun Life Singapore’s CAR at more than 900%.
“We are a very cautious entity globally. We would always err on the side of caution and ensure we have sufficient capital. CAR is something we keep a very, very close eye on. We have a very strong finance team, both in Singapore, regionally and globally, that all work together to ensure that we keep those ratios where they need to be and where we want them to be,” Albrecht says.
Private banks help
To take a step back, why do HNWI need UL-type policies? Any well-heeled individual might have cash in the bank, an investment portfolio, a pension plan, and some life insurance. “When you get into the ultra-high-net-worth space, there are more tools in the toolbox such as trusts, private investment companies, private label funds, and universal life,” Albrecht says.
Interestingly, private banks have lent their clients the money to buy UL policies, Albrecht points out. “Those loans are very specific in that the client will pay the bank interest, with the capital being repayable upon death or upon surrendering the policy. The policy is assigned to the bank. The banks love this, because these clients probably have several different credit lines.”
These insurance policies are more robust in that they are not highly volatile in terms of their underlying value, and the capital is protected. “This is why the banks are happy to lend against them, and it’s also why they’re very comfortable. We have an AA S&P rating,” Albrecht adds.
This financing methodology works best in a low-interest-rate environment. Moreover, nearly all UL products are in US dollars, which could be a disadvantage in the current de-dollarisation phase.
