Author
Bowtie Team
Updated on
2025-07-21
Disclaimer: This article is translated with the assistance of AI.
Savings insurance is often more intricate than standard term plans. How do insurers craft their designs and strategies? Are those expected returns truly risk-free? Join Bowtie’s actuary Mr. J as he breaks it down for you.
Savings Insurance Design
Savings Insurance includes a savings component, and its design involves several complex factors, such as:
- Risk-free Rate: This forms the foundation for insurance companies’ product pricing. Companies conduct detailed scenario analyses to assess the impact of different interest rate environments on product profitability. This includes considering the current economic conditions of the country, central bank policies, and long-term interest rate trends.
- Risk-adjusted Return: Insurance companies need to strike a balance between risk and return. While some high-risk assets may offer higher returns, regulatory bodies impose higher capital requirements on these assets, limiting their proportion. With limited capital, insurers must allocate funds cautiously to meet regulatory requirements while providing competitive returns to clients.
- Surrender Rate: Insurance companies reference historical data from similar products, combined with current market trends and economic forecasts, to estimate future surrender rates for the product. This helps companies predict cash flows more accurately and adjust product design accordingly.
- Mortality Rate: This is based on Hong Kong’s demographic data, combined with the company’s own client group characteristics for analysis and evaluation. Insurance companies regularly update this data to ensure pricing accuracy.
Additionally, liability matching is a core concept in insurance product design. It ensures that the company has sufficient assets to fulfill future commitments to policyholders. For example, for a three-year savings insurance plan, the company might purchase three-year bonds to ensure sufficient funds are available to pay clients upon maturity.
What is “Underwriting Profit”?
It refers to the balance after subtracting claims payments and administrative expenses from premium income. Here, we need to mention an important concept: the minimum expected return on capital (Hurdle Rate, such as 8%). Simply put, the total return from pricing each insurance product must exceed this Hurdle Rate; otherwise, the company might as well invest the funds in other projects.
Savings Insurance Investment Strategies
Participating policies are a common type of savings insurance, and their investment strategies typically involve various asset classes:
- Fixed Income Products , including government bonds and investment-grade corporate bonds. These assets carry lower risk and provide stable but relatively modest returns. They act as stabilizers in the portfolio, especially during market volatility.
- Equity Products , including listed company stocks and private equity funds (PE). These assets are higher risk but offer greater long-term return potential. Insurance companies usually adjust the allocation of equity assets based on market conditions and risk appetite.
- Alternative Investments , such as real estate investment trusts (REITs) and hedge funds. These investments help diversify risk and may provide additional returns when traditional assets underperform.
Expected Returns of Savings Insurance
Unlike ETFs that typically highlight past performance in their promotions, savings insurance focuses on expected returns (i.e., guaranteed plus non-guaranteed returns). However, the assumptions and calculation methods behind these projections are often not disclosed, making it tough for consumers to evaluate the product’s true value.
Insurance companies employ a range of complex analysis methods and strategies when calculating expected returns for savings insurance:
- Return Analysis: Insurers reference the historical returns (Expected Return) and volatility (Standard Deviation) of each asset class, using statistical models like Monte Carlo Simulation to test projected investment returns. This data often comes from past market performance or forecasts from major financial institutions.
- Economic Forecasts: Companies hire economists and analysts to predict future economic trends, including GDP growth, inflation rates, and interest rate changes. These macroeconomic factors significantly impact investment returns.
That said, these predictions and models aren’t foolproof—actual investment performance hinges on market shifts and fund managers’ skills. So, when buying participating policies, consumers should fully grasp these uncertainties.
Who Should Buy Savings Insurance?
Savings insurance isn’t for everyone, but it can appeal to certain folks:
- High-Net-Worth Clients: These individuals can use savings insurance to spread risks in their existing portfolios. With its stable yet relatively modest returns, it acts as a counterbalance to high-risk investments.
- Affluent Folks Planning Wealth: Savings insurance serves as an estate planning tool, helping the wealthy distribute assets smoothly and sidestep future inheritance squabbles.
- Those Needing Forced Savings: Requiring regular payments with penalties for early withdrawal, it encourages long-term saving habits—perfect for those lacking self-discipline but eyeing future security.
Actuary Mr. J’s Take on Savings Insurance:
While savings insurance targets specific groups, Mr. J believes it’s not ideal for the average Joe, and here’s why:
- Low Liquidity: Sure, returns might edge above risk-free rates, but its liquidity is way lower than other options—making quick cash access a hassle when you need it.
- Relatively Low Long-Term Returns: Compared to index funds or real estate, savings insurance often delivers lower yields, potentially causing you to miss out on juicier opportunities.
- Weak Inflation Protection: Against inflation-beaters like gold, savings insurance might not hold up well in battling rising prices.
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