My colleague forwarded me this participating fund health check that Milliman did for 2025 and thought it was quite interesting to share.
Singapore: Health check of the participating fund 2025.
What is a participation fund?
Some of your insurance policies have a cash value. Term life insurance has no cash value. Your investment-linked policies or universal life policies are invested in separate unit trusts and funds and are not considered to have cash value.
If you own a whole life insurance plan or endowments, they typically have cash values and you may wonder what drives their returns.
The performance of the participating fund determines the return.
Most of the information Milliman has is available to you because it is published by the MAS.
I think what I would like to do in this article is not what Kyith interprets, but what Milliman says. After a while you may not want to hear my interpretation anymore, but a more ‘refined version’.
The biggest benefit is that you hear from them… what drives returns.
Performance of the participating funds for 2023 and 2024
Information about investment returns and investment mix was obtained from the insurer:
- Etiqa’s par fund update has not yet been published, so Milliman is using information from the latest product summary Enrich Income product for its par fund.
- FWD Singapore launched its par fund in 2023, so we include the information on this fund from 2023, excluding previous years’ figures.
The chart below shows the annual investment returns of each par fund for 2023 and 2024.
Why interest rates significantly influence returns
A significant portion of participating funds are in fixed income assets, and Milliman points out that their returns are heavily affected by changes in yield curves.
The chart below shows the yield curve of Singapore Government Security (SGS) in 2023 and 2024:
Milliman:
- The increase in interest rates would have had a negative impact on SGD bond prices.
- This is partly offset by the income from the bonds.
Because the availability of SGD corporate bonds is limited, Milliman typically sees par funds investing in both USD and SGD fixed income assets.
The following chart shows the yield curve of US government bonds:
While prices went on the short side downMilliman notes that the impact of the significant increase in long-term returns have a greater impact.
This is likely because fixed income assets have longer maturities and are therefore more affected by movements in longer-dated assets.
Which insurer has a larger share of equity-backed participating funds?
If your fund share is riskier, you may be able to earn higher returns due to risk taking. If your fund share is lower, your fixed income should generate a large portion of the returns.
The chart below shows actual equity backing ratios (EBRs), or the share of investments allocated to stocks and real estate:
What you, as a policyholder, may not realize is that for every €1 of less risky assets (fixed income) that the participating fund has, the insurer will have to support that €1 with fewer assets.
But if things are riskier, like stocks and real estate, they should support that more assets.
Which insurer wants to take more risk by investing the fund in shares and real estate?
Well, this table will tell you.
Below you can read the table above with the annualized investment returns per Par fund:
Milliman says the following:
Clearly, there is more to a fund’s total investment returns than simply looking at its EBRs and returns based on market indicators. Allocations to different equity markets and the stock selection within each will have an impact on total returns, as will the actual bond selection within fixed investment portfolios and the way credit spreads have evolved accordingly. When investing in different markets, there will also be effects from currency movements and the extent to which these are hedged.
Solvency and capital
The graph below shows the picture at an aggregated level of the change in the solvency of the par fund:
The chart lists the financial resources and risk requirements for ALL par funds in the Singapore market.
- Overall, the fund’s solvency requirement will increase by 10% from 2023.
- This is due to a strong increase in financial resources.
- Partially offset by higher risk requirements.
Increase in financial resources due to:
- Stronger investment returns in 2024 for many funds.
- This increases the buffer within the provision for future non-guaranteed benefits when the return is higher than the increase in the guarantees from the bonuses added in the year.
- Settlement of risk-free interest rates when calculating the guarantee reserves. The change in risk-free interest rates (from the previous paragraphs) has an impact here. Increase in the market interest rate for will then have 4 years as a tenor positive impact on financial resources.
- New contracts entered into in 2024 will have an impact because the cushion for future non-guaranteed benefits allowed in the pricing may be recognized at the launch of the new business.
The chart below shows the increase in C2 market risk requirements. This allows us to investigate what might be causing the increase:
Increase in risk requirements:
- The par-fund C1 insurance risk requirements increase by 7.9% compared to 2024. Driven by the generation of new contracts that exceed the run-out of existing contracts during the year.
- The market risk requirements for par fund C2 increase by 8.8% compared to 2024.
- From higher equity risk requirements due to higher allocations.
- Lower interest rate risk requirements
- This may be because interest rate matching is better when fixed-income securities with a longer term are available.
- The increase in credit spread risk requirements may be due to:
- Increase the allocation to corporate bonds
- More unrated debt
- Extending the maturity of the corporate bond portfolio (which again explains the reduction in interest rate risk requirements).
I think it’s a useful report to read and if you’re big on cash value insurance policies, following these Milliman reports can increase your understanding of your policies, as I did.
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Kyith is the owner and sole writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, more solid wealth foundations, how to pursue a passive investing strategy, learn about investing in REITs, and the basics of active investing.
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Kyith worked as an IT Operations Engineer from 2004 to 2019. He currently works as a Senior Solutions Specialist at Insurance Start-up Havend. All opinions expressed on Investment Moats are his own and do not represent the views of Providend.
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