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In Singapore, insurance companies will often deploy a technique termed “smoothing of bonuses” for its participating policies. In general, this technique maintains stability in the policyholder’s return over time.

The Framework of a Participating Policy

Within the participating fund, the fund manager invests in a range of assets that fulfils the insurance company’s objective. However, there exists systematic risk that affects the overall fund performance.

At the same time, other factors such as claim experience affects the overall performance of the participating fund.

On balance, the insurance company has to be responsible for its contractual obligations. For instance, it has to meet the guaranteed liabilities and to enable the declaration of bonuses at a reasonable level. With this in mind, the insurance company applies smoothing of bonuses to the participating policy to this end.

In Years of Good Experience

In this case, the insurance company will keep some of the additional profits earned in the year. While doing so, the insurance company will continue to declare and maintain the same rate of bonuses to the policyholders

In the long run, the insurance company may also choose to declare a higher rate of bonuses to the policyholders.

In Years of Poor Experience

To make up for the poor experience, the insurance company will withdraw part of its reserve from the previous years. Thereupon, it will continue to distribute the same rate of bonuses to the policyholders.

Conclusion

In the long run, smoothing of bonuses helps to provide stability in the returns to the policyholders. This is regardless of the participating fund’s experience. On the whole, the long-term cost of smoothing is intended to remain neutral across generations of policyholders.

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Share Your Thoughts 💭

1️⃣ Do you own a participating policy?

2️⃣ Has smoothing of bonuses kept returns stable for your policy?

3️⃣ Does the participating fund’s performance matter to you?


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