Risk Based Capital Framework 2 (RBC2) - What is it & How does it affect you?
The RBC framework for insurance companies was introduced back in 2004 and it adopts a risk-focused approach to assessing capital adequacy and seeks to reflect the relevant risks that insurance companies face.
It’s objectives are (1) to enhance policyholder protection, (2) observe international standards and best practices and (3) to ensure insurers can perform its economic and social role on a sustainable basis.
The revised framework (RBC2) requires insurers to set aside more capital, especially for products with high guarantees.
Coupled with the low-interest rate environment, it makes the insurers role more challenging.
Also, the Life Insurance Association Singapore (LIA) is adjusting the projected illustrative returns from 1 July 2021 from 4.75% to 4.25% for the upper illustration and 3.25% to 3% for the lower illustration.
The last adjustment was made in 2013 from 5.25% and 3.75% to the current rates.
Consumers do not need to be concerned as the changes are only made on policies incepted moving forward (and not retrospectively)
Consumers can expect lower guaranteed returns from policies taken up 1 July 2021 onwards and this may potentially affect overall returns – making par policies (whole life, endowment) less attactive.
Insurers will also be replacing ALL of their existing products to meet the new requirements.
Do par policies still have a place in your portfolio moving forward? How can you still use them effectively in your portfolio?
Feel free to reach out to me for a discussion! Signing off. Your friendly #CFP #CertifiedFinancialPlanner