Positive Growth Ahead for Investment-Linked Product in Asia ex-Japan

March 30, 2023 — Singapore

Private pensions and the need for protection combined with investments will drive growth

Despite negative publicity in some markets, investment-linked products (ILPs) form an important distribution channel for mutual funds and are likely to see continued growth in Asia.

Regulatory changes in the region, including the implementation of risk-based capital (RBC) and International Financial Reporting Standard (IFRS) 17 in many parts of Asia, are putting more product emphasis on ILPs or variable capital products, which often rely on the fund-of-funds approach. The regulatory burden or capital reserve requirement is lighter on the separate account side since ILP assets and liabilities lie with the insured to a large extent. IFRS 17 also requires mark to market of the assets. Therefore, there is a preference for insurance companies to promote products that reduce asset accumulation on the general account side, such as ILPs.

At the same time, the promotion of corporate (second pillar) and private (third pillar) pensions in North Asia are increasing asset growth in ILPs. For example, under the default option scheme introduced last August in Korea for defined contribution plans, target-date fund products in the shape of ILPs have a strong chance of development and proliferation to replace current capital-guaranteed products already sold by insurance companies.

The structure of the market also plays an important role in the success of ILPs. In Indonesia, for instance, it’s estimated that at least 60% of life insurance assets are sitting within unit-linked products (ULPs), partly due to the low GDP per capita of the population, as those with low purchasing power prefer ILP-type insurances where their monthly contributions remain in the visible balance shown in an ILP policy rather than being “spent” at the end of the insurance period for term life insurance products. Furthermore, due to smaller wallet sizes, bigger items such as endowments and whole-life insurance are often not affordable.

ILPs seem to enjoy higher acceptance in emerging markets. For example, ILPs account for 61% of Malaysia’s conventional life business, while variable ULPs dominate the Philippines’ life insurance market at 74%. In these markets, ILPs are seen as providing multiple benefits in the form of protection and investments, along with access to mutual fund products otherwise reserved for wealthier individuals.

“We expect the region’s ILP market to grow, as North Asia’s corporate and private pensions require more insurance-based fund-of-fund products and solutions, and Southeast Asian markets' need for protection combined with investments continues. These bode well for asset managers wanting to work with insurers to place their mutual funds,” comments Soo Ah Ran Cho, associate director.

“In constantly evolving emerging markets such as Southeast Asia, the local population's relative inexperience with ILPs provides a cleaner slate for insurance companies to mold a positive image for their products. Even in mature markets such as North Asia, when products come with tax support or transparent benefits in terms of capital gains or regular high payouts, the stickiness of assets provides opportunities for managers,” she concludes.

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Note to editors

These findings and more are from The Cerulli Edge—Asian Monthly Product Trends Edition, March 2023 Issue.

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