Life Products

Nishit Majmudar

Thanks, Garth. Good morning everyone.
You will have noted from Garth earlier slides that Prudential Singapore has above profit margins among our Asian operations. I will talk briefly about some of the product strategies that we implemented over the last few years to achieve and maintain these high margins.
The first strategy evolves around increasing a proportion of Regular Premium business as a percentage of APE. During the period 1998 to 2001 Prudential and industry were writing increasing amounts of Single Premium business. This increase in Single Premium business was caused largely by the liberalisation of the Central Provident Fund rules, basically 1997 and another liberalisation in 2001. Since 2001 we have significantly increased our proportion of Regular Premium business as compared to the industry. This was achieved through a combination of measures, like re-training of advisors and setting minimum targets for Regular Premium production, (inaudible), etc.

Now, let me talk a little bit about our Single Premium business and how we manage the mix of our Single Premium business in a fast evolving market. The blue line shows our market share of the Single Premium traditional business and the green line shows our market share of our Linked business. Since 1999, just up there, we have deliberately slowed down the sales of our Single Premium traditional business, as this business has low margins and is not very capital efficient. Our competitors continue to write large volumes of this business, and hence our market share of this business continue to drop every year. The market share now is pretty low. We have instead focused our energies on the sales of Linked Single Premium business, which is very profitable and capital efficient. The red bar shows the sales of our Single Premium Linked business. This business has grown consistently every year – these are only the half year results – have grown every year since 1998, with year 2001 being an exceptional year because of the Central Provident Fund liberalisation.

We are very proud of our Singapore Managed Fund and I would like to share some of the highlights with you. It was launched in 1992 and has generated a return of 6.5% since inception. In 2002 it won a special award for the highest absolute returns over a 10-year period. At £603 million it is by far the largest unitised fund in the Singapore industry, even including the Unit trust.
The Singapore Managed Fund has not only managed generated good absolute returns, but has also out-performed the benchmark consistently from 1999 to 2004. This out-performance has resulted in many satisfied customers and has created significant value for the shareholders.
Over the last few years, many new Linked funds and Unit trust have been launched. Obviously there is more competition now. Now there are more than 100 Unit Linked funds and Unit Trust funds in Singapore. However, about 70% of these funds have a fund size of less than £25 million and, as a result, have high expense ratios. Over the last few months, in fact, we've seen some of these small funds closing down. We at Prudential have built a core range of funds that have got critical mass, low expense ratios and solid investment performance. The Asian Reach fund and China India fund were launched less than 2 years ago and it demonstrates our ability to build critical mass quickly. Our diversified fund range allows us to meet the changing needs of our customers and also stream a steady stream of income for our shareholders.

I think that on the product side one of our key achievements has been our ability to launch Linked business successfully across most of our operations across Asia. In 1992, Singapore was the first country to launch the Linked business in Asia and were held at that time by the team from the UK office. Since then the Singapore team has taken on that job and has helped many other countries to successfully launch Linked business. We are in the first to market in 5 countries: Singapore, Malaysia, Indonesia, Philippines and Taiwan. And their approach has been to introduce and explain the concept to the regulators. We have also assisted them drafting the legislation and reporting requirements and in some cases have arranged for them to come up and meet up with the Singapore regulators. We also helped the regulators to design a training programmes and agency licensing exams and by doing so we have created a win-win, not only for Prudential, but also for the local industry.
I'm going to hand back to Garth.

Garth Jones

I mentioned earlier the importance of riders to profitability. It is also important that our Life businesses continue to offer a mix of savings, investment and protection products to meet a broad range of customer needs. The successful development and sell of riders is therefore something we focus on as a means of further improving both new sales and providing up-sell opportunities to our existing customers. The successful introduction of potential opportunities is leveraged through shared learning and delivery across the region. The successful riders are transplanted from one country to another. The breadth and depth of our operations in the region is a distinct advantage here and you can see how rider attachment has steadily in Malaysia over the last 10 years.

To summarise: in terms of product management, our diversified portfolio is a core strength. This enables product and country portfolio management; it allows sharing and leverage (of?) competitive advantage; it allows maintenance of margin and volumes. We have a track record of consistently delivering value successfully in this way.

I now pass to Pete, our Regional Actuarial Director to talk about Life Product Design.

Pete Lloyd

Thanks, Garth and Nishit. Good-morning everybody. You just heard about our history of successful product management. What I'd like to do now is to give you some insights into the product development environment in Asia. I'll also explain the approaches we've adopted to ensure that we maintain our record of innovation in product development, whilst effectively managing risk and delivering strong bottom-line growth.

Over the course of this week, you'll see the diversity of the region in which we operate. In addition to the diversity of economies and socio-economic environments, we also have to work with 12 different regulatory structures. Some of these have strong UK or US influences in both regulatory framework and types of products prevalent in the market. For example, fund structures vary from market to market, and territories with a British colonial past, such as Singapore, Malaysia, India, the UK style 1910 Life Fund structure is mandated for participating business. But not-participating and Unit Link business may be written in shareholder owned funds.

In markets where an American influence has been greater, such as Taiwan and the Philippines, we operate Single funds writing both participating and non-participating business. And the nature of participation tends to be through cash dividends, rather than reversion real terminal bonuses. There is though a considerable degree of overlap between approaches. For example, we write cash dividend participating products in Hong Kong and offer UK style participating products within US style funds in Indonesia and Vietnam. Despite their individual differences there are though some common regulatory themes, which we see across the entire region. The region's regulators are by nature innately conservative. This conservatism seems to be a consequence of the regulator's desire for stability in the Life Insurance market, rather than any specific consumerist objectives. Regulators are often concerned to provide a stable environment for their domestic insurance companies, particularly where these company's agency distribution channels will (transcriber: have?) considerable political force.

Thus innovation, particularly by the foreign players, is either discouraged or even not allowed. Unlike the UK, where regulation is concentrated on the regulation of the sales process, regulators in Asia prefer to go one step back on that and they prefer to focus on products. The level of product regulation varies from country to country. In some cases, notably Japan, Korea and Taiwan and also Thailand, the regulator will impose premium formulae including prescribing the mortality tables used, interest rates and even maximum expense loads within the formulae. These formulae, though, are generally quite simplistic. They don't, for example, allow for the cost of capital tax or maintenance expense inflation over the life of the policy. Our internal rating system, in contrast, are much more sophisticated and build all these factors into our assessment of profitability. It's therefore necessary for us to backwards from our own profit tests to solve for a set of parameters in the regulatory rating formulae, which both meet our internal criteria and within the regulatory limits for ages and policy terms, which we wish to offer. Sometimes we can't actually find any common ground between the regulatory rating limits and our own assumptions. For example, the regulation of mortality assumptions in Taiwan wouldn't allow us to factor in any allowance for mortality improvement into annuity rates. So we decided to just stay out of the annuity market there, even though some competitors have promoted such products quite heavily. This conservative attitude that Garth mentioned sometimes costs us some sales, but we believe it's the right approach for sustainable profitability.

Regulators have a strong influence on product design in Asia. In seven out of our twelve markets, we're required to gain regulatory approval of all product features prior to launch. This means filing policy documents, premium rates, and bases with the regulator, and often entering into lengthy correspondence and debates with them regarding the introduction of new product features or benefits. As I mentioned earlier, in 4 of these markets we also have to follow a formula-based approach to premium rating. Whilst the other 5 markets don't officially require approval of all product features, in practice we have to gain regulatory approval for almost all new products. Even in Hong Kong, which has perhaps the most liberal regulatory environment, we have to get approval for our Unit Link products from the body which regulates mutual funds. In Singapore, products in which people can invest their Central Provident Fund contributions have to go through both the normal filing procedures with the monetary authority of Singapore, and also be approved by the CPF board.

One common feature across most of Asia is the regulators insistence on guaranteed minimum surrender values. In most markets, these aren't particularly onerous guarantees, as the statutory minimum levels are considerably lower than what we would offer in normal market conditions. In some markets, though, notably Taiwan, Japan and Korea, statutory surrender values on non-linked products are based on the original pricing formulae, leading to higher guarantee and capital costs and a more restricted investment strategy. Our strategy in markets with high guarantees has been to reduce our alliance on such traditional products in favour of linked products, where we have been able to leverage our experience in other markets to develop and gain regulatory approval for innovative and market leading products which offer more choice for consumers with greater capital efficiency and lower risk to our business. To achieve this, as Nishit mentioned, we have had to spend substantial time educating regulators and helping them to develop appropriate regulations for non traditional types of business. Whilst these procedures are sometimes frustratingly slow, we see them as a worthwhile investment in aiding the development of a healthy and sustainable market for modern financial products.

One of the challenges we face, particularly in the less developed markets for life insurance, is the lack of industry co-ordination in obtaining data for pricing our products. Unlike the UK, where the actuarial profession has been instrumental in co-ordinating the analysis of mortality and morbidity data, the local actuarial bodies in Asia have not had the resources or the influence to be able to gather industry data for independent analysis. It's perhaps worth saying a few words about the actuarial profession in the Asian markets. Actuarial associations exist in most of our markets, though lack of scale means that few have the resources to run their own training programs. There are though active actuarial associations in our established markets of Hong Kong, Singapore and Malaysia with actuaries who are UK, North American or Australian-qualified. The other developed markets of Japan, Korea and Taiwan also have actuarial bodies with their own professional qualifications. Indonesia and the Philippines also have recognised professional actuarial associations with their own locally recognised qualifications, but in Thailand and Vietnam local actuarial professions have yet to become established. The developing markets of India and China are, I think, the ones where actuarial capabilities are expanding most rapidly. After almost 50 years of marginalisation following the nationalisation of the insurance industry in India, the Indian actuarial profession has been re-invigorated by the new era of competitive financial services market with a need for modern standards of financial analysis and control. Similarly, the rapid growth of the Chinese insurance market has led to a high demand for actuarial skills, with many highly educated young people joining the profession. Whilst China has, for some years, had its own system of actuarial qualification for regulatory purposes, the trend is now for people to study for international, primarily US, qualifications as well. The rapid progress that these students make is all! the more impressive, when you realise that many of them have never travelled outside China, but are studying and taking exams in English.

In the more developed Asian markets the regulators and industry bodies have provided some standard experience tables for their local markets, but in most cases this data is confined to mortality experience. The existence of a few dominant players in the market, who are often unwilling to share their data for competitive reasons, means that any data that is available may be somewhat outdated and needs to be treated with caution. Such information as there is, tends to come from government sources and be drawn from population, rather than life industry experience. We therefore have to take a cautious approach to rating, using tables adjusted from other markets, and also working with our re-insurers to interpret local data. We have to be particularly careful with morbidity statistics, where the introduction of insurance cover may lead to an increase in the reported incidents of some ailments, which were previously underreported, due to the lack of affordable medical care. This inherent uncertainty leads us to prefer non guaranteed risk premium rates or participating with profit policy structures, wherever possible.

Besides the direct regulation of products, the other main influence of regulation is in respect to reserving and capital requirements. Regulatory valuation requirements vary considerably between countries, both in methods of calculation and overall results. The effectiveness of local regulatory solvency regimes in Asia has been variable. On one hand, the adoption of UK or US style reserving and solvency requirements, together with the conservative approach to product pricing, has lead to stable and secure life insurance environments in our established markets. In contrast, the Japanese, Korean and Chinese markets have suffered from overly generous guarantees in the past, which became onerous as interest rates fell and have necessitated numerous bail-outs. The true solvency of some of the local companies is often obscured by their ownership or government subsidy. In recent years, the local regulators have acted to clean up their industries, but there are still some remaining issues of negative spread and inadequate reserving, obscured to some extent by reserving bases which don't reflect current investment conditions. The regulatory stance in these markets though has been to protect established local players, allowing them time to rebuild their balance sheets, rather than to force rapid consolidation. Local solvency margin requirements also vary considerably. Asian markets have generally followed European union style calculations with a percentage of reserves and a percentage of sums at risk. These regimes, though, are increasingly being replaced with more sophisticated risk based capital requirements on American lines with specific allowance for interest rates, mortality, morbidity and investment mismatching risks. Japan and Indonesia have operated risk based capital solvency margins for some years, Taiwan moved to RBC last year, and Singapore adopts completely new risk based valuation and solvency requirements from 1st of January, 2005. We expect other countries to follow this trend over the next few years.

With the challenges outlined on the previous slides, we need to have strong actuarial teams on the ground in each operation. Across the region, we have over 40 qualified actuaries and around 100 students. Most of our actuarial staff are local recruits, though where we can't get the necessary skills locally, we bring in expatriates with the necessary experience. We also use secondments between Asian and other Prudential group operations, to fill gaps and provide career development opportunities for our actuaries and students. This depth of talent and experience provides the resources to adopt a rigourous approach to product design, with a robust regional product approval process. We encourage close co-operation between individual operations through regular conferences and training courses, in order to leverage expertise across the region, to enable faster and more efficient product development. Once products are launched, we also undertake regular reviews of risks and profitability to ensure that our products continue to meet our requirements. The quality of our actuarial teams has lead to good relationships with local regulators. We encourage our local actuaries to be open and pro-active in their relationships with government authorities, and to contribute to the development of the actuarial professions and financial services in which they operate.

The combination of strong local actuarial and marketing teams with on-the ground knowledge of their local markets, together with the synergies of support at a regional level, gives us significant advantages in product design. This structure also adds an additional level of risk control and review as new product proposals are first subject to rigourous testing and risk assessment at a local level, and then have to pass through a standardised regional screening process for approval prior to launch. The actuarial aspects of product design are of course centred around the financials, with the emphasis on risk control and profitability. We also set criteria for capital efficiency, in terms of limits on initial strain, length of pay-back periods and contributions to the estate in the case of life fund products.

Garth has already illustrated our overall capital profile. To achieve this level of capital efficiency, we have to develop products with favourable profit signatures. Our product approval criteria include limits on the new business strain, as a proportion of annualised new business premiums, and also on a pay-back period of any strain. Our aim on all products is to limit shareholder funding of new business strain to less than 40% of annualised new business premiums, and to achieve full pay-back of any strains within 5 years of policy inception. Our internal rate of return requirements vary by territory, as we looked for product IRR's of at least 10% per annum above the achieved profits risk (incomprehensible). In practice, though, the high capital efficiency of our products, in particular the unit link ranges, can provide us with a much higher returns on capital. The other aspect of capital efficiency is the avoidance of onerous guarantees. For participating policies this means insuring there is a sufficient proportion of the total policy benefits are in the form of non guaranteed terminal or final bonuses, so that we maintain a buffer between what we expect to be able to pay out, and what we have to pay out even under adverse circumstances.

Risk control analysis is primarily a matter of sensitivity testing against variations in all key parameters, with particular consideration being given to circumstances where losses may be multiplied by combinations of adverse experience. Whilst we don't expect everything to go wrong at once, we like to know what the result would be if it did. Having established that a proposed new product meets basic financial criteria, we also take a wider view of the product in conjunction with our colleagues in the marketing and compliance areas. You'll hear more shortly about our pursuit of customer centricity, but in the case of product development, this means insuring that any new product will meet customers needs, add something new or update an existing product, and that policy benefits can be communicated in such a way as to insure that policy holders reasonable expectations are created and met. This last point leads on to the regulatory and compliance issues of distributed training and policy illustrations.

Whilst we put a lot of effort into the development of new and enhanced products, we also carefully monitor in-force business, the overall financial health of each life business is reviewed annually through a financial condition report. These reports are reviewed by my regional actuarial team, and a regional report prepared for presentation to the group board. We also monitor experience against our embedded value assumptions, the results of which are reported in our achieved profits and the group accounts. It's inevitable that experience will emerge differently from our best estimates, particularly in new and/or rapidly developing markets. For example: this year we increased expense assumptions for our Vietnamese operation in the light of higher than expected policy maintenance costs. We also updated persistency assumptions in our Singapore operation, to reflect the slightly higher surrender rates experienced over the past few years. Despite the success of our unit link products, participating business still represents a large part of our business. Bonus management is therefor a critical part of our financial controls, and one where we are becoming increasingly sophisticated. We manage bonuses using asset share techniques and are now supplementing these with stochastic modelling to determine guarantee costs and capital requirements. The results of these investigations have lead us to adopt a cautious stance on bonuses, favouring lower revisionary bonuses and greater emphasis on non guaranteed terminal bonuses. This has enabled us to maintain an asset mix which we believe will be of long term benefit to both policy holders and shareholders, without undue risk or large capital requirements. In some cases our business reviews conclude that products need withdrawing or re-pricing. As examples, we withdrew from immediate annuity business in Singapore, when we felt the market was mispricing longevity, only re-entering once we felt that our product would be both competitive and profitable. In Japan, we withdrew! last year from the independent agency channel, as the products they were selling to corporate clients no longer provided an acceptable return. PCA Life Japan has since been repositioned to sell a new range of products to individual clients.

We continue to take a lead in the development of the financial services markets of Asia, with the aim of fostering a healthy and sustainable market for life insurance products. We have contributed to the development of regulation, by providing information on markets in which we operate, and facilitating contacts between regulatory bodies in different markets. We have helped to develop new regulations, particularly in the area of unit link products. As a market leader in the link business, we first had to gain regulatory approval for the concept, which has involved educating local regulators, and helping them to formulate suitable regulatory frameworks. Our actuaries around the region also take an active part in the local professional bodies, where these exist, with some of our senior actuaries taking leading roles in these organisations. We encourage this involvement, both for the professional development of our staff and to promote what we believe are our best practice standards throughout the industry.

To summarise, life product design in Asia is driven by a complex mixture of regulatory and competitive factors, which differ by market. We have an effective approach to meet the challenges of this environment, backed up by a well qualified and experienced team of professionals with well structured processes. And finally, we have a proven record of positively impacting the business and the industry. Thank you. I will now hand over to Ken, Chief Marketing Officer of our Hong Kong insurance operation, to talk about customer centricity.

Close this window