SecureGrowth 20: repricing a participating endowment after a 170 bp fall in yields
Summit Life's flagship product, SecureGrowth 20, is a 20-year participating endowment sold at an average annual premium of ₹42,000 for a ₹5,00,000 sum assured. It was priced 30 months ago on a gross investment return of 8.0%, an expense overrun of 12% of first-year premium, mortality at 90% of the standard table and a 6% first-year lapse rate. The sales illustration projects a maturity value of about ₹11.2 lakh. Since then the 10-year benchmark yield has fallen from 8.1% to 6.3%, new-money corporate spreads have narrowed by 60 bp, and the yearly renewable term reinsurance rate has risen 18%. Three years of bonuses have been declared at ₹42 per ₹1,000 sum assured on a simple basis, and the asset share for the 2021 cohort is tracking 9% below the illustrated path. New business is ₹180 crore of annualised premium; the solvency ratio is 1.71 against a 1.50 control level; the product is 46% of the individual book. The board wants a decision in three weeks.
1. Assess whether SecureGrowth 20 is still profitable at current assumptions, quantify the effect of the yield fall as far as the data allow, and set out the pricing or design levers you would pull, in order.
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1. Is the guarantee at risk? No. Over 20 years the contract collects ₹8.4 lakh of premium (₹42,000 × 20) against a ₹5 lakh guaranteed sum assured. Even at 6% the guaranteed benefit is covered with room to spare. The stress is on the participating upside and on shareholder profitability, not on the solvency of the guaranteed benefit.
2. Size the yield effect. The backing portfolio has a duration of roughly 7 years. A 170 bp fall in new-money yields reduces expected accumulation by approximately 1.7% × 7 ≈ 12% over the remaining term. Applied to the illustrated ₹11.2 lakh, the supportable maturity is closer to ₹9.8–10.1 lakh before any bonus reduction. The 9% shortfall already visible in the 2021 cohort asset share is consistent with that calculation and suggests the gap is not a one-off.
3. Profitability test. Re-run the profit signature at 6.3% gross return, YRT rates 18% higher and the actual expense overrun. On these inputs the internal rate of return on required capital falls below the product hurdle, and the product no longer earns its risk margin as priced. The 46% share of the individual book makes this a capital-allocation decision, not a single-product decision.
4. Levers, in order of least harm:
- Stop illustrating the old bonus scale; restate new-business illustrations on a supportable basis and cut the expense load.
- Reprice: roughly a 10–12% premium increase, reduced guaranteed additions, or a longer term for the same premium.
- Renegotiate the YRT rate and reduce the acquisition load.
- Shift new money modestly into longer matched credit within credit-quality limits.
- Withdraw from new sales if the repriced product still fails the hurdle.
Order matters: repricing is reversible; already-declared bonuses are vested and cannot be clawed back.
2. Policyholders were shown roughly ₹11.2 lakh at maturity. What are your obligations on illustration, bonus declaration and governance, and how do you prevent this becoming a mis-selling and remediation problem?
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Illustration. Sales illustrations must be prepared at or below the maximum rate the regulator permits and must show that the higher figures are not guaranteed. If the ₹11.2 lakh was produced at 8% when the permitted illustration rate was lower, the illustration itself was non-compliant, not merely optimistic. Establish first which rate was used for each distribution channel and vintage - that determines whether this is a pricing problem or a conduct problem. Illustrations must also show the guaranteed element separately from the non-guaranteed element, with a clear statement that bonuses can be zero.
Bonus declaration. The ₹42 per ₹1,000 already declared for the past three years is vested and cannot be withdrawn. Going forward, the with-profits committee may declare a reduced rate or nil. The decision must be taken on the fund's asset share and the reasonable expectations of policyholders, both of whom are treated fairly, not on the shareholder dividend.
Governance. Take the bonus decision through the with-profits committee and the board, minute the evidence, model the fund on both a deterministic and a stochastic basis, and have the Appointed Actuary sign off. Communicate the reduced outlook to in-force policyholders annually and honestly.
Mis-selling containment. Audit the last 24 months of illustrations by channel, run root-cause analysis on complaints and free-look cancellations, retrain and re-script agents, and prepare a remediation plan for policies sold on a non-compliant illustration. Silence now becomes a conduct finding later.
3. Recommend an asset-liability approach for the guaranteed element and explain how it interacts with the bonus decision and with capital.
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Split the portfolio. Segregate the guaranteed element from the non-guaranteed element. The guaranteed sum assured plus vested bonuses is a bond-like liability with a known date and amount; match it with long-dated government and AAA paper whose cash flows fall on or before the guaranteed payment dates. Do not reach for yield in illiquid credit to cover a guarantee - that trades a certain liability against an uncertain asset.
Duration and convexity. The duration of the guaranteed cash flows at issue is materially longer than 7 years; the current portfolio duration of about 7 years leaves a reinvestment gap. Extend duration where paper is available, and use forward or swap-based hedging where the market permits, so that a further fall in yields does not worsen the position.
Non-guaranteed element. Hold a higher-returning, moderately diversified portfolio for the participating element, but keep the credit-quality floor and liquidity buffer consistent with policyholder reasonable expectations. The asset share, not the illustrated rate, drives the bonus.
Interaction with the bonus decision. The lower the expected asset return, the lower the sustainable bonus. Cutting the bonus protects the fund and the estate; chasing yield to preserve the bonus increases the risk of a credit loss falling on policyholders. That trade-off should be modelled and documented, not decided by the investment team alone.
Capital. Hold capital for interest-rate mismatch, credit spread and the cost of the guarantee. Report the mismatch position to the board each quarter, and stress it for a further 100 bp fall. Assumption changes that flatter the solvency ratio at the year-end are a separate and serious governance issue - see how the same pressure appears in valuation work.