• 4.37 The application of the SV floor to liabilities also results in a non-economic valuation framework. The asset liability management mismatching issue above does not incentivise insurers to invest long-term particularly when interest rates are high, in order to avoid a large duration mismatch charge.
• 4.38 MAS introduced the SV floor within the reserving basis when UL policies were first launched in Singapore for the following reasons:
  • a) The lapse experience for UL products tends to be influenced by market conditions.
    • The crediting rate for UL policies is highly visible to policyholders and makes it relatively easy for comparisons to be made with interest rates on bank deposits.
    • If the differential between the crediting rate and rates provided by banks is sufficiently large, policyholders may choose to reduce their premium payments (for regular pay flexible premium UL policies) or surrender²³ the policy altogether.
    • This element of policyholder behaviour makes the valuation of such UL policies more difficult and subjective compared with more straightforward whole life or endowment products;

2016 0715 - Monetary Authority of Singapore - Consultation Paper: RBC 2 Review – Third Consultation - 157p