Comparing the sales performance of insurers would have been simpler if there were only one premium payment method. Unfortunately, there are two payment methods which make comparison problematic. With these two payment methods, comparison of companies’ new sales is not determined accurately.
For years, the life insurance industry’s sales performance has been measured by the total premiums or total premium income, net of reinsurance, generated in one year. This has been criticized, however, because in determining the total premium income, 100 percent of the single premium business is factored in, thus distorting the premium income for the year since a single premium covers the entire period of the policy, which could be several years. Counting in single premium policies bring in more money up front because of the immediate payment of the entire premium than the regular premium policies. Single premiums are paid at the start of the policy. This can be distorting especially when comparing the new business of one insurer with the others that both generate single premiums and recurring premiums. The proportion of single premium policies differs from one insurer to the other. It is not a good way to compare new sales generated among insurers.
Single premium is also known as single-pay or one-time pay, as opposed to the regular pay. For the regular pay, it is to be noted that insurance policies afford several premium payment options. Premiums can be paid monthly, quarterly, semiannually and annually. Thus, the acceptance of 100 percent of the single premium business has become the root of contention. New sales or new business of life insurance products written during a reporting year are not measured accurately using total premiums.
Beginning 2019, the Insurance Commission has adopted the Annual Premium Equivalent, also known as the New Business APE or the Annualized Premium Equivalent, as a standard to measure life insurance industry sales performance. The APE is already widely used across the globe. It has, in fact, become an international standard. New sales of life insurance products are measured more accurately using the APE.
Under the APE, the value of regular premiums from products newly sold in a specific year (or the initial annualized premium) is added to 10 percent of any new single premiums written. Only 10 percent of the single premiums are considered. It is the sum of the annual premiums of new recurring premium business (initial annual premium) plus a portion, or one tenth, of the single premiums written during the reporting year. Why 10 percent? It assumes that the average life insurance policy lasts only for 10 years. The 10 percent annualizes the single lump-sum payment received over the 10 years the policy is in effect. The APE, thus, normalizes policy premiums into the equivalent of regular annual payments.
One alternative measure to determine new business is the present value of new business premiums, which recognizes all premiums at their present value. It is the present value of total confirmed premiums that will be received from present to future. It is a more sophisticated alternative that is part of the European Embedded Value standards. Still, there are others in the horizon such as the New Business Margin, which is determined by the Value of New Business divided by the present value of new business premiums PVNBP. The APE is not covered by IFRS 17 or by any GAAP.
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Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.
