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Capital markets products

CM-SIPSpecified Investment Products: Derivatives & Collective Investment Schemes M8Collective Investment Schemes M8ACollective Investment Schemes II CM-EIPExcluded Investment Products: Securities, Collective Investment Schemes & Foreign Exchange

Insurance

M9Life Insurance & Investment-Linked Policies M9AStructured Products & Structured ILPs HIHealth Insurance PGIPersonal General Insurance CGICommercial General Insurance BCPBasic Insurance Concepts & Principles

Securities & derivatives dealers (IBF)

RES 1ASecurities Exchange Dealers RES 1BSecurities Dealers of Non-Exchange Members RES 2BDerivatives Dealers of Non-Exchange Members RES 2ADerivatives Exchange Dealers RES 12BSecurities & Derivatives Dealers of Non-Exchange Members

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M9A — Structured Products & Structured ILPs

Structured ILPs

Life insurance is one of the possible "wrappers" for a structured product, and the structured ILP is that wrapper. It is typically a single-premium investment-linked policy (ILP) whose sub-fund is invested in structured products (or other structured funds) rather than ordinary equity or bond funds. The structured products are tailor-made for the sub-fund: the issuer — or another entity — stands ready to unwind them at prevailing market prices so the sub-fund can meet redemption on each dealing day. Because an ILP is a life insurance policy, only a life insurer may issue it, so it behaves like term insurance plus a structured fund and insurance terminology applies — money in = premium (the principal), contract = policy, redemption value = cash value. Structured ILPs carry a fixed policy term / maturity date, usually have complex structures, and are exposed to counterparty, credit-default, market, foreign-currency, liquidity and other risks.

7 sections~6 min read

Must-know for the exam

A structured ILP is typically a single-premium ILP whose sub-fund is invested in structured products or other structured funds; only a life insurer may issue it (M9A Ch4, 1.7–1.8).
Life insurance is one of the possible "wrappers" for a structured product; a structured ILP operates like a term insurance plus a structured fund (1.1, 1.7).
The structured products are tailor-made for the sub-fund: the issuer (or another entity) stands ready to unwind them at prevailing market prices so the fund can meet redemption each dealing day (1.7; MAS Notice 307).
Insurance terminology: money in = premium (the principal); contract = policy; redemption value = cash value = surrender value = market value of units (1.8, 1.12).
In theory a structured ILP can be single- or regular-premium, but in practice it is single-premium because that cost structure best maximises investment returns (footnote 3).
Protection is kept very low so more premium is invested; the death benefit can be as low as 101% of the single premium (S$101k on S$100k), or the cash value if higher (1.10).
Death benefit pays the higher of sum assured or cash value, then the policy terminates; on survival to maturity the term insurance expires and the maturity value is paid (1.9).
The sum assured is the guaranteed death-benefit amount, but investment returns are NOT guaranteed except where a specific capital-guarantee feature is stated (1.12; 2.26).
Unlike a participating (par) policy there is no smoothing — the policy owner bears the full investment gains and losses and may lose part or all of the principal (1.4–1.7).
It is not a bond: even designs with regular payouts and capital return only "seek to provide" targeted returns; the insurer need not step in if the underlying assets underperform (2.24–2.26).
Counterparty/credit risk: the derivative issuer may fail to pay, deliver or honour a guarantee; a rating downgrade raises NAV volatility and a default can have a domino effect across counterparties (2.18–2.20).
Liquidity risk: derivatives are hard to value, so the sub-fund is valued on a regular dealing day (at least once a month, vs daily for other ILPs); redemptions can be capped (e.g. 10% of units/day) and early redemption can forfeit guarantee features (2.21–2.22; 7.7).
Layered charges: front-end sales charge ~5% (single premium), annual fund management fee, bid/offer spread ~3%–5%, plus the cost of death benefit; first-year expenses can reach ~8%, so it needs a medium-to-long horizon (2.9–2.12).
An ILP sub-fund is not a trust (the insurer is legal owner) but has quasi-trust status via policy owners' priority claims under the Insurance Act 1966; governed by the FAA 2001, Insurance Act 1966, CIS Code and MAS Notice 307 (5.1–5.3).
A 14-day free-look runs from issue of the policy document; cancellation refunds the premium adjusted for any downward movement in NAV per unit during the period (6.9).
A portfolio bond / insurance wrapper is an ILP that lets owners appoint portfolio managers and invest across cash, equities, bonds, derivatives and CIS; used for tax and succession, but it is not a conventional bond and the principal is not guaranteed (Ch5, 1.1–1.5).

What a structured ILP is

Life insurance is one of the possible "wrappers" for a structured product — and the structured ILP is that wrapper. It is typically a single-premium ILP whose sub-fund is invested in structured products (or other structured funds), rather than in ordinary equity or bond funds.

Here "structured products" are tailor-made for the sub-fund: the issuer(s) of the securities/instruments — or an entity other than the issuer — stand ready to unwind the products at prevailing market prices, so the sub-fund can meet redemption on each dealing day (a term defined in MAS Notice 307).

Because an ILP is a life insurance policy, only a life insurer may issue it. It therefore behaves like term insurance plus a structured fund, and insurance terminology applies: the money invested is the premium (representing the principal), the contract is the policy, and the redemption value is the cash value.

A structured ILP shares the common traits of structured products: bought with a single payment, a fixed policy term / maturity date, usually complex structures, and exposure to counterparty, credit-default, market, foreign-currency, liquidity and other risks. In theory it could be a regular-premium policy, but in practice it is single-premium because that cost structure best serves the goal of maximising investment returns.

The insurance element vs the investment

A structured ILP splits the single premium between a small protection (term insurance) component and a larger investment component placed in the sub-fund.

Because it is designed as an investment product, the protection element is deliberately kept very low so more of the premium works in the market — the death benefit can be as low as 101% of the single premium (e.g. S$101,000 on a S$100,000 premium), or the cash value if that is higher.

Unlike a participating (par) policy — which offers guaranteed plus non-guaranteed benefits and smooths returns by holding back some good-year gains to cushion bad years — a structured ILP has no smoothing. The policy owner bears the full investment gains and losses and, in a bad market, may lose part or all of the principal.

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It is still an ILP; the 'structured' part refers only to what the sub-fund holds, not a different product class.
Fund managers and banks do not issue ILPs — the insurance wrapper requires a life insurer.
The point is a low, not high, protection element — the goal is to maximise the invested portion.
The sum assured is the death-benefit amount, not the surrender payout; cash value moves with the market.
Despite the 'bond' label it is an insurance wrapper (an ILP), not a conventional bond or an endowment.
It is the higher of the two amounts — not simply one of them, and not premiums returned.
General market decline is market risk; counterparty risk is specifically about the derivative issuer defaulting.
The reduced valuation frequency (monthly, not daily) is what drives the liquidity constraint.

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Exam-style questions

For each structured ILP sub-fund, within what timeframes must the insurer provide the Semi-Annual Report and the Relevant Audit Report after the period to which they relate?Answer explained →Under the CIS Code investment guidelines applied to a retail structured ILP sub-fund, exposure to a single entity is generally capped at 10% of the fund's NAV. This cap is tightened to 5% whenAnswer explained →A structured ILP is marketed to 'seek to provide' annual payouts and repay capital at maturity. How does this differ from an ordinary bond?Answer explained →A retail structured ILP sub-fund enters an over-the-counter (OTC) derivative directly with a financial institution instead of through an exchange clearing house. Under the CIS Code, what counterparty-exposure treatment applies?Answer explained →Compared with an ordinary ILP, what is generally true of a portfolio bond?Answer explained →

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