AIA is stepping up the equity and risk exposure of its participating fund, a move that should yield better returns for policyholders.

Traditionally, AIA has been the most conservative among the insurers. At one point some five to six years ago, for instance, its life fund's equity weighting was roughly 8.5 per cent.

Says general manager and executive vice-president Mark O'Dell: "Over the last 18 months we have been increasing our risk exposure on an opportunistic basis... A more bullish allocation strategy gives us a chance to meet an expectation of a higher return."

For a new series of participating products - endowments and whole life plans - the risk weighting, which includes equities and real estate, has risen to 30 per cent from 15 per cent previously.

For its in-force book of business, the risk weighting has risen to 20 per cent.

AIA's participating fund has about $15 billion in assets. With participating products, investors share in the experience of the fund through non-guaranteed bonuses. Policyholders are shielded from market volatility through a smoothing mechanism.

In terms of returns, the new policies are illustrated up to the industry cap of 5.25 per cent. Previously, AIA policies were illustrated at a lower rate of 4.75 per cent.

Mr O'Dell maintains that AIA will remain fairly conservative. "We're not going to be aggressive. If a company's par fund is 40 to 50 per cent in equities, policyholders may as well invest in ILPs (investment-linked plans) which are at least more transparent. I think the policyholder wants a par product because of the smoothing and balanced approach. We should hold more fixed income than other assets."

On its regular premium book of new business, 50 to 60 per cent tends to comprise par plans and 30 per cent ILPs.

He adds: "We tend to be in the conservative half of the market when we look at our competitors. We're comfortable there. We don't mind saying so and defending that position."

AIA's capital adequacy ratio is expected to fall somewhat. "A higher risk exposure will require us to hold more capital or be satisfied with a lower ratio, but our target is to stay at or above 200 per cent which is well within the strongest band. We're easily within the 230 to 240 per cent range."

As at end-2005 when AIA's equity weighting was 11 per cent, its capital adequacy ratio was the industry's highest at about 523 per cent, which suggested that it could well afford to take on more risk.

In the new range of policies, AIA has launched limited pay endowments with guaranteed premiums. Its plans will also pay out total and permanent disability benefits on a lump sum basis, instead of staggering the payouts over a few years.

On its new whole life series called Life Plus, its guaranteed cash value is comparable to the older series of Prime Life policies. But its total cash value - including non-guaranteed benefits - shows an improvement. Its total yield on the 30th year of holding a policy is also more competitive - and even more attractive - than those of some other insurers.

On its limited pay endowment - 12-year limited premium payment plan and maturity at 24 years - its yield to maturity is quoted at about 4 per cent, compared with less than 3 per cent for its earlier endowment plans.

Earlier this year, Prudential also said it has raised the equity weighting for its long-term regular premium plans to 45 per cent. This resulted in a lowering of its capital adequacy ratio from 370 per cent to 284 per cent. But it has also helped policyholders participate in strong equity returns. Prudential paid a special bonus of $250 million earlier this year.

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