A financial institution, such as a bank or insurance company, is required by the Monetary Authority of Singapore to have a share capital (i.e. risk-based capital) that reflects its risk profile. The risk profile comes from its invested assets and from its contractual liabilities to its customers.
A financial institition that takes more risk (i.e. asset and liability risk) is required to have more share capital. One that takes less risk is required to have lower share capital.
If the financial instition has more capital, it may appear to be "safer" and "better" for their customers. But this is only one side of the story.
A financial institution with more share capital has to make more profits to satisfy their shareholders. The expected return for shareholder is usually 10% to 15% on their investments. The higher profits is usually taken away from their customers, through excessive charges and other devices to "cream off" the customer.
It may be better for customers to transact with a financial institution that take lower risks and require lower share capital from the shareholders.
When you invest in a low cost, diversified investment fund, you are taking the investment risk. The fund manager does not take the risk, and does not require to have a high capital to provide the guarantee. They are able to give you a higher return.
Read this FAQ on how you can reduce your own risk, and still enjoy the high return:
http://www.tankinlian.com/faq/savings.html
Mr.Tan,
ReplyDeleteI've invested my money with NTUC Insurance since 1995...
In this case,is NTUC considered as
"safer"??
Retiree : )
Is it true that it is because of this, many insurers try to sell ILP?
ReplyDeleteBecause by selling more endowment plans, the insurer has to maintain a higher risk share capital?
5.47pm is absolutely correct. It is no longer worth while selling traditional products like endowment or whole life.Too much capital is committed to low interest bearing instruments like bonds which is a requirement to form the risk based capital. And this is not putting the life fund to work harder. As a result the return of the life fund is poor.
ReplyDeleteNTUC life fund might have suffered last year . The result is still not known. The result for 2006 and 2005 was 7% and 10% respectively during Mr. Tan 's time.