Tan Kin Lian's Blog: Restructuring of bonus

Monday, May 05, 2008

Restructuring of bonus

Someone posted in my blog that the restructuring of the bonus rates is sound actuarial practice. He (she) even suggested that this is what I would have done, if I were in charge of NTUC Income.

I have to disappoint this person. In my view, the restructuring of the bonus is unfair and is detrimental to the interest of policyholders. It contravenes their "reasonable expectation".

There is no need to restructure the bonus, unless the solvency is at threat. This is not the case, coming from a year of high investment yield. If this is the real reason (and I doubt it), then it should be stated openly and the cut in bonus should apply to all policies.

I do not like a large part of my policies' bonuses to be unvested, as it can be taken away at any time. I do not like the manner in which this restructuring has been done.

10 comments:

Anonymous said...: Dear Mr Tan,

Correct me if I am wrong, I thought the actuary has mentioned that they would put the additional reserves into high yielding investments instead of leaving it unvested?

This is however, in my opinion, unnecessary because as a cooperative, to protect the policy holders' interests is of the uppermost importance. By putting the reserves in high yielding instruments, is as good as subjecting the policy holders to higher risks. If that is the case, I would have invested in the stock market instead. What we want is just a saftety net to fall back on in case we are faced with an unfavourable situation.

Please enlighten, thanks.; May 05, 2008 1:53 PM
Anonymous said...: Hi Mr Tan,

You mentioned "There is no need to restructure the bonus, unless the solvency is at threat. This is not the case, coming from a year of high investment yield."

The solvency of an insurer is measured over time and a conclusion cannot be drawn merely from a single year of investment returns. Mr Tony Tan, George Soros and even our PM Lee has stated that there is a possibility of a "L"-shaped long-term stagflation in which we could go into the most severe recession since the Great Depression. Surely it is naïve to imagine we have constantly have such good returns? It is important to learn from these great men.

What you have mentioned is thus a personal opinion and not a fact. Please distinguish between the two.

In fact, our government has on many occasions said that our country's reserves should never be tapped into due to such contingencies. I would like to hear from you your views on this issue.; May 05, 2008 2:33 PM
Tan Kin Lian said...: I have expressed my views many times, that is boring to repeat them.

The restructuring of the bonus is unjustified and goes against the "reasonable expectation" of the policyholders.

I hope that NTUC Income will avoid spending too much of policyholder's money on sales promotion and other expenses, and give a fair rate of annual and terminal bonus to policyholders.; May 05, 2008 3:03 PM
Tan Kin Lian said...: To 2:33 pm

I can probably guess who you are, but it will be nice for you to identify yourself, if you wish to engage in a serious discussion.; May 05, 2008 3:05 PM
Anonymous said...: Anon 2.33 pm,
So in your opinion, during bad times must cut bonus, because great leaders say so. During good times, we must prepare for bad times, so cut bonuses also, and as you have implied, great leaders say so too.
Here we are not talking about salaries bonuses, nor handouts. We are talking about our financial investments. Investments that we go into after considering the returns which are reflected in the projections.
In fact, the great leaders you mentioned are actually giving their own opinions. Whereas Mr. Tan Kin Lian is actually giving us a factual opinion as well as an opinionated fact. You are the one who has to distinguish between facts and opinions.
We are certainly not naive at all to have to believe that when the company makes money from our money, they hold back our money to spend our money...
Haha, those days of peasants pooling their money to the tontine head to abscond is gone already.; May 05, 2008 3:29 PM
Anonymous said...: 2.33pm, i can see where you are coming from. You think we are idiots and can drawn into a debate over such non related issues. Don't deviate and don't use the same line by someone in his argument to justify the restructuring of the bonus. The fact is policyholders will lose if the annual bonus is reduced and don't fool us with a longer and fatter carrot at the other end.It is an illusion. Remember, ILLUSION; May 05, 2008 7:13 PM
Anonymous said...: Mr Tan

you talked so much about policyholders reasonable expectations. Can you please define what it is? Reasonable expectations mean the policy must pay exactly the same bonus as it has stated in the illustration? Or what? What is the actual professional definition? Or it is defined and invented by you?; May 06, 2008 2:20 PM
Anonymous said...: Anon 2:20pm:

Let me answer this question for you, from a consumer and policyholder point of view.

Yes, I expect to see the policy pay out exactly what is in the illustration. Paying more than what was illustrated would be good, it shows that the company's investment is working hard. That's why I put my money with the insurer - to grow. It is reasonable to me that insurer do not lose my money through prudent money management.

If there is a reduction in bonuses, they must be restored in the earliest opportunity possible - this is the least of a policyholder's expectation.

"Not guaranteed" is not all clear passport to cut bonuses. I also expect "not guaranteed" to mean that more bonuses will be given - but has that happened before? If not, don't expect policyholders to happily accept that the insurer can arbitrary cut bonuses.

Why is it so difficult for Income to maintain the annual bonuses? Lack of focus or unable to find good talent to manage the money? These are the questions that Income's management must search for answers within rather than to penalise loyal policyholders.; May 06, 2008 5:59 PM
Anonymous said...: I don't really agree with this statement:

"There is no need to restructure the bonus, unless the solvency is at threat. This is not the case, coming from a year of high investment yield."

Isn't solvency a factor of past years' surplus, reserves, investments etc?

If there is deficient capital along previous years, will just one year of exceptional investment yield reverse the situation? Not to forget, what goes up comes down. I will worry if the company belittle the need to set aside reserves for future certainities.; May 07, 2008 9:55 AM
Anonymous said...: Skywalker

perhaps you hit an important note. I'm guessing that perhaps solvency could potentially be at threat for Income. If not, why suddenly change bonus structure?

I don't think the management will do anything to change suddenly if things are going well for so long. Especially if they want to keep running the high yields story in the newspapers.; May 08, 2008 3:52 PM