Tan Kin Lian's Blog: Reasonable Expectation

Wednesday, May 07, 2008

Reasonable Expectation

Mr. Tan,
What do you mean by policyholder's "reasonable expectation"?

REPLY
In a participating life insurance policy, the contract states that a bonus will be added each year based on the profit for the year and distributed in a manner that is approved by the board of directors, acting on the advice of the actuary.

To prevent abuses, the Monetary Authority of Singapore (MAS) has issued guidelines to require the insurance company to declare its bonuses fairly and equitably, to meet the "reasonable expectation" of the policyholder.

Take the example of a policy with a benefit illustration stating that a bonus of $X will be added yearly to the policy, subject to the investment yield at 5.25%.

If the insurance company earns much more than 5.25%, the policyholders would expect the bonuses to be increased. It would not be fair for the directors to reduce the bonus. The policyholder can object to this reduction as a breach of "reasonable expectation".

If the yield is lower, the policyholder will have to accept that the bonus will be reduced, but they can insist that the reduction has to be applied fairly across all the policies. The insurance company cannot cut the bonus for some policies and increase the bonus for other policies.

6 comments:

Anonymous said...: Dear Mr Tan, i would like to thank you for the article that appeared in straits times, for it spoke out the displeasures and confusion felt of all singaporeans who hold NTUC policies. while my dad feels that the article was a resort "to make yourself heard" in a negative notation, i personally feel that singaporeans, if not spoken up for by another brave person who knows what he is talking about, is going to be at the losing end often. take this case for example.

the shift of emphasis between the special bonus and annual bonus attempts to be downplayed and NTUC attempts to convince the policyholders that this increase in special bonus is good and suitable for all policy holders.

i beg to differ.

this shift is suitable for policyholders who are more risk-taking. however, in my opinion, policyholders who let the insurer do the investing, tend to be more conservative, or balanced at most.

with this shift, it introduces more unknown variables such as the lack of transparency as to how much of this special bonus is vested as u have mentioned and reducing the more vested annual bonus. this seems to be more inclined to the preferences of risk-takers, which is unfair to the policyholders as they may or may not prefer such risks.; May 07, 2008 4:00 AM
Anonymous said...: Hi Mr Tan
I was trying to point out one point from the recent change in the bonus cut. I believe a lot of policyholders thought that they will breakeven their premium paid within 10 - 15 yrs when they bought the policies and now it seems that they are only able to breakeven or get back our premiums upon termination due to death or surrender. The fact is a lot of agents selling point is the high surrender value during the policy duration and now it seems that they just change the whole feature of their participating plans...; May 07, 2008 4:25 AM
Anonymous said...: I think 4.25 AM knows very little about participating policies.

Break even in a particular year means your cash value at that year equals or exceeds total premium paid into the policy (up to that year). It doesnt depend on surrender or termination.

You better brush up on insurance, or ask Mr Tan for private tuition.; May 07, 2008 5:23 PM
Anonymous said...: Mr Tan

I think you have to check your facts. I do not think MAS did issue guidelines to dictate that it is mandatory for all insurers to declare their bonuses in a fair and equitable manner. Rather, MAS leaves bonus declaration to be a commercial decision, although it is required of all insurers to have a proper governance policy. You seemed to have lost touched with changes in the market.

Your view on giving little discretion to the Board and Actuary to declare bonuses shows that you do not trust the Board or the Actuary belonging to your own profession. This is sad. You advocate so much on investing in funds. But in doing so, you are trusting the fund manager to make the investment decision for you. Why should you trust them and their judgement? You can simply pick your own stocks, and not let these fund managers with exorbitant and lavish offices take a huge cut from your returns. They may appear to charge low annual fees, but have you seen the amount of performance bonuses they take from you?

If the Board and the Actuary is not given the power to exercise accountability and judgement in declaring bonuses, then they are in fact not needed in today's insurance world. Someone should just come up with a formula that could calculate your bonuses. I think anybody who knows how to add/subtract/multiply/divide can do just that.; May 07, 2008 5:37 PM
Anonymous said...: To: 5.37 PM

Are you saying that MAS allows the directors and actuaries to change the bonus in an arbitrary manner? Is this why NTUC is making the change? It does not have to be fair and equitable? It just have to be a "governance policy" - whatever that means?

At least the fund manager is transparent in taking away their stated fees, and leave behind a good yield to their investors.

I have invested in some funds that give a return of more than 10% in recent years, compared to the poor return and bonus cut by NTUC. Where is the comparison?

KY; May 07, 2008 7:49 PM
Anonymous said...: Yes where is the comparison Mr 7：49PM? When you die, your funds will not protection values. That is the difference. Pls get your facts right.; May 07, 2008 11:01 PM