Tan Kin Lian's Blog: View from Appointed Actuary (2002-2007)

Wednesday, May 28, 2008

View from Appointed Actuary (2002-2007)

Dear Kin Lian

A high terminal bonus (which some companies suddenly reduced to zero when STI was low in 2002/3) is used by most companies to pass much of the investment risk to policyholders, without giving any significant additional return. If a policyholder wants an investment linked product, he can buy one - a policyholder who buys With Profit wants and deserves a more predictable ultimate claim value.

Stock Companies (i.e. all companies offering With Profits life insurance policies in Singapore, other than Income) are constrained in that their shareholders demand a stable dividend. The amount that can be transferred to Shareholders is limited to 1/9th of the cost of bonus - hence the annual bonus has to be sustainable with a very high degree of confidence, even in extreme financial conditions - and hence has to be low.

Income, as a Cooperative, distributes less to shareholders and is not constrained in this way - the transfer from Par Fund to Shareholders Fund has been no more than 2% of the cost of bonus - so a variable and high annual bonus can be paid, to the benefit of policyholders.

Income has managed to maintain remarkable stability in its non-guaranteed Terminal Bonus over the years - not even reducing it when STI was down at 1,300. As a result, in my opinion, the Income bonus philosophy was much better than that adopted by competitors, since the policyholder could predict with greater certainty the value of his policy as it approached maturity.

Other companies have an inferior product - and it would be unfair to policyholders for Income to unnecessarily follow "market norms".

Nicholas Rhodes,
Appointed Actuary of Income 2002-2007.

1 comment:

Unknown said...: I fully agree with the views of Mr Nicholas Rhodes.

If the long term average investment yield of Income is 7.8% pa (as quoted by Mr Tan Kin Lian) as compared to the 5.25% pa used in the benefit illustrations, the past practice of declaring high annual bonus seems sound, in fact it is not unreasonable for policyholders to expect more annual bonus to be declared.

In fact when Income chose to cut bonus rates in the past due to unfavourable investment environments, they chose to reduce the the annual bonus rather than terminal bonus. They had a choice to cut the terminal bonus, which would affect a smaller pool of policyholders in a BIG way, but wisely cut the annual bonus instead so that "loss" is spread to a larger pool of policyholders so that each will share the "loss" in a small way i.e. equitable principle of risk-sharing.

I feel that Income has the unique competitive advantage as a co-operative and very low-cost operator, which allows it to compete in a differentiated way against other commercial insurers. But seems that it is trying align many of its past good practices to the so-called "commercial practice", i think in no time it will become another commercial insurer and with it, the high cost structure.

To reiterate, life insurers are largely investing in the same kind of asset classes, their long term investment returns would be largely the same (at least for the big players like Income). What differentiates the winners from the rest will likely be a low cost structure, at least from a policyholder's perspective.

Anyway seems like the so-called reshaping of bonus will proceed as uaual, only time will be tell if this is a wise move. Fortunately or unfortunately, policyholders would be the ones most impacted by the final outcome.; May 28, 2008 10:18 PM