Friday, May 30, 2008

Where Equitable Life Went Wrong

I invite readers to read this report:
http://news.bbc.co.uk/2/hi/business/3547441.stm

Dubious Practices
One device - used by all life insurers to varying degrees - was to stop allocating bonuses to customers policies in the form of "reversionary bonuses".

These were guaranteed and had to be counted on the life insurers' accounts as a liability.
Instead, an increasingly large chunk of the bonuses allocated to policyholders took the shape of "terminal" or "final" bonuses. These could be added or cut with impunity and without affecting the company's solvency - even if they did affect the value the customer expected.

Equitable never even counted part of these final bonuses as a liability.

It seems that Equitable Life declared high terminal bonuses, but did not count them as a liability. This is one cause of its collapse. The old bonus system adopted by NTUC Income is better. As each year's bonus is declared, it has to be reserved for the policyholders.

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