The MAS website contains the annual return submitted by insurance companies. Row 5 of Annex 1 K – Policy Liability of Participating Fund reported a figure as “sum of liability in respect of each policy of the participating fund”.
From the description, I presume that this total figure is obtained by adding up the individual figures applicable to each participating policy. I hope that this statement means what it says.
You can write to your insurance company to ask for:
1. the individual liability for each of your participating policies
2. the cash value for the same policy
3. the difference between these two figures
For example, if the liability for the policy is $30,000 and the cash value is $25,000, is it fair for the insurance company to keep $5,000 as additional profit, when they have already deducted their expenses, mortality charges and profit over the years, in arriving at the liability of $30,000. Are policyholders being cheated?
If a customer has $30,000 in the bank and the bank report it as the liabilty to the company, the bank is required to pay out the full amount to the customer on withdrawal. I believe that the same principle should apply to an insurance company.
Probably the most accepted accounting definition of liability is the one used by the International Accounting Standards Board(IASB). The following is a quotation from IFRS Framework:
> A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits/
Regulations as to the recognition of liabilities are different all over the world, but are roughly similar to those of the IASB. Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an IOU.
I don't follow your argument. For example, with term policies, which have no cash value, the company still needs to hold a reserve, so are you saying that entire reserve is profit to the company? No.
ReplyDeleteOr the opposite of your argument is that any amount of money that is above the liability minus the cash value is profit. Then again, I ask, what about term policies, which will have a liability, but the cash value is zero.
IFRS 4 defines an insurance contract as: A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
I think IFRS/IAS has a specific definition for insurance liability as well. Those types of liabilities you listed have to be valued differently on the balance sheet than an insurance liaiblity.
Hi Jill
ReplyDeleteCan you focus on participating policies, rather than term insurance (non-participating policies)?
But the comment would still stand. If it is not additional profit under a non-par policy, why is it viewed as additional profit under a par policy? I used the term policy as my example, as it is much clearer case.
ReplyDeleteThis is why I don't buy par. I like guaranteed non-par, where all the risk (and reward) is with the insurance company.
Another thought, some of that additional "profit" has to be held as capital required for solvency purposes. This is a prudent amount, held above and beyond the reserves for ensuring the insurer's solvency.
ReplyDeleteJill,
ReplyDeleteWhen the policy matures or is terminated, there is no need to set any capital for this policy.
It will be unfair to the policyholder that some of the money is being held back to provide capital to support other policies. The money reported as liabilty should be paid in full to the matured or terminated policy.
Dear Kin Lian,
ReplyDeleteThe liability for the policy is based on an actuarial guesstimate of future expected claims of the policy taking into account future contingencies and the Appointed Actuary's skill, knowledge and conservatism etc. So it is an estimate and not a real figure. This is the prospective asset share of the policy talking into account expected future experience of the life fund.
The cash value if computed on earned asset share basis taking into account actual experience of the fund is the real liability.
In most cases the prospective asset share is never equal to earned asset share as the actuary would have provided some degree of conservatism.
So paying the $25,000 is not cheating!!! We are paying what is equitable and fair to the policyholder if the value is based on earned asset share basis.
Hi Siewkhim
ReplyDeleteI did not know tht you are an actuary.
The cash value is NOT the asset share. It was based on conservative assumptions made at the time of issue of the policy.
The earned asset share is likely to be the liability as reported to MAS. The liability is almost equal to the value of the fund, so it represents the earne asset share. The insurance company is "cheating" policyholders by paying a lower amount compared to the liability.
Dear Kin Lian,
ReplyDeleteThat is why I indicated cash value on earned asset shared basis.
If cash value is computed on the min Act basis as was done in Malaysia before asset share day then it is CHEATING!!!!!!!
But this cheating is allowed by MAS because it says pay the at least min Act basis.
Hi Siewkhim
ReplyDeleteThe insurance company is required to distribute a fair rate of bonus on participating policies. If the fund earns a good yield, the bonus should be increased.
Many insurance companies are not treated their policyholders fairly, by declaring a fair rate of bonus. They declare a low rate of bonus, and project high rates of terminal bonus. For policies that are terminated before maturity, they confiscate the undeclared surplus.
This is "cheating the policyholders". I hope that MAS will take stronger action to protect the interest of participating policyholders.