The Monetary Authority of Singapore has stated that insurance companies are required to compute the asset share for each cohort of participating policies and that the insurer needs to have a "governance framework" to ensure that the bonuses are distributed fairly to policyholders. They also declared that the law has stated that all the assets in the participating funds belong to the policyholders and that there is no "orphaned money".
This approach has a fundamental weakness. It is possible for the insurer to under-declare the bonus or to pay less than a fair value to the policyholder of a terminated policy, and to accumulate the "surplus" (although known as the "estate" or "orphaned money") in the life insurance fund. This has been the practice over the past decades, prior to the introduction of the concept of "asset share".
The MAS approach relies on a "governance framework" involving the appointed actuary and the board of directors, who are made responsible for the "fair treatment of policyholders". There is no independent party representing the interest of the policyholders in this arrangement. Some people refer to this arrangement as appointing the fox to guard the hen house.
The regulator in Malaysia has adopted the concept of "asset share" in a simple and fair way. The key elements are:
a) The asset share has to be computed for each policy, taking the actual premium and investment income and deducting the actual expenses, based on the actual experience of the policy.
b) The insurer is free to declare the bonus in any appropriate manner, to ensure its future solvency.
c) The asset share has to be paid to the policyholder on the termination of the policy after a certain number of years, and on maturity.
I hope that MAS will adopt the approach used in Malaysia. It can be done quite easily and will produce fair results that do not rely on the honesty of the "governance framework".
Tan Kin Lian
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