Tan Kin Lian's Blog: Letter to MAS

Monday, August 24, 2009

Letter to MAS - Asset Share

Ms. Angelina Fernandez
Monetary Authority of Singapore

I refer to your reply that is published in the Straits Times today (24 August). I need to follow up with a few clarifications:

1. Can you confirm that the insurance company has specified an asset share for each individual participating policy
2. That the total of these individual liabilities equal to the total assets of the participating fund?
3. Is the insurance company required to pay out the full individual liability on the termination of a policy?
4. If the insurance company is allowed to pay less than the asset share, how is the money allocated to the remaining policyholders?

In my earlier letter, I stated that if the total of the individual liability is $13 billion and the total assets is $15 billion, the difference of $2 billion is "orphaned money". I do not get a clear explanation from your latest reply to this point.

Please call me at 81685485 if you wish to seek clarification to my question.

Tan Kin Lian

6 comments:

Anonymous said...: Dear Mr Tan,

As someone who is concerned about the welfare of consumers, I too am worried about Singaporeans getting hurt by participating products. I usually advise people around me not to buy participating products and instead go for "buy term and invest the rest".

After reading your recent comments advocating more transparency and distribution of asset share for participating products, I can't help but feel that you have taken the wrong approach to protecting your constituents. First, you are misinforming the public about the nature of participating products, making them believe that it is supposed to work like an investment-linked plan. Next, I am also appalled by your apparent lack of understanding/ awareness about local regulations, and guidance issued by the actuarial profession. Allow me to explain.

1) Nature of participating products

Participating products are not investment-linked products (ILPs). Participating products are not supposed to have the following features:
- Having each policyholder’s money in individually identifiable accounts (movement towards unitized with profits in UK is, in my opinion, completely misguided);
- Flexibility to withdraw the funds on demand at near market value with minimal penalty; and
- Complete transparency in fees and charges.

Those who want any of these features should buy into ILPs instead.

I continue to believe that the two cornerstones of a participating product are COMMUNITY and TRUST.

- COMMUNITY. Participating policyholders are meant to be viewed as a community. In some cases, different generations of policyholders are grouped into separate communities; but it is never the intent of participating products to be managed as individual accounts. Buy pooling funds together as a community, policyholders can offer to each other important benefits like insurance and investment guarantees that would not otherwise be available (or would be quite costly to obtain if offered by a shareholding company) if the policyholder invest on his own. That is why ILP usually comes with no investment guarantee. Your question to MAS asking for policy-by-policy asset share and asking for asset share to be paid out on surrender run counter to how participating funds are supposed to work.

- TRUST. Policyholders are meant to trust that the monies will be managed by competent people who have integrity; and trust that distribution of surplus arising will be fair. If one believes that insurers can be trusted, then why ask more and more disclosure? More disclosure only means incurring more expenses to prepare, audit and print those information. All these will surely be charged to the participating fund which as no cap on expense loading. In turn, yield will be affected. If one believes that insurers cannot be trusted, then they can get all the disclosure that they want from a unit trust & ILP with the assurance that expense is capped contractually.; August 25, 2009 4:00 AM
Anonymous said...: (cont')

2) Local regulations

The law clearly states that an insurer’s liability to participating policyholders collectively cannot be lower than the money collected from policyholders plus investment return less all relevant expenses and claims. (See section 17 of Insurance Act.) This pool of money that belongs to policyholders is then notionally allocated to each individual policy. There is not supposed to be any money that remains unallocated. (See Insurance (Valuation and Capital) Regulations, Regulation 20(7).) The $13 bn vs $15 bn numbers that you are quoting merely a reporting irregularity that happens to NTUC Income only. If you look at the regulatory filings of Great Eastern and Prudential, you would notice that “Policy Liabilities” shown in Form 1 and Form 14 does tally. But even for the case of NTUC Income, existence of the gap should not be interpreted as the existence of “orphaned estate”. This money does have an owner – i.e. participating policyholder collectively – and is by no means an orphan. This money can serve as important capital buffer such that even when investment values were to plunge, the guaranteed insurance and investment benefits are still secured. Notional allocation of such capital buffer is merely an academic exercise. It need not be made available to policyholders in the form of higher surrender value because if policyholders exiting take along with them their notional share of capital buffer, it would weaken to protection available to those policyholders who stay in the fund. Remember, it is Community not Individualism that the cornerstone of participating products. Actions that are detrimental to the community should be discouraged. Therefore, insurers should not be paying out the notional asset share on surrender.

And to answer your question to MAS, if surrendering policyholders takes with them less than their notional share of the fund’s money, the difference is then re-spread to all remaining policyholder by way of Regulation 20(7) mentioned above.

In my mind, “orphaned estate” only exists if the laws do not spell out clearly the ownership of participating fund money. UK has this problem because their laws were poor in the past. Recent developments in UK are merely attempts to undo past wrongs. Singapore, being a young country, often has the benefit of hindsight and is able to avoid mistakes made by other countries. I believe that as it stands, the Singapore legislations have effectively removed the orphaned estate problem.

3) Professional guidance

As an actuary, you are supposed to be aware of guidance issued by Singapore Actuarial Society (SAS). You should note that the term “orphaned estate” did not appear in the SAS guidance notes at all. This is a testimony that the actuarial profession recognizes the strength of the Singapore legislation in addressing the orphan estate problem.; August 25, 2009 4:01 AM
Anonymous said...: (cont')

4) Participating products are generally inferior

You are fighting the war of consumer protection using the wrong approach and basing on wrong facts. I would sincerely invite you to join me in advocating that the public stop buying participating products (unless the product is clearly mis-priced). Preventing them from falling into a trap is always better than helping them kick and cry after they have fallen in, right?

I usually try to get my friends thinking about participating products by using the shares investment analogy. I ask them the following series of questions:

a) Buying a participating policy is just like buying shares into an insurance cum investment business, right? If the business does well, shareholders (as a general class of people) tend to gain.

b) When you buy shares, the company generally does not earmark its assets for you and every other shareholder, right? Also, the company usually won’t redeem the shares on demand at near market value, right? Even if early redemption is allowed, it’s often executed at a discount from the market cap (unless the buy-back is initiated by the corporation itself). Participating products behave in the same manner.

c) Most people extract returns from the shares they by either by getting dividend or selling the shares in secondary market? You generally won’t have a say on how the company distribute dividends, right? Same for participating products when it comes to bonus declaration. And is there a ready market for you to trade your participating policy with other investors? None established in Singapore.

d) Does your policy come with voting rights that let you have a say on how the participating fund is managed? What if the management is overly prudent and keeps an excessive amount of capital vis-à-vis the riskiness of the business? What if they don’t have tight control over expenses and are wasteful? And are you sure that they always have superior investment management skills? As a shareholder, you can have either some say or have a less painful exit strategy? With ILP, expenses are usually capped and capital doesn’t really come into the picture? But as a participating policyholder?

e) Company management is usually loyal to their shareholders. With almost all life insurers being proprietary companies, where do you think the loyalty of insurance company’s management lies?

I find these questions helpful in getting people to stay away from participating plans and follow the “buy term and invest the rest” principle. Maybe you should try it too.

The heart to protect consumers is commendable. But if executed wrongly, it can hurt those who you want to protect. Please return to the correct path.

Best of luck in your quest to protect consumers.

TMG; August 25, 2009 4:02 AM
Chris said...: Dear TMG,
I used to buy policies(all kinds - ILPs, life, H&S) from friends who at one point in their careers decided to become insurance agents, without questioning about the costs/benefits. One of those mistakes I have made with my monies. But ever since I read Mr Tan's blog, I am convinced about "buying term and invest the rest" - I attribute this principle to Mr Tan's wise guidance. Am therefore little surprise that your note did not recognise the effort put in by Mr Tan in promoting this principle. Did you actually read his blog?
Yours, LCY; August 25, 2009 10:28 AM
Anonymous said...: TVs get BETTER and CHEAPER because of technology and mass market. Can we say the same for insurance products? NO!! basically they don't get better but get worser because wholelife insurance is about COST and RETURN and labour cost. Cost and return have inverse relationship. Cost goes up return goes down.
In the past years life insurance costs have gone astromically. The costs include the ceos' salary and who are asking for ridiculous 6 figure salary and senior managers asking for 5 figures and insurance agents asking for higher commission and more incentives to kick their ass before they work. Who pays for them?
Of course the suckers, the consumers.
How come the sales in the first qaurter of 2009 went up but not the protection as reported by LIA? The answer is simple the agents only sold whoelife participating products which benefit the company and the agents but NOT the consumers.
Why did consumers buy? NO, they didn't buy, they were sold. This clearly explains how ignorant and clueless the consumers were and were conned by their trusted agents.
What is the result? All of them under insured.
Why ? consumers cannot afford those expensive wholelife participating products to fully meet their risk needs.
Another dumb thing consumers were conned is they were cheated and sold a saving plan that is losing money in the long term. How can the consumers retire with such dumb products that are not beating inflation and accumulate fast enough to meet their long term neeeds. Safe? it is bullshit..How can they be safe when they are losing money for your you in REAL term.
Whole life and endwoment products are really and actually risky products . They may not lose the FACE value but they are guaranteed to lose the real value. Real value is important and the value you must look at when investing. Buy these scam wholelife and participating products is investing in gauranteed and sure loss products.
Consumers must wake up and realise that your insurance agents are conning you for their own benefits and it is illgotten gain as good as cheating.

The Watchman; August 25, 2009 8:29 PM
Anonymous said...: To LCY: "Buy term and invest the rest" is not a new concept, and I have been telling people around me that even before I read Mr. Tan's blog. Just as no one deserves credit for telling people that the sun rises from the east, I guess we should not overstate the significance of this concept that we are promoting here. Let's be humble, OK?

To both LYC and Watchman: Glad to see that you now understand the truth about insurance. May I urge you to take the next step and actively spread the words to people around you rather than just sitting in front of the computer reading the blog? Please help your fellow Singaporeans. Thanks.

TMG; August 25, 2009 8:57 PM