Aug 6, 2009
TRANSPARENCY IN INSURANCE
THE report last Friday, 'Insurance funds need more transparency', is a good start. But there is more.
We have invested more than $60,000 per household in whole life and endowment policies.
The money goes into a huge policyholders' fund at each life insurance company. We know little about the fund or how the money is invested.
It is very different from buying a unit trust, where you get a certain number of units in proportion to your ownership in the fund. These units amount to the fund's net asset value or NAV. It is updated and published daily.
Policyholder funds have the same concept but use the term 'asset share' instead of NAV.
Another difference is insurance companies do not disclose the asset share. This makes it easy for insurers to underpay policyholders without them knowing it. Insurers acknowledge this happens with early surrender policies, but do not say if it also happens with policies held to maturity.
As the rightful owners are policyholders who have left the fund - and supposedly cannot be found - it is called 'orphaned money' or money without a home.
Underpayments to policyholders accumulate over the years, and are now huge. Aviva in Britain made a distribution of $2.7 billion last year. In that case, policyholders got 70 per cent of the money and Aviva kept 30 per cent. The company claimed that legally, it could have kept it all.
That is one way insurers benefit from orphaned money. Another is earning a risk-free 10 per cent on the income it generates.
A third way is to provide a buffer to absorb losses in case of a market downturn. It means the fund avoids dipping into tier 1 capital, which is largely stockholders' money.
Officially, the rationale for holding orphaned money is different: It provides a buffer for policyholders to avoid bonus cuts in downturns. Not correct. Insurers typically cut bonuses in downturns - like now - while the orphaned money keeps growing.
Singapore insurers disclose nothing about orphaned money. We do not know how much there is or where insurers keep it. Does it remain in the policyholders' fund or has it been transferred to stockholders?
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