Tan Kin Lian's Blog: Unfair reduction in bonus

Wednesday, September 23, 2009

Unfair reduction in bonus

A policyholder found that the bonus on his maturing policy had been cut by 40% compared to the original projection issued on the point of sale. The reason given by the insurance company was that the bonus was cut due to several economic crisis during the past years. The policyholder argued that one company - who had gone through the same crises- did not cut the bonus, but his the insurer rejected his argument.

The policyholder asked my views on the fairness of the bonus cut and if there is any point in lodging a complaint with FIDREC.

I encourage him to lodge this complaint with FIDREC. A large part of the bonus cut is probably due to the cut in terminal bonus. This cut might have been necessary earlier during this year, when the stock market dropped sharply. However, the stock market had recovered by 60% (from its lowest point) during the past six months. It is only fair that the cut should be partially restored. I hope that FIDREC will consider this point in its adjudication.

Tan Kin Lian

15 comments:

Anonymous said...: Majority of single premium policy holders are risk averse and have little knowledge of the investment world. As such they are at the mercy of these gigantic insurance companies who can then pay the barest minimum bonuses upon maturity. A "projection" is a promise to pay; which given their expertise, should have factored in most market conditions. Or are "projections" just another jargon to lure innocent investors into parting good money for near zero returns. There is simply no criteria or explanation given for paying below projected sum. Not even a apology for NOT making the mark. The implication given is "LUCKY to have something back." I'm real fed up.; September 23, 2009 9:18 PM
Anonymous said...: Per the current econmic crisis, I would like to share my experience with a insurance Company P. There was a reduction of the 10.3% drop in projected maturity value which cannot be explained. The Acturial mentioned that there are no formula for the 10.3% downwards in terms of reduction in Projected Maturity value. As an policy holder, we have a right to know how the figure of 10.3% is derived as we are paying for it. Based on the feedback from the P Company, the answer is a No on the formula for deriving the 10.3%. This is astonishing when i ask her where she plucked the figure of 10.3%. Just wondering where they pluck the figure from the sky or the sea ? Puzzled if this a professional answer from an Actuarial ?
After persistent questioning, the answer is a yes, only that it will be very technical. This had been mentioned that this involves other policies holders confidentiality. Is the company trying to hide the truth away from the consumer ? From my perception, credibility is an issue with them.; September 23, 2009 9:22 PM
Vincent Sear said...: In a participating policy, some companies use interim or persistency bonus in their yield projection. For whole life policies, gradual unspectacular yields are projected year after year until the 20th year, when a huge bonus is projected to make overall returns look respectable and even attractive.

The sales pitch is usually that's to encourage policyholders to hold on to their policies for the long term, and not declaring and vesting full bonuses every year, but holding back till the 20th year allows the insurer to invest the funds more flexibly through the years to deliver fully or even exceed the non-guaranteed portion of the projection.

If the policyholder upholds his end of paying premiums for 20 years, then he should be entitled to the bonus. The trouble is that the bulk of this bonus is usually written into the non-guaranteed portion itself. In times of financial troubles, the management may be tempted to cut or even take away this bonus. It's technically non-guaranteed but it' still blatant shortchanging, for the 20th year bonus is based on not declaring and vesting full bonuses for the past 19 years.

Anyway, I don't like this type of policy structure. Don't just look the total return at the end of the policy. Look at it every year and every line. Beware of many years of mediocre returns every year but suddenly boosted by extra bonuses in say the 20th or 30th anniversary. Although a life policy is ultimately a long term investment, bonus structure and year-to-year cash values can be very important, e.g. when there's a need to, how much policy loan can be taken out.; September 23, 2009 9:40 PM
Anonymous said...: That is the beauty of this industry practice, low annual and big uncertainties in the special bonus.
That is why ntuc adopted it and hailed it as the industry BEST practice. For who?
Now you know for who this practice is for, right?
Low annual bonus and everything is at the special bonus. The idea is to hold policyholders to ransom . Keep for a long period and you might NOT even get what is projected.
Believe or not, an endowment policy from one of the BIG FOUR has a breakeven point same as the maturity.This is really holding the policyholders hostage. The policyholders cannot surrender prematurely because there is no breakeven point.
These par products are scam products with con or scam artistes peddling them. Some of these con artistes are daring and upfront with their titles, financial CONsultant and their victims are known as CONNEDsumers.; September 23, 2009 10:38 PM
sunnysunshine said...: The reason given by the insurance company was that the bonus was cut due to several economic crisis during the past years. I was wondering if the insurance company undergoes cost cutting measures like reducing operation cost or adopt the pay cut till the times are good.

I had saw their website in that P Insurance company able to pay their shareholders in year 2009 half year dividend increased by 5% per share compared to Year 2008 which is a better year. Is the policy of 90/10, giving 90% of profit to Policies Holders and 10% to Share Holders. But end up i suffer 10.3% drop in my projected maturity value.; September 23, 2009 10:47 PM
Vincent Sear said...: After all that's said and done, the sad but real fact is, rich people who can afford it don't need insurance, whereas poor people who struggle to afford it need it most.

Why do someone who have a $100k income, $100k car, a $1m home and even more in his bank account and investment holdings need insurance? He's already self-insured, i.e. his dependants won't go destitute if something unforeseen and unfortunate happens to him.

The question, both econimic and social, is with the low income earners who's surviving and sustaining their families day-to-day, month-to-month, hand-to-mouth. To them, an insurance claim of $100k or even $20k can meant a lot for their families to tide over periods like when their surviving children are not fully grown adults to earn a living.

That was Dr. Goh Keng Swee's philosophy when NTUC Income was founded in the early 70s.; September 23, 2009 11:02 PM
Vincent Sear said...: In my years in the industry, I've myself been on all four sides of the field:
- Client & policyholder
- Sales agent & adviser
- Agency supervisor
- Management marketing staff

To be fair, not all agents are too bad. I've seen agents recommending clients to buy much lower commission policies than they could have. (There's a process where supervisors check agents' submissions before forwarding to underwriting for policy issuance). And it's not uncommon. Happened frequently. The bigger problem seems to me to be the product design.; September 23, 2009 11:24 PM
Vincent Sear said...: In this respect, I've worked in two systems before: centralised agency system (NTUC Income under Tan Kin Lian) and independent multi-tiered agency system (most other insurers).

The centralised agency is more cost-effective, for there's only one tier of agent's commission to be paid. However, remember than NTUC Income needs to pay their managers, executives and staff to service policyholders too. But all in all, the cost model is cheaper.

The independent agencies model adopted by the other insurers are 3-tiered commissions (1 agent commission, 1 supervisor overriding and 1 manager overriding). However, remember, none of these supervisors and managers above agents are receiving salaries; overridings are their main, if not sole source of income.; September 23, 2009 11:34 PM
Anonymous said...: Rich people also buy insurance. Alot of rich Indonesian bought policies from agencies here too. However, I am sure if they are coaxed into buying or do they really need insurance.; September 24, 2009 10:42 AM
Anonymous said...: Do you know why rich Indonesian bought insurance policies in Singapore and NOT in Indonesia?
Yes, they need insurance but for a different reason.
Insurance can be a waste of money. You need not necessary be afflicted with a disease.The probability is 5%. As one doctor told me if you are as "lucky" as winning a 1st prize toto.
Some rich people either they buy out of friendship, out of ignorance, out of greed, out of many other 'needs' except financial. Insurance is about financial replacement and that event may or not happen in one's life time.
So before you rush in to buy where angels fear to buy think first or get a a REAL financial planner and confide in him or her and you will get counselling and NOT a insurance salesman who will tell you everything needs insurance.; September 24, 2009 11:45 AM
Vincent Sear said...: Frankly, what I understand from experience about rich Indonesians buying life insurance in Singapore is, currency value protection, or we can call it long-term hedging. For them, what's the worry of losing a year or 2 of premiums to distribution costs when compared to the ever-present and frequently proven risk of the Rupiah being heftily devalued or their business assets burned down by rioters.

They placed lots of cash deposits with Singapore banks too. It's up to the banks and insurance companies to compete for their trust and business. A well-trained competent insurance agent actually has an edge in this case, because of personal contact and personalised service, much needed for someone who's placing money abroad. That's why banks invented relationship managers to counter.; September 24, 2009 5:45 PM
Anonymous said...: The insurance companies are their laundry machines and the agents are their mules.; September 24, 2009 7:22 PM
Anonymous said...: It is not the insurance agent but the insurance company that is the biggest con-man. The agent cannot do anything if the company decided to reduce the bonus. But the question is 'Why Is Insurance Agent Knowing They Are Working For Cheats Still Act As Their Puppet And Continue To Sell Their Product???'

Reason : MONEY!!!

The love of money is the root to all EVIL!!!!; September 24, 2009 10:09 PM
Anonymous said...: I think a lot has been said about this problem and I do not think there is much policyholders can do about it, unless you can prove that they are doing something illegal, or resorting to malpractices.

I suffered the same fate over the years. The small print in the illustration/policy itself tells you that the insurance company is at liberty to adjust the bonus as the directors deem fit.; September 25, 2009 4:23 PM
Anonymous said...: If you have any other policies why not let FISCA review them and check for mis-selling, misrepresentaion or malpractice. Review them and if there are malpractices by the insurance agents, FISCA can help to write to the company for refund of all [premium paid or take up legal action against the agents/company or report to MAS.; September 26, 2009 11:03 PM