Participating policies, i.e. endowment or whole life policies, are designed to provide a guaranteed yield at a modest level (say 1% p.a.) and to provide variable reversionary and terminal bonuses that can increase the yield to a higher level. The bonuses are declared each year based on the financial results of the insurance company.
In the past, most life insurance companies were able to give an attractive yield to the policyholders. The insurance company invest the money well with a long term perspective and were able to achieve an attractive return. After taking away a fair proportion to cover their expenses and profits, they distribute most of the surplus to the policyholders with a high rate of bonus.
The insurance company maintains a manageable number of policy series, and distributes the same rate of reversionary or terminal bonuses to all policies in the same series. The policyholders in each series can see that they have been treated equally with other policyholders in the same series.
This practice has changed in recent years. Insurance companies have introduced too many policy series and distributes different rates of bonuses to policyholders in the same series. It is difficult for any policyholder to be sure that they are getting the fair rate of bonus, based on the actual experience of the fund.
To make matters worse, some insurance companies retain too much surplus in the fund, under the purported aim of "smoothing the bonus", or use the surplus to pay for high expenses, resulting in a poor yield to policyholders.
It is the lack of clarity that gives a bad name to participating policies in recent years. Many policyholders find that the projected bonuses made at the inception of the policy had been severely reduced due to "difficult investment climate", but it is not clear if the reduction is due solely to this cause or to other unethical and unfair practices.
To overcome this problem, the insurance company can adopt the "asset share" method to distribute bonus. This method ensures that each policyholder gets its fair asset share on the surrender or maturity of the policy based on the actual experience for that policy. It is quite to adopt this method using modern computer technology.
Some countries make it mandatory for the "asset share" method to be used, to ensure that the policyholders are fairly treated. The regulator in Malaysia took this step many years ago, in their effort to protect the interest of the consumers and to ensure fair practices.
In Singapore, many insurance companies have severely reduced their reversionary and terminal bonuses in recent years, often more than expected. Many consumers have lost trust in the participating policies and the insurance companies that sold these policies.
I hope that the regulator in Singapore will implement the "asset share" method early, to ensure that all policyholders are given a fair return in this volatile situation and that the trust in participating policies can be restored.
Tan Kin Lian
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