Tan Kin Lian's Blog: The good and bad of life insurance

Tuesday, August 17, 2010

The good and bad of life insurance

Someone asked me why I am against life insurance, when I spent 30 years in this industry.

Life insurance is inherently good. It provides financial security through the pooling of risk of premature death and encourages thrift and savings. Life insurance becomes bad when it is used to take advantage of the ignorance of consumers by locking them into a bad product and milking them over a lifetime.

When I run an insurance company, I offered to consumers the opportunity to get a financial product that gives them a good yield for their savings. This was made possible through operating with low expenses and declaring high rates of bonuses from the surplus of the insurance fund.

During the earlier years, the regulators were quite strict in ensuring that the life insurance policyholders were treated fairly in the distribution of the bonuses. They inspected the insurance companies and asked them to justify their practices. The regulatory practice changed around the last 1990s under the "regulate with a light touch" regime. They allowed more leeway for insurance companies to run their operations.

This change of regulation was a big mistake. The insurance companies introduced new products that were quite unfair to consumers. The regulators allowed these practices, so long as they charges are disclosed in the benefit illustrations. Some of these products were clearly ripping off consumers.

The insurance companies also cut their bonuses on the pretext of low investment yields, but were slow in restoring the bonuses when the yields improve. This is unfair to consumers. and would not have been allowed in the earlier years. The insurance companies started to increase their marketing and other expenses, often at the expense of their existing policyholders.

This bad practices were the factors that made me now speak against most types of life insurance policies, except term insurance. I have also decided to intensify my efforts to educate the public to avoid these bad products. I hope that all young people, especially those who has just started work, learn about how to handle their own financial planning (see Practical Guide on Financial Planning) and getting locked into a long term savings plan that give them a poor yield.

Read the FAQs in www.tankinlian.com and attend the educational talks organised by FISCA (www.fisca.sg).

Tan Kin Lian

4 comments:

zhummmeng said...: In the recent LIA report there are some figures that you are unable to reconcile.The report showed,
1.sale gone by 28% in first half of 2010
2.sum assured sold was about $54K (about the same as past years.)
3.claim amount was about $47K (about the same as past years)
4.72% of cases submitted with full and partial KYC (6% more than last year)
Examine the figures closely you notice the discrepancies and yet the President of LIA didn't even bother to comment.In the past MAS did highlight them on few occasions and yet these figures never improved except one window dressing figure, ie the 72%.
If the sum assured didn't go up in tandem with the sales increase this could mean product pushing by insurance agents is on the rise,right?
If the sum assured sold didn't go up it means more wholelife products with high commission were the main type of products sold.
But the number of cases with full and partial KYC has gone up why didn't the sum assured sold go up? 72% is a high figure and it should have translated into bigger sum assured sold, right? Is there something wrong?
When fact find and analysis is done the recommendation of the products should be of the reasonable basis, ie. right product with the right amount as uncovered.It should be as high as $500,000 sum assured and not $54K, right?
Why it didn't result in high sum assured sold?
The answer could be all the insurance companies condoned the unethical practices of their agents.Why isn't the top down fair dealing outcome guidelines followed? Is $54K sum assured fair dealing when so many as 72% of the cases submitted by insurance agents
were of FULL OR PARTIAL KYC? This is terribly wrong somewhere in the system.MAS must investigate the cause. My interpretation might help MAS with a lead.The discrepancies were due to conflict of interest and mis-selling. Commission skewed the recommendation.; August 17, 2010 11:02 PM
zhummmeng said...: Another reason behind the discrepancies is that the full or partial KYCs were fake and fabricated to appear to meet compliance.In other words to fool MAS into believing that the insurance companies are self disciplined in self regulating.
It doesn't need a qualified financial planner to see the 72% was a fake. All the figures don't tally up but conflicting.There is something wrong in the internal governance and some heads should roll. That is what the top down fair dealing guidelines was supposed to provide.The first heads should roll are the CEOs becuase they are supposed to be responsible for this fair dealing culture to pervade down the whole organisation, right? Certainly , it didn't and this explains why the insurance agents are still pushing high commission products for their own pockets and the companies market share and why the sum assured sold was only $54K.
MAS, this is your opportunity to send out more police to check on the companies and the agents before they cover up the foot prints of evidences of conflict of interest and misconduct.; August 17, 2010 11:55 PM
Recruit Ong said...: mr tan, about the "light touch" regulatory approach that began in mid-late 90s(?), my own take is it came about when 'someone' was finance minister, this person is also behind the major push to make SG a financial centre using this to justify even lighter touch approach hahaha!

if we compare with whats happening in the US around the same period, it coincides with the demise of financial regulation under right wing hawks and neo-conservatives (even though clinton was POTUS, all resistance ended once Bush II took office). Today it is very clear the LHL regime is extremely right wing in economic ideology, the man himself is imo an out and out neo-conservative e.g. his "trickle down economics". Today we have an economy that is reminiscent of the one in US just before the crash... an economy on steroids (as lucky tan puts it) that is unsustainable and one that will continue to experience violent fluctuations to the detriment of ordinary Sporeans. X_X; August 18, 2010 12:36 AM
JRT said...: Why not start a life insurance company that sell direct to the consumers instead by offering better yield and honest products?; August 18, 2010 9:29 AM