Role of Insurance in Financial Well-being

Talk at Junior College

Mr Tan Kin Lian qualified as an actuary in 1975. He was the chief executive of NTUC Income for 30 years from 1977 until his retirement in 2007.

In his talk, he will touch on the following topics:

* Economic functions of insurance
* Careers in insurance
* Role of an actuary
* Special skills requied to be an actuary

Insurance plays two important economic functions. It is a way of managing risks of individuals and businesses. Each person contributes a small sum of money (called a premium) into a pool to pay the claims of the people who suffered the insured losses. By reducing risks for all the parties, it helps people to carry out their economic activities and daily lives, without being financially destroyed by an unfortunate event.

Life insurance is also a way for ordinary people to make regular savings for their future needs. The funds that are mobilised can be invested for the long term to build the infrastructure and the productive capacity of the economy. It also earns a return on the funds to be shared by the investors.

The insurance industry provide careers for the following categories of people:

* marketing and sales
* customer service
* technical (underwriting risk and managing claims)
* investments
* administrative, support, technology and management functions

The actuary plays a special role in the insurance industry. He evaluates the risks and calculates the premium rates to be charged for the risks. His skill is applied in all fields of insurance, namely in life, general and health insurance.

He has to use two special knowledge:

* statistics showing the chance of occurrence of certain losses
* time value of money, as the losses may occur at various times in the future

Some actuary also play an important role in marketing and communication. He can explain the insurance and financial products in simple terms for the ordinary people to understand.

You can read more about Mr Tan and his special area of knowledge from the following:

Blog
Website

Express differing views

The visitor to my blog include:

* ordinary people who are interested in financial education
* insurance and investment professionals

My blog is intended mainly for the ordinary people. Most of them find my views to be educational and useful.

I also welcome the contribution of the professionals, as they add to my limited knowledge. They can tell me more about certain products in the market, to allow me to make an analysis.

Some of them express views that differ from my views. This is all right. They should avoid making judgement. After all, it is just a view.

Trading in Endowment Policies

There is a website service (in the UK) that allows a policyholder to find someone who is willing to buy his endowment policy for a better price than the cash value offered by his insurance company.

The advertisement says:

* We offer an exclusive 'execution-only' service for people wishing to sell their unwanted endowment policies.

* Shop around the endowment marketplace in order to try and find you the best offer for selling your endowment policy.

* We will usually get you a number of offers for your endowment policy.

This is how the "trading" works. The insurance company has a monopoly of your endowment policy, and will offer you a poor value. This allows them to make a profit when you surrender your policy.

By approaching the market place, you may be able to find another buyer who can give you a higher value. They will keep the policy till maturity and still make a profit over their funding cost.

I believe that someone tried to introduce this service in Singapore. But I am not aware if it has been successful.

Structured products and life annuity

COMMENT POSTED IN MY BLOG:

Mr. Tan,I agree with most of your write-ups except for your view on structured products and annuity.

First, I think you are not conversant with structured products.They are very low risk if you understand them and you can say they offer free lunch.(good return at almost no risk)

Secondly, CPF offers the best annuity . It has good payout and has options to let you choose the duration and amount of payout. If you want to recieve until 100 years old it can be designed as such.

Today Insurers'annuities are not comparable except maybe variable annuity.
As a whole it is commendable of you to educate the public.You are indeed providing a social service. Thank you , Mr. Tan.

---------------------

MY REPLY:

Most of the structured products which are capital guaranteed give a poor return. For example, the Swing Fund that recently matured gave a return of 2% in total for 5 years. During this period, the stockmarket went up by more than 50%.

If you want no risk, invest in a government bond. You can get nearly 15% for 5 years. This is much better than the structured products which give less than 5% (after deducting the charges).

Leaving your money in CPF to earn 4% per annum is a good idea. It is also a good idea to invest in a participating annuity plan from NTUC Income. You should see an insurance adviser to learn about the difference. You can make a better decision.

Read the FAQ.

Financial Planning Tips and Products

If you wish to have my financial planning tips and an explanation of the common products, you can read the FAQs here.

Low cost endowment plan

Dear Mr Tan,

Are there any low cost endowment plan? I like to get a secure return of about 4% per annum, and have life insurance cover built in as well.

-----------------------------

REPLY:

You can buy a single premium endowment plan. It should give you a return that meets your target. The upfront charge is usually less than 3% of the single premium. This allows the policyholder to earn a good return (after deducting the charges).

I am not aware about any monthly premium endowment plan that are designed to be "low cost". It is possible for this plan to be designed with an upfront charge of (say) 20% of the annual premium. This will give a good return to the policyholder. There will be a good market for this product.

Most endoment plan that are now in the market have an upfront charge that take away one year's of premium. The net return is poor.

Streettracks Gold Shares

streetTRACKS® Gold Shares is the first gold-backed exchange-traded fund to be listed in Asia. It is designed to track the price of gold and trade like any stock on the exchange.

The Gold Shares are backed by physical allocated gold bullion and are denominated in U.S. dollars. Investors can buy as little as one board lot of ten shares, with each share priced at approximately one-tenth the spot price for an ounce of gold. If the gold price is USD 650, the minimum investment amount is USD 650.

Transparent interest rate on home loans

Hi Mr Tan

What are your views about the "transparent" interest rate charged by DBS Bank on their home loans? It seems to be slightly higher than the interest rate of other banks. As the interest rate moves with the interbank rate, will I have to pay more, if interest rate goes up?

--------------------

REPLY:

I prefer a transparent interest rate. The rate charged by DBS is based on a interbank rate, plus a premium of 1.25%. I think that this is a fair rate.

It is better to have a transparent rate. This ensures that you will get a fair rate, even if you do not monitor it closely.

There were news reports that some banks adopt many tranches of board rates previously, and may be overcharging some customers, who do not monitor the rate closely.

It does not matter that the interest rate may move up or down with the market. Over the years, this will average out. It is more important that you arrange with the bank for the following:

* keep the same monthly payment, even if interest rate goes up
* flexibiilty to make early repayment, if you have the cash.

Invest in Gold ETF

Hi Mr Tan,

What is you view in investing in Gold via Exchange Traded Funds (ETF)? Is it a good time to go into Gold?

--------------------

REPLY:

I am not familiar with investing in gold, and also the right "timing" to invest in gold.

Some experts believe that gold should be part of a well diversified portfolio. If the current price is not too high, it may be a good time to implement this diversification.

--------------------

FROM MY STOCKBROKER:

The Counter is Gold 10 US $ under stock exchange. Seller @ US 63.80(Last done 63.60)

It is similar to trading in STI-ETF. However, this is in 10 shares and in US $
Fom the above indication, you can buy min of 10 shares, the cost will be US$ 638

According to my colleague, this price is fair as it is close to physical gold and move in tandem to it.

Insights into Financial Investments

Dear Mr Tan,

Thank you for so unselfishly sharing your knowledge with us. I especially appreciate your insights into financial investments and your friendly approach. I enjoy reading your blog!

I wish you all the best.

Understanding Research

Research is important to build our knowledge based industries in Singapore. Besides manpower and infra structure developments we must bring our capabilities to higher levels through research in order to advance and remain competitive.

Dr. Lee Kum Tatt has been involved in many fields of research in his life. He shares with us his experiences and views on how he classified research and how they are evaluated. Read his article on Classification of Research Activities in his blog.

Insurance is pooling of risk

Insurance is pooling of risk. If we have a large group of people joining an insurance scheme, everyone pays a contribution to the pool. The contribution is used to pay benefits to those few who have to make a claim for the insured event, e.g. death or accident.

If you join a pure insurance scheme, the cost should be quite low. It is based on the total amount of claim divided by the number of people, plus a small loading to cover the expenses.

Unfortunately, the real cost to the consumer could be much higher, due to the following factors:

* the pure insurance is combined with some other benefits, such as savings and investment

* a proportion of the premium is used to pay the commission for the adviser to sell the product

* the consumer may not get a good deal

If you buy the simple product that offers only the pure insurance, you will be able to compare the prices charged by a few insurance companies. You can get a product that offers you the coverage at a modest cost.

Lesson: Go for the simple products that you can understand and make a comparison. You can get a better deal.

My approach towards my career

Hi Mr Tan,

I'm just finished NS and is currently awaiting for my enrolement into NTU to study engineering. During my free time, I had been thinking about my future goals and what I want to achieve in the future, in my personal development, career, wealth ,and family and friends.

I'm writing to you hoping that you could share with me your advice. What made you chose the path you have choosen? Before you started out did you had a vision of what you want to achieve? Did you just know by instinct that the financial industry was the right fit for you? Was money the primary consideration?

As a corporate veteran, what are your views? Is it really hard to get promoted these days? Do you have any advice on how to successfully climb the corporate ladder? What in your opinion are the most important factors or skills that has contributed to your carrer? Is it the people-skills like they always say (EQ) rather that the credentials? Any tips on how to be a people person ?

------------------------------------

REPLY:

I decided to take the actuarial course because it suited my interest. I was strong in mathematics and was able to communicate clearly. These strenghts make it quite easy for me to pass the actuarial course. However, for most other people, this course was considered to be very challenging and difficult.

I know that the actuary is well paid, but it was not an important factor to me. Interest was more important. I enjoy studying the actuarial course, because the subjects are very useful for many aspects of daily lives, eg financial, investment and demographic matters.

I also took an active interest in learning about information technology and how to program computers to do the calcuations, data processing and other work. They help to make it easy for business to be conducted more efficiently, at lower cost and better customer service.

Here is my approach towards promotion in my career:

* I learn the skills that are useful for my work
* I put them to good use, to improve the business results
* The opportunity for promotion will come
* I am patient.

I hope that you find these remarks to be useful.

My blog had 60000 visitors

Dear Mr Tan,

Congratulations for having more than 60,000 visitors to your blog. This is a milestone during this short span of time (since 8 Feb 2007).

Once again, thank you for the free and independant advice on financial matters.

--------------------------------------------------------

REPLY:

I receive an average of 500 visitors a day. The visitors have incresed in recent weeks.

Market Timing

COMMENT POSTED IN MY BLOG

Mr. Tan, you seem to be an advocate of market timing, from most of your postings. Investors following your advice are in great danger. I think, Mr. Tan, you need to get your understanding of investment right.

Despite your many years as a CEO of Income and to be fair to you, your knowledge of investment is horrendous.

You better stick to insurance. Even in this area I also find your recommendations not appropiate sometimes. You have great knowledge in products but not planning.

You are sincere, there is no doubt at all. but this is not enough. Hope you take this in good spirit of sharing.

----------------------------------------------

REPLY

I posted a study by Plexus Asset Management. It showed the experience over the past 100 years in the United States. For a investor who made an investment at a time of high market P/E ratio, the return over the next 10 years is lower than for other periods.

If you wish to ignore this study, it is all right. In my case, I prefer to avoid investing a lump sum at a time when the market is high. I prefer to wait for a more normal time. It is all right, if you make small monthly investments, and take take advantage of "averaging".

Three in one

Jakarta imposes a "three in one" system. For certain roads, during certain hours, each car should have at least 3 people. If not, the driver has to pay a heavy fine.

This is simular to the "four in one" system adopted in Singapore about twenty years ago.

My experience with Valuair

I took Valuair to Jakarta and back.

My experience is positive. The seat is comfortable. They serve a light meal on each trip. The fare is a discount of about 30% compared to Singapore Airlines.

The only disadvantage is that they allow a maximum of 9 kgs for a bag taken into the cabin. I had to check in my bag.

Useful to have a financial or insurance adviser

I suggest the following approach for the ordinary lay person:

* learn about the basic aspects of financial planning (eg read my FAQs)
* use a low cost financial or insurance adviser

The adviser who can help you to make the best decision for your circumstances. If you do not take up a lot of their time, they can give you the advice for a low fee or to earn a modest rate of commission. For example, the advisers from NTUC Income falls into this category. By using the adviser, you can save a lot of time, and make a better decision.

For example, I can buy shares through the internet. But, I find it useful to go through a stockbroker. The fees have now come down to 0.3% (down from 1% a few years ago). I find it to be a fair rate of commission for the time spent by the stockbroker.

Future return depends on your entry level

I saw a study by Plexus Asset Managmeent. It looked at the P/E ratios of the S&P 500 index for each year from 1871 to 2006 and calculates the average ten-year forward real return.

Here is the findings

Average     Average 
P/E ratio   10 year return
8.5          11.0% p.a
12.0          8.1% p.a
15.0          6.1% p.a.
17.6          5.7% p.a.
21.6          3.2% p.a.

Lesson: Your future return depends on your entry level. If you invest in the stockmarket now (at P/E ratio of about 18 times), the likely real return over the next 10 years is 5.7% p.a. (and not the high return of past years).

Free and independent advice

COMMENT POSTED IN MY BLOG:

Don't you think it's good we have Mr Tan here dispensing his free and independent advice in financial matters?

Why should financial advisors get a fee? From Mr. Tan free unbiased recommenation, you can get free independent financial advice at NTUC's business centre, and still get your financial plan implemented. There is no fee.

Just imagine if the rest like the banks and insurers follow the leadership of NTUC, would it be great cost savings for the consumers? In fact, I don't see any flaw in this business model at all. Free advice, low cost plans, zero fees.