Tuesday, June 10, 2008

Danger of unfunded terminal bonus

The collapse of Equitable Life in UK was quoted as the reason to restructure the bonus of Income. The consultant recommended that the annual bonus rate was too high and supported the restructure to a lower rate of annual bonus, to be compensated by a higher rate of terminal bonus.

Tan Yew Ming, a local actuary, studied the report on the collapse of Equitable Life. He found that the problem of Equitable Life was the high rate of terminal bonus promised to policyholders that were not reserved.

When the court decided that Equitable Life had to pay the terminal bonus, Equitable Life faced financial difficulties and had to cease transacting new business. This concluson was also reported by BBC in a commentary.

If Equitable Life had declared a higher rate of annual bonus, they are required to set aside reserve for the bonus. This would have given them a stronger financial position.

I hope that Income will study this matter carefully and avoid the risk faced by Equitable Life, i.e. promise high terminal bonus rates that are not funded.
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3 comments:

Larry Haverkamp said...

Hello --

It is an excellent point, Mr. Tan.

Obviously, terminal bonuses are higher than annual bonuses. Doing that -- pushing most of the bonuses to the end the policy -- puts the policyholders' fund at risk IF the courts would decide the company cannot simply walk away from its obligation to pay its terminal bonus, as promised.

That is what happened in the case of Equitable Life in UK. Equitable couldn't pay and it went broke.

Are Singapore insurers also at risk?

Well, it depends. In the case of NTUC Income, it gave its assurance at its recent AGM (May 30) that it would not walk away from its terminal bonus. It would pay it.

In a way, that is good for policyholders.

On the other hand, such a statement sounds very much like "an obligation".

Requiring NTUC Income to keep its promises (to meet its obligations) could be expensive for the company.

As mentioned, it was prohibitively expensive for Equitable Life in UK.

Sincerely,

Larry Haverkamp

June 10, 2008 9:40 PM
Raymond T said...

Give me guaranteed annual bonuses over future non guaranteed terminal bonuses anytime :)

June 10, 2008 10:13 PM
siewkhim said...

Hi Kin Lian,

My best bet is Income will not listen to you or to any of our reminders. They claim to have the best fresh management team and BODs to ensure the policyholders will never be dissappointed.

It is very difficult for Income management to revert back to a different platform regarding their bonus policy because of it is a very "malu" kind of thing.

Well if people want to shallow a live grenade, we just watch and pick up the pieces after the blast - Amen!

June 19, 2008 6:15 PM

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