The baby boomer generation, who are now in their 50s and 60s, benefitted from the economic growth and are generally quite wealthy.
Some of them are thinking of how best to transfer a portion of their wealth to their children.
I suggest that they should make a partial transfer now, when their children are in their 20s. The children need the mney now, rather than 20 years later (when their parents pass away).
NTUC Income will organise seminars to cover will writing, annuity plan, term annuity, trust, estate duty and similar topics.
More details will be announced later.
Friday, March 17, 2006
Preferred policyholder
NTUC Income plans to register a "preferred policyholder". They will be allowed to have a loan in the future (for car, house, and other purpose) at a preferential interest rate and more attractive terms.
This will be specially useful for young policyholders. The saving on interest can amount to a lot of money.
We will communicate to our policyholders soon.
This will be specially useful for young policyholders. The saving on interest can amount to a lot of money.
We will communicate to our policyholders soon.
High cost of living
I read a news report that young people find the cost of living to be high in Singapore.
I agree.
When I was young, the HDB flats and shops were at a subsidisied and controlled price. This helps to keep the cost of living low, and make Singapore competitive.
During the late 1980s, the HDB flats were allowed to appreciate to the "market price". This benefitted the HDB flat owners, but increased the cost of living for the next generation.
Looking back, it would have been better for Singapore, if HDB flats had been kept at the controlled prices. But, it is too late to turn back the clock.
At the current high prices, property will be just like any other investment. One has to think carefully before investing in property. Is the price right?
For some people, it may be better to rent a property. The rental may be lower than the cost of owning the property.
The capital sum can be invested in other means, eg in unit trusts or the combined fund from NTUC Income. These investments may give a better return in the long run.
Get advice. Make the right choice.
I agree.
When I was young, the HDB flats and shops were at a subsidisied and controlled price. This helps to keep the cost of living low, and make Singapore competitive.
During the late 1980s, the HDB flats were allowed to appreciate to the "market price". This benefitted the HDB flat owners, but increased the cost of living for the next generation.
Looking back, it would have been better for Singapore, if HDB flats had been kept at the controlled prices. But, it is too late to turn back the clock.
At the current high prices, property will be just like any other investment. One has to think carefully before investing in property. Is the price right?
For some people, it may be better to rent a property. The rental may be lower than the cost of owning the property.
The capital sum can be invested in other means, eg in unit trusts or the combined fund from NTUC Income. These investments may give a better return in the long run.
Get advice. Make the right choice.
Thursday, March 16, 2006
Incomeshield Unlimited
Someone suggested that we should call our medical plan as "Incomeshield Unlimited".
This plan now provides unlimited lifetime coverage. The total claimable amount is subject to certain specific and annual limits, but is unlimited in the amount that can be claimed during a lifetime.
Our coverage is better than the $5,100,000 limit that is advertised by another medical plan (which charge much higher premium than Incomeshield).
This plan now provides unlimited lifetime coverage. The total claimable amount is subject to certain specific and annual limits, but is unlimited in the amount that can be claimed during a lifetime.
Our coverage is better than the $5,100,000 limit that is advertised by another medical plan (which charge much higher premium than Incomeshield).
Logic9 National Competition
Here is an interesting competition to find the faster players to solve the Logic9 (Sudoku) puzzle. Registration is free.
Click on the following link to get details of the competition and to register
http://www.logic9.com.sg.
You have a chance to win up to 36,000 worth of prizes. The top prize for each age group is an IBM Thinkpad notebook worth $4,000.
You stand a better chance of winning, if you practice for this competition. You can buy a Logic9 CD or booklet for $5 only at selected NTUC Fairprice supermarkets.
Click on the following link to get details of the competition and to register
http://www.logic9.com.sg.
You have a chance to win up to 36,000 worth of prizes. The top prize for each age group is an IBM Thinkpad notebook worth $4,000.
You stand a better chance of winning, if you practice for this competition. You can buy a Logic9 CD or booklet for $5 only at selected NTUC Fairprice supermarkets.
Tuesday, March 14, 2006
Growth plan gives a fairly attractive return
A policyholder invested $50,000 in a Growth plan in 2001. It matured 5 years later with a maturity value of $58,000.
The policyholder earned a net return of 3.1% over the past 5 years on the Growth policy.
As the Growth policy has to be invested mostly in short term secure bonds, the return of 3.1% is quite attractive. During the past five years, Government bonds provide a return of around 3%.
Apart from giving a fairly good return, our Growth plan also give life insurance cover, which is built into the contract and not charged separately.
Our aim is to invest the funds prudently, get a fairly attractive return, and return most of the return to our policyholders.
Here is the good news for our policyholders of our Growth plan. The bonus rate has been increased recently. We expect to give better than 3.1% return in future years, based on the higher bonus rates. For a Growth plan that is invested for more than 10 years, the return should be higher than 4% per annum, based on our current bonus rates.
The policyholder earned a net return of 3.1% over the past 5 years on the Growth policy.
As the Growth policy has to be invested mostly in short term secure bonds, the return of 3.1% is quite attractive. During the past five years, Government bonds provide a return of around 3%.
Apart from giving a fairly good return, our Growth plan also give life insurance cover, which is built into the contract and not charged separately.
Our aim is to invest the funds prudently, get a fairly attractive return, and return most of the return to our policyholders.
Here is the good news for our policyholders of our Growth plan. The bonus rate has been increased recently. We expect to give better than 3.1% return in future years, based on the higher bonus rates. For a Growth plan that is invested for more than 10 years, the return should be higher than 4% per annum, based on our current bonus rates.
Survey of Young People
2,140 young people responded to the survey.
Which is more important to you?
* Get a better return on your savings 86%
* Make regular savings from salary 52%
* Adequate insurance cover 42%
* Get preferential terms for a loan in the future 19%
NTUC Income is planning to offer special terms for a loan "preferred policyholder". Which do you prefer?
* Lower interest rate 92%
* Hassle free application 50%
* Longer repayment period 29%
* Higher loan amount 27%
* Pre-approval of loan 15%
Which type of loan is likely to be attractive to you?
* To buy a home 66%
* For education 43%
* To buy a car or motor cycle 41%
* Loan for marriage 20%
* Other purpose 26%
To be a "preferred policyholder", you will need to be insured for at least 2 years and have total regular saving of more than $5,000. Do you find these conditions acceptable?
* I am interested to qualify in 2 years time 41%
* I already meet them 35%
* I am not interested at all 24%
Which is more important to you?
* Get a better return on your savings 86%
* Make regular savings from salary 52%
* Adequate insurance cover 42%
* Get preferential terms for a loan in the future 19%
NTUC Income is planning to offer special terms for a loan "preferred policyholder". Which do you prefer?
* Lower interest rate 92%
* Hassle free application 50%
* Longer repayment period 29%
* Higher loan amount 27%
* Pre-approval of loan 15%
Which type of loan is likely to be attractive to you?
* To buy a home 66%
* For education 43%
* To buy a car or motor cycle 41%
* Loan for marriage 20%
* Other purpose 26%
To be a "preferred policyholder", you will need to be insured for at least 2 years and have total regular saving of more than $5,000. Do you find these conditions acceptable?
* I am interested to qualify in 2 years time 41%
* I already meet them 35%
* I am not interested at all 24%
Switch and save on part of the 150%
Some people invested in a regular premium investment linked product from another insurer and have to incur up a distribution cost. Up to 150% of the annual premium may be taken away from their investment during the first few years.
A policyholder who has bought an expensive policy recently, and who was not told clearly about the high distribution cost, may find it better to switch to NTUC Income now.
They do not have to incur the distribution cost for the remaining period (usually up to three years) and can take a similar ILP policy from NTUC Income (Ideal 5) where 100% of the saving is invested from the first month.
There is a small catch. We impose $20 more in policy fee each year. You can see our adviser or visit our business center.
A policyholder who has bought an expensive policy recently, and who was not told clearly about the high distribution cost, may find it better to switch to NTUC Income now.
They do not have to incur the distribution cost for the remaining period (usually up to three years) and can take a similar ILP policy from NTUC Income (Ideal 5) where 100% of the saving is invested from the first month.
There is a small catch. We impose $20 more in policy fee each year. You can see our adviser or visit our business center.
Get 150% more
NTUC Income advertise our Ideal plan, which invests 100% of the monthly premium from the start. Similar plans from other insurers take away as much as 150% of the annual premium during the first few years.
Some insurers are unhappy with our advertisement. They expressed that our advertisement denigrates their product.
Here is my reply.
We wish to educate the general public that they have an option to buy a regular investment linked plan that does not carry a large front end load.
We do not intend to denigrate the products of other member companies. I am
sure that they are capable of convincing the consumers about the necessity
and value of paying the front end load.
Some insurers are unhappy with our advertisement. They expressed that our advertisement denigrates their product.
Here is my reply.
We wish to educate the general public that they have an option to buy a regular investment linked plan that does not carry a large front end load.
We do not intend to denigrate the products of other member companies. I am
sure that they are capable of convincing the consumers about the necessity
and value of paying the front end load.
Monday, March 13, 2006
Internet portal reduce front end charges
The Straits Times reported that two internet portals have reduced their front end charges for investing in unit trusts. The charges have been reduced to 1% and 2.5% respectively.
The unit trusts sold by these portals have high annual charges, typically from 1.5% to 2.5% per annum.
These high annual charges can reduce your return over a 10 year period.
By comparison, the combined fund from NTUC Income has modest charges, as follows:
- initial spread: 1.5% to 3.5%, depending on amount invested
- annual charge: about 1% per annum.
By investing with NTUC Income, you can get a return of about 3% to 12% more over 10 years, assuming that the performance of the fund is similar. This better return comes mainly from our lower annual charge.
The unit trusts sold by these portals have high annual charges, typically from 1.5% to 2.5% per annum.
These high annual charges can reduce your return over a 10 year period.
By comparison, the combined fund from NTUC Income has modest charges, as follows:
- initial spread: 1.5% to 3.5%, depending on amount invested
- annual charge: about 1% per annum.
By investing with NTUC Income, you can get a return of about 3% to 12% more over 10 years, assuming that the performance of the fund is similar. This better return comes mainly from our lower annual charge.
Thursday, March 09, 2006
How to give to your adult child
A woman in her mid 50s wanted to pass some of her wealth to her adult child. But she does not want to give a lump sum as the child may spent the money.
I suggested to buy an annuity for the child. The annuity will make an annual payment for a certain number of years. The payment can start from a certain date in the future.
She thought that this was a good idea. It did not occur to her.
The annuity provides a return of 3% to 4% per annum, guaranteed. It is tax exempt.
She originally wanted to buy a property and give the rental income to the child. However, this may involve some knowledge of how to look after the property and to find tentant. It may be too troublesome for the child.
I suggested to buy an annuity for the child. The annuity will make an annual payment for a certain number of years. The payment can start from a certain date in the future.
She thought that this was a good idea. It did not occur to her.
The annuity provides a return of 3% to 4% per annum, guaranteed. It is tax exempt.
She originally wanted to buy a property and give the rental income to the child. However, this may involve some knowledge of how to look after the property and to find tentant. It may be too troublesome for the child.
Get an affordable medical plan
If a male aged 25 buy an expensive medical plan, he has to pay a total premium of $57,600 in premium up to age 80 based on current premium rates.
The total premium may increase in the future, as the premiums are subject to revision.
If he buys Incomeshield with corresponding top-up rider, total premium is only $40,100, or 31% lower.
The coverage under both plans are largely similar.
The total premium may increase in the future, as the premiums are subject to revision.
If he buys Incomeshield with corresponding top-up rider, total premium is only $40,100, or 31% lower.
The coverage under both plans are largely similar.
Tuesday, March 07, 2006
Inadequate life insurance
The average amount of life insurance per breadwinner is $37,000. This is inadequate.
Each breadwinner should aim to have 3 to 5 years of earnings to take care of the needs of the family in the event of premature death. As a guide, they should aim to have a sum of $100,000 in life insurance.
Many people find it costly to insure for $100,000 in an endowment, whole life or dread disease policy. The premium is too high.
The current amount of life insurance probably reflect what they can afford to spend for a traditional life policy.
I suggest that they should take a personal accident or term life policy to make up the difference. The premium is quite low, as it is intended solely for protection.
Each breadwinner should aim to have 3 to 5 years of earnings to take care of the needs of the family in the event of premature death. As a guide, they should aim to have a sum of $100,000 in life insurance.
Many people find it costly to insure for $100,000 in an endowment, whole life or dread disease policy. The premium is too high.
The current amount of life insurance probably reflect what they can afford to spend for a traditional life policy.
I suggest that they should take a personal accident or term life policy to make up the difference. The premium is quite low, as it is intended solely for protection.
Reverse mortgage for HDB flats
We have been offering reverse mortgage to private property owners since 1997. HDB is now allowing HDB flat owners to obtain reverse mortgage from us.
We will be the 1st insurer to offer Reverse Mortgage for HDB flat. We hope that older HDB owners will be able to benefit from this .
The key features are as follow:
Eligibility for all flat owners of between 70 to 90 years of age
HDB Flat must have at least a remaining tenure of 50 years at the end of the loan period
Competitive effectove interest rate - at 5% pa (for promotion period)
Loan Quantum - up to the total projected loan not exceeding 70% of the total projected valuation of the property.
Loan Period - Up to 20 years OR 90 years of age OR death, whichever earlier
We will be the 1st insurer to offer Reverse Mortgage for HDB flat. We hope that older HDB owners will be able to benefit from this .
The key features are as follow:
Eligibility for all flat owners of between 70 to 90 years of age
HDB Flat must have at least a remaining tenure of 50 years at the end of the loan period
Competitive effectove interest rate - at 5% pa (for promotion period)
Loan Quantum - up to the total projected loan not exceeding 70% of the total projected valuation of the property.
Loan Period - Up to 20 years OR 90 years of age OR death, whichever earlier
Reverse mortgage for HDB flats
Here are the tentative terms, subject to modification.
------------------------------------------------------------
1. Eligibility
All flat owners from age 70 to 90, who has no and small outstanding loan on their HDB property. The lease at the end of the loan period should be at least 50 years
Borrower must be our life policyholder for at least 1 year. For non-policyholder, borrower can take up a life/personal accident policy
2. Tenure of loan - age 90 or death, whichever is earlier subject to 20 years term.
3. Monthly drawdown
Below is an illustration of the maximum drawdown per month (assuming upfront fees of $3.5k):
Monthly payout should not fluctuate greatly and should be for 20 years or up to age 90 years.
For someone who enters at age 70, the monthly drawdown is 0.2% of the property value at the time of taking the loan. The borrower can opt to receive a lower amount. NTUC Income is allowed to vary the monthly payout in accordance to the value of the property.
4. Lump sum borrowing
At the start of the loan, the owner can take a lump sum of up to 5% of property valuation – once off. This is mainly intended to help borrowers settle other debt he/she may have run up at much higher interest rate.
5. Mechanism of the reverse mortgage
a. Loan repayment
The loan is not repayable until the oldest borrower have died or moved out of their flat. The total loan outstanding including interest must then be repaid.
If one of the borrowers dies, or needs to go into medical or care facility, monthly drawdown amount will not change. The other borrower can carry on living in the HDB property as before.
b. Property value fluctuation
If the HDB property increases in value, it will allow the monthly drawdown to be extended for a longer period, and leave a larger balance to be passed to the beneficiaries. If the flat decreases in value, NTUC Income may cease the payout if the outstanding sum exceeds 70% of the value of the property.
c. Early repayment
We allow the owner to sell the flat at any time and repay the balance of the loan without penalty.
If the borrower downgrade to a smaller HDB flat, the RM loan have to be repaid in full or repaid in part if the smaller HDB flat is under RM financing, depending on the situation.
6. Counseling and financial advice (Mandatory)
This is to ensure that the borrower understands the working of reverse mortgage, and how it serves their needs. The borrower must be made fully aware of the features and risks, including:
personal counseling, as each borrower’s financial situation is unique
access to advice on their legal rights - Eg: home may not be left to heirs.
a reverse mortgage is a long term commitment and not for short term cash needs
advise on the consequences of repossession and on other income alternatives, such as downgrading to a smaller flat, or home-stay arrangements
------------------------------------------------------------
1. Eligibility
All flat owners from age 70 to 90, who has no and small outstanding loan on their HDB property. The lease at the end of the loan period should be at least 50 years
Borrower must be our life policyholder for at least 1 year. For non-policyholder, borrower can take up a life/personal accident policy
2. Tenure of loan - age 90 or death, whichever is earlier subject to 20 years term.
3. Monthly drawdown
Below is an illustration of the maximum drawdown per month (assuming upfront fees of $3.5k):
FlatType PropValue Monthly Payout
3-room 160k $200-$230
4-room 240k $320-$360
5-room 320k $430-$490
Exec apt 480k $660-$750
Monthly payout should not fluctuate greatly and should be for 20 years or up to age 90 years.
For someone who enters at age 70, the monthly drawdown is 0.2% of the property value at the time of taking the loan. The borrower can opt to receive a lower amount. NTUC Income is allowed to vary the monthly payout in accordance to the value of the property.
4. Lump sum borrowing
At the start of the loan, the owner can take a lump sum of up to 5% of property valuation – once off. This is mainly intended to help borrowers settle other debt he/she may have run up at much higher interest rate.
5. Mechanism of the reverse mortgage
a. Loan repayment
The loan is not repayable until the oldest borrower have died or moved out of their flat. The total loan outstanding including interest must then be repaid.
If one of the borrowers dies, or needs to go into medical or care facility, monthly drawdown amount will not change. The other borrower can carry on living in the HDB property as before.
b. Property value fluctuation
If the HDB property increases in value, it will allow the monthly drawdown to be extended for a longer period, and leave a larger balance to be passed to the beneficiaries. If the flat decreases in value, NTUC Income may cease the payout if the outstanding sum exceeds 70% of the value of the property.
c. Early repayment
We allow the owner to sell the flat at any time and repay the balance of the loan without penalty.
If the borrower downgrade to a smaller HDB flat, the RM loan have to be repaid in full or repaid in part if the smaller HDB flat is under RM financing, depending on the situation.
6. Counseling and financial advice (Mandatory)
This is to ensure that the borrower understands the working of reverse mortgage, and how it serves their needs. The borrower must be made fully aware of the features and risks, including:
personal counseling, as each borrower’s financial situation is unique
access to advice on their legal rights - Eg: home may not be left to heirs.
a reverse mortgage is a long term commitment and not for short term cash needs
advise on the consequences of repossession and on other income alternatives, such as downgrading to a smaller flat, or home-stay arrangements
Friday, March 03, 2006
Comparison of Motor Premium Rates
We compared the premium rates charged by the key insurers for 10 models of vehicles.
The average premium rate for the 10 models are shown below:
The premium rates charged by NTUC Income are lower than the other insurers. One insurer charge 45% more than our rates.
The average premium rate for the 10 models are shown below:
Age of car: 1-5 Years 6 Years
NTUC Income $584 100% $534 100%
Company AI $648 110% $635 119%
Company AS $702 120% $675 126%
Company AX $790 135% $774 145%
The premium rates charged by NTUC Income are lower than the other insurers. One insurer charge 45% more than our rates.
Consumer Education Effort
QUESTION FROM JOURNALIST
MAS's deputy managing director, Ms Teo Swee Lian gave a speech outlining the general trends and challenges facing the insurance industry.
Question: Do you agree with the areas mentioned by her?
Reply: I agree with the following priorities:
- futher consumer education efforts
- improve clarity in the sales process and in documents
- raise ethical standards of agents
- raise proficiency of financial advisers
Question: I think NTUC Income for its part, has spearheaded some education efforts. Can you tell me more about these?
Reply: We have set up a website called www.KnowYourInsurance.com.sg. We encourage the public to visit the webite and learn about specific insurance topics on their own. They can take a simple test. On completing the test, we offer them a modest discount if they take the insurance with us, either directly or through our adviser.
The website receives an average of 500 visitors a day. About 100 take the test daily. We are happy with the results. We consider this to be a successful website.
I also write about insurance matters in my personal blog, www.tankinlian.blogspot.com. About 100 people read my blog each day. Some fo them e-mail to me, after reading my blog to ask additional questions. They told me that they like my blog, as it is educational.
MAS's deputy managing director, Ms Teo Swee Lian gave a speech outlining the general trends and challenges facing the insurance industry.
Question: Do you agree with the areas mentioned by her?
Reply: I agree with the following priorities:
- futher consumer education efforts
- improve clarity in the sales process and in documents
- raise ethical standards of agents
- raise proficiency of financial advisers
Question: I think NTUC Income for its part, has spearheaded some education efforts. Can you tell me more about these?
Reply: We have set up a website called www.KnowYourInsurance.com.sg. We encourage the public to visit the webite and learn about specific insurance topics on their own. They can take a simple test. On completing the test, we offer them a modest discount if they take the insurance with us, either directly or through our adviser.
The website receives an average of 500 visitors a day. About 100 take the test daily. We are happy with the results. We consider this to be a successful website.
I also write about insurance matters in my personal blog, www.tankinlian.blogspot.com. About 100 people read my blog each day. Some fo them e-mail to me, after reading my blog to ask additional questions. They told me that they like my blog, as it is educational.
Tuesday, February 28, 2006
Make a direct claim against your insurer
A motorist left the workshop to make a claima against NTUC Income. The workshop inflated the bill and submitted the claim through a lawyer. We disputed the claim.
The motorist sent an e-mail to me directly. He complained that we were not fair in handling this claim and labelled it as "Unfair Insurance Practice".
Here is my reply:
-----------------------------------
Dear
It appears that you are insured with another insurance company and you wish to make a third party claim against NTUC Income.
Under our fair practice, you should contact us directly and allow us to settle the claim with you, Apparently, you did not.
You asked the workshop to handle the claim for you. The workshop probably submitted a claim that is much higher than the cost of
repair that can be done by our workshop.
There is also the question about liability. Is the truck insured by NTUC Income liable for the accident? This has to be
established.
I want you to realise that you have caused a lot of problem to us by your unfair approach. But I realise that you were not aware
about it.
I will ask xxxxxxx to look into this case, and see if he can help to expediate the matter. I hope that you agree with my
view.
Tan Kin Lian
CEO, NTUC Income
The motorist sent an e-mail to me directly. He complained that we were not fair in handling this claim and labelled it as "Unfair Insurance Practice".
Here is my reply:
-----------------------------------
Dear
It appears that you are insured with another insurance company and you wish to make a third party claim against NTUC Income.
Under our fair practice, you should contact us directly and allow us to settle the claim with you, Apparently, you did not.
You asked the workshop to handle the claim for you. The workshop probably submitted a claim that is much higher than the cost of
repair that can be done by our workshop.
There is also the question about liability. Is the truck insured by NTUC Income liable for the accident? This has to be
established.
I want you to realise that you have caused a lot of problem to us by your unfair approach. But I realise that you were not aware
about it.
I will ask xxxxxxx to look into this case, and see if he can help to expediate the matter. I hope that you agree with my
view.
Tan Kin Lian
CEO, NTUC Income
Take a cheaper medical plan
QUESTION
I attended A talk on medical insurance given by your manager. I was told that the rider (to cover the balance of the bill) has to be paid by cash and the premium will increase as I grow older.
Mr Tan, is there a limit, that is a certain period of age that can stop paying the premium for the rider. Or we must pay until we die. That means a lot of money to pay for the rider.
REPLY
Briefly, you can stop the rider at any time, so that you do not need to pay the increasing premium.
My advice is for you to take a lower cost plan, so that there is sufficient money to pay for the basic plan and the rider for as
long as possible.
I attended A talk on medical insurance given by your manager. I was told that the rider (to cover the balance of the bill) has to be paid by cash and the premium will increase as I grow older.
Mr Tan, is there a limit, that is a certain period of age that can stop paying the premium for the rider. Or we must pay until we die. That means a lot of money to pay for the rider.
REPLY
Briefly, you can stop the rider at any time, so that you do not need to pay the increasing premium.
My advice is for you to take a lower cost plan, so that there is sufficient money to pay for the basic plan and the rider for as
long as possible.
Monday, February 27, 2006
Principle of profit sharing
QUESTION FROM JOURNALIST
Why do you need to charge higher premiums for takaful-based motor insurance?
ANSWER:
In a conventional product (ie profit not shared with policyholders), the shareholders take the entire risk. All profit or loss is borne entirely by the shareholders.
In a profit-sharing product, such as takaful insurance, a major portion of the profits goes to the participants. It is necessary to increase the premium rate by about 10% to 20%, to reduce the risk of loss (in case of bad claims). As the shareholders take only a modest portion of the profit, it is fair that they should bear a smaller risk of loss.
It is likely that the rebate (or share of profit) will be more than the additional premium, so that the net cost (after the rebate) will be attractive to the policyholder.
The profit sharing will also encourage the policyholders to work in cooperation to minimise the loss, as they can benefit from the share of profit. This will be good for the policyholders in the long run.
Why do you need to charge higher premiums for takaful-based motor insurance?
ANSWER:
In a conventional product (ie profit not shared with policyholders), the shareholders take the entire risk. All profit or loss is borne entirely by the shareholders.
In a profit-sharing product, such as takaful insurance, a major portion of the profits goes to the participants. It is necessary to increase the premium rate by about 10% to 20%, to reduce the risk of loss (in case of bad claims). As the shareholders take only a modest portion of the profit, it is fair that they should bear a smaller risk of loss.
It is likely that the rebate (or share of profit) will be more than the additional premium, so that the net cost (after the rebate) will be attractive to the policyholder.
The profit sharing will also encourage the policyholders to work in cooperation to minimise the loss, as they can benefit from the share of profit. This will be good for the policyholders in the long run.
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