Tan Kin Lian's Blog: Asset share of your life insurance policy

Friday, August 28, 2009

Asset share of your life insurance policy

The Monetary Authority of Singapore has stated that insurance companies are required to compute the asset share for each cohort of participating policies and that the insurer needs to have a "governance framework" to ensure that the bonuses are distributed fairly to policyholders. They also declared that the law has stated that all the assets in the participating funds belong to the policyholders and that there is no "orphaned money".

This approach has a fundamental weakness. It is possible for the insurer to under-declare the bonus or to pay less than a fair value to the policyholder of a terminated policy, and to accumulate the "surplus" (although known as the "estate" or "orphaned money") in the life insurance fund. This has been the practice over the past decades, prior to the introduction of the concept of "asset share".

The MAS approach relies on a "governance framework" involving the appointed actuary and the board of directors, who are made responsible for the "fair treatment of policyholders". There is no independent party representing the interest of the policyholders in this arrangement. Some people refer to this arrangement as appointing the fox to guard the hen house.

The regulator in Malaysia has adopted the concept of "asset share" in a simple and fair way. The key elements are:

a) The asset share has to be computed for each policy, taking the actual premium and investment income and deducting the actual expenses, based on the actual experience of the policy.
b) The insurer is free to declare the bonus in any appropriate manner, to ensure its future solvency.
c) The asset share has to be paid to the policyholder on the termination of the policy after a certain number of years, and on maturity.

I hope that MAS will adopt the approach used in Malaysia. It can be done quite easily and will produce fair results that do not rely on the honesty of the "governance framework".

Tan Kin Lian

10 comments:

Robert Tan said...: The relevant authorities should look into these suggestions by Mr Tan and adopt them where appropriate. As long as the final decision is arrived at after careful consideration, the final outcome is not so important. It would be a pity if the suggestions are brushed aside without even giving them a thought.

If no improvements are made to ensure that policyholders get better returns on their par policies, the ultimate advice to people may well be to consider carefully whether it is a good idea to buy par policies.

In this regard, all those concerned should also assess regularly whether the expense charges borne by the par fund is reasonable as this will "eat" into policyholders' returns. One concern is that the insurer may not have a strong enough vested interest to keep costs down if the costs are not borne by the insurer but by the policyholders especially the "accountability" link is not so direct in that insurers can just declare lower bonuses and "blame" the lower bonuses on poor investment performance instead of high expenses. I am not suggesting all insurers have such lack of integrity, it's just that higher transparency and better internal controls will lower the risk of unfair treatment to policyholders.; August 28, 2009 10:27 AM
Anonymous said...: Agreed. If the proposal helps to improve the system, at least what MAS should do is to form a committee to study it before sticking to their gun that the present system is flawless. Time have changed. The old system needs a little tweaking...; August 28, 2009 1:42 PM
Anonymous said...: Is it in the interest of the management to keep cost down? The ceo and senior managers want high salary , 6 figure salary and the insurance agents want high commission and enough incentive to kick their ass. If the policyholders interest is 'taken care' by one and the same as the ceo do you think that is possible. As Mr. Tan has put it that you have fox in charge of your chicken.
There is no check and balance mechanism in place; August 28, 2009 7:53 PM
Anonymous said...: Robert is only partially right. Yes, it is easy for par fund to be mismanaged. But so what if, say, you find that the expense ratio is too high? Surrender the policy? But there's always huge surrender loss.

So, the right thing to do is not to ask for more transparency, scrutinize expense, etc.. The additional compliance cost associated with such suggestion will still be charged to par fund. Just tell people not to buy par policy - a product that offers poor liquidity and poor exit strategy.

And by the way, I don't think MAS is doing the wrong thing. Do you thing MAS is not irritated by par products? It must be. But it is politically incorrect for them to tell the public not to buy par products. Many agents' livelihood depends on it (and Singapore has over 10,000 of them). So, MAS is trying to tell you that the fund is managed by some people and some framework. I think they want to get you thinking if you can trust these people and framework. It seems that you have come to the correct conclusion. The next step is really for you to take the right action given that conclusion. And in my mind, suggesting more transparency is certainly not the right action that MAS is hoping you to take.

- TMG; August 28, 2009 10:53 PM
Anonymous said...: I have time and again said that par products are ripped off and against the interest of consumers in term of protection and saving. The problem is these products are sold and not bought.
The inusrance agents know full well that they can only be sold and no one will come running to them and says he or she wants to buy.
MAS has NOT recognised this problem and still has its head buried in the sand. MAS must do something and remove the commission from these par products and let us see whethet agents will still sell and push.These agents will telll different story .
The consumers must realise it and consult FISCA if they have doubts.; August 29, 2009 11:03 AM
Anonymous said...: MAS seems to be caught in the dilimma . MAS knows that par products are screwed up and instead of telling to stop selling par products they telll the insurers to do something about commission which is the cause of all the mis-selling by insurance agents.
The crux of the matter is these par products like wholelife and endwoment are useless to address your needs efficiently and effectively. This the reason why generally singaporeans are under insured and the low claim is the proof.
Worse, singaporeans CANNOT retire if they use par products , regular or single. Many baby boomers have discovered that and many feel cheated by insurance agents.These baby boomers are now working as cleaners, toilet and fast food outlets.
TMG is right. Consumers MUST STOP buying par products. They are NOT GOOD for you.; August 29, 2009 1:00 PM
Anonymous said...: And I'd say again, now that many of you seems to understand the problem, please ACTIVELY tell people around you to do the right thing. This is the least that you can do to protect your family and friends if you truely claim that you care.

- TMG; August 30, 2009 2:17 PM
Robert Tan said...: I understand it may be too late for some to surrender their policies now but these discussions may be useful for those who have not bought any par policies yet to reconsider. For some others, like Mr Tan Kin Lian, even though they may suffer some losses, it might still be worthwhile to surrender their par policies and cut losses now.

I think high commissions is just one of the causes of low returns for par policies. Seems like we can see at least 3 main causes (may have others) of low returns of par products:

1) high commissions
2) policyholders don't get their full share of net assets upon termination, maturity or possibly even upon death. To find out, do a simulated calculation of a person who bought term and invested the rest himself and you will know.
3) high overhead expenses

Problem is, the above 3 items are not well disclosed when par products are sold, a bit like hidden charges.

Some parties have argued that only expenses of the par fund can only be charged to the fund and therefore, this means that insurers cannot simply choose to allocate any expenses they like to the fund. Whilst this argument has some merit, it does not compel an insurer to ensure that costs that are attributed to the par fund are kept low if the costs are borne substantially by the policyholders. When an insurer "sees" that the par fund has so much surplus and "buffer", there may be less incentive to cut salaries, overhead costs and commissions. For example, a par fund may have $1b of "net assets". Out of this, $0.6b have to be set aside as "policyholders liabilities" because of mortality claims, matured policies, past accumulated bonuses that have been declared etc. This still leaves $0.4b surplus kept aside as buffer for future bonuses and potential fall is asset values. When an insurer sees such a big buffer, whether in a downturn or upturn, he may be less compelled to manage costs. This could possibly be why in a downturn, we read about cost cutting measures in airlines, banks etc but we read only about bonus cut but not cost cutting measures taken by life insurers. And, the most significant part of their business is in the par fund!! Because of this reason, insurers may be motivated to declare low bonuses as the bigger “buffer” gives them more flexibility to deal with the surplus as they choose and sometimes, the choices made may not be aligned to policyholders’ interest; August 30, 2009 4:44 PM
Anonymous said...: Easier said than done. Think of the thousands who already bought par policies. You think so easy to exit when their eyes are suddenly opened big big? These policyholders will get burnt if they exit today. Their money goes into 'orphaned money' which is denied by Life Insurance Association and MAS. What they know for sure is: Surrender Value B4 Maturity = Finacial Loss!; August 31, 2009 2:01 PM
Anonymous said...: Life insurance is labour intensive and the cost of labour has not gone down, has it? It is spirally upward but the return is spirally down ward, interest is plunging so how to get high return and cash value and low cost protection?
Don't be fooled again. Stop being conned into buying whole life and endwoment products by your so called trusted greedy agents.
If you have whoel life or endowment surrender them NOW and cut losses. Never mind about the orphaned money. Let the company have it and spend it one kite flying. At least you know you have stopped subsidising the company and unscrupulous the agents; August 31, 2009 7:56 PM