I REFER to last Wednesday's report, 'AIG fights for its life'.

Many of us buy insurance policies and investment-linked products to cover financial loss, protect our loved ones and invest for the future. This which supposedly gives us peace of mind could turn out to be a nightmare, as shown by the cash crisis at American International Group (AIG), resulting in the insurance giant facing total collapse.

This is a wake-up call that money invested in insurance companies or deposited with banks and finance companies is not risk-free or foolproof. We may still suffer a loss if the financial institutions collapse.

Under the current Deposit Insurance Scheme, deposit amounts held by individuals and charities with banks and finance companies are insured by the Singapore Deposit Insurance Corporation up to $20,000 in aggregate across specified accounts for each depositor under the Deposit Insurance Act. The Deposit Insurance Scheme recognises the risk faced by depositors and offers at least some protection to account holders.

The Monetary Authority of Singapore (MAS) should consider making it mandatory for insurance companies to provide similar insurance cover to protect at least the cash value of insurance policy holders, subject to a cap of say $30,000, for a start.

The financial problem of AIG also reminds us that it is not safe or wise to keep or invest one's hard-earned money in just one financial institution. We should reduce or diversify our risks by buying insurance policies or investment products from various insurance companies. We should also keep or deposit our money with various banks and financial companies. This way, we will minimise loss if a financial institution collapses.

Nowadays, people keep their savings with banks and finance companies for safe keeping rather than to earn interest. Banks and finance companies generally pay depositors interest so negligible, it cannot even cover inflation.

With people living longer, they are likely to keep their money with banks, finance and insurance companies for retirement. If financial institutions cannot provide a good return, the least they should do is guarantee that savings are safe.

The current insured amount of $20,000 is too low and MAS should revise it upwards progressively to, say, $50,000, to protect depositors and policy holders. While this may increase insurance premiums payable by banks and finance companies, they should be able to afford them with the low interest they pay depositors and the high return from funds available.

Goh Kian Huat

This article was first published in The Straits Times on September 22, 2008.