By Larry Haverkamp (Doc Money)
mail@AskDrMoney.com

THERE is an insurance golden egg that you may not be aware of. It grew because insurers have paid out less than the asset share value when policies are cashed in or mature. The balance has been retained in a policyholders' fund and has grown into a golden egg. Policyholders have no access to it.

Even the exact ownership has become fuzzy over the years. Other countries force insurers to divide and distribute the golden egg. This is not done here.

How big is it?

Singaporeans own more than five million whole life or endowment policies. It averages more than one policy per person. They combine insurance with investments and are hugely popular, in part, because of the marketing skills of the 13,000 agents who sell them.

The premiums from everyone's whole life and endowment insurance go into one big policyholders' fund at each insurance company.

For all life insurers, it comes to $66 billion and averages $66,000 per household. It is huge. Details are in returns insurers provide to the Monetary Authority of Singapore. But there aren?t enough details to know our share.

Another problem is when we surrender policies, we get a cash value set by insurers which is lower than the proportion of the egg related to the policies, called 'asset share'.

The money that is not paid to previous holders of terminated or matured policies remains in the nest, like orphaned money - in the custody of insurers. It is commonly called 'orphaned money'. Other countries require the orphaned money to be distributed to policyholders and shareholders. Aviva in the UK announced such a distribution last month. Our life insurers do not do this, based on my observation.

How much orphaned money is there? Based on the methodology used by Malaysia's Central Bank, I calculate it to be between $8.2 and $27 billion for the top four life insurers.

The range is wide because we don't know for sure. Let's be conservative and use the smaller number. Then divide by two to reduce it some more. It still averages $4,000 for each of our one million households. It is a lot of money. There is no reason we should have to guess this number. Insurers should tell us.

Why hold our money?

Some claim that keeping this orphaned money in the policyholders' fund somehow reduces risks.

Not correct. Whole life and endowment insurance contains two types of risk: mortality (death) and investment risk. Mortality risk isn't much since these policies don't include much term insurance. It is small enough to be covered by the 'tier 1' capital, from stockholders, and requires little or no policyholders money.

A second risk is investments. Yes, a large policyholders' fund helps with diversification. But this is easy to achieve in other ways, like with a unit trust.

A large policyholders' fund does NOT reduce investment risk more than a unit trust of the same size and asset mix.

How your egg shrinks

Insurers can take part of the golden egg by cutting a deal. Aviva in UK agreed to distribute $2.7 billion to one million policyholders ONLY if stockholders got part of the money. After negotiations, a 70/30 split in favour of policyholders was agreed to.

Is that an eggs-cellent solution or is it unfair?

The writer is a consumer activist & newspaper columnist.

This article was first published in The New Paper on September 6, 2008.