I BELIEVE current regulations do not effectively ensure distribution of bonuses based on asset share values to policyholders.
Looking at the actual payouts to policyholders of terminated and matured policies, the payouts appear to be far short of the actual experience of the life fund.
The insurance company is required to submit to the regulators an annual return of their participating fund. There is a figure called 'sum of liability in respect of individual policies'.
For the top four life insurers, it comes to $48 billion. They are NTUC Income, AIA, GE Life and Prudential which control 85 per cent of all life insurance assets.
There is another figure in the annual return that shows 'minimum condition liability'. This is the amount that represents the valuation of the accrued guaranteed benefits based on certain conservative assumptions.
For the top four life insurers, it comes to $29 billion. This is 60 per cent of the 'sum of liability'.
What is important to the policyholder is the cash value of his or her policy, if it is terminated at that point of time. The annual return does not show the cash value, but it is quite likely to be close to the 'minimum condition liability'.
If all the policyholders decide to terminate their policies and are paid a total of $29 billion, what happens to the balance of $19 billion that makes up the 'total liability' of $48 billion?
I speak hypothetically, of course.
Each policyholder can ask for the cash value payable upon termination. It is their contractual right to get an answer.
Suppose the policyholder asks: What is my share of the $48 billion that is kept in the policyholder?s fund - called the asset share?
In theory, the companies should be able to produce this figure. Regulation requires the total of $48 billion to be obtained by adding up the sum of the liability in respect of each individual policy. Yet, the insurers refuse to disclose this individual sum.
Is it fair?
Suppose the law forces them to do so. Say you are told that the asset share of your policy is $10,000 and your cash value is $7,000. This means that you will lose $3,000 by terminating the policy. Is this fair?
Ask how much premium you paid over the past years of the policy. It is likely that you have paid more than the cash value and maybe more than the asset share.
If you have paid a total premium of $11,000 and you get a cash value of $7,000, is this fair? Why is the asset share lower than the total premiums paid plus the investment income earned?
Because the insurance company deducts its expenses before arriving at the liability. These include death benefits paid out, shareholders' profit, agents' commission, and costs of running the company.
As the expenses are quite high, the asset share can be lower than the premiums paid. The policyholder can feel upset by this. Part of it is also that the insurance company retains a large portion of the asset share from the terminated policyholders.
Although I have quoted a hypothetical example, it reflects the real situation in Singapore. The annual returns submitted to the authorities showed that the 'minimum condition liability' is 60 per cent of the 'total liability'.
Can the life insurance company be trusted to be fair to the policyholders? We need rules to ensure a fair payout to policyholders.
The writer is the former CEO of NTUC Income.
This article was first published in The New Paper on September 6, 2008.
