POLICYHOLDERS across the Causeway may be getting more from their life insurance payouts upon surrender and maturity than Singaporeans. It involves a golden egg called 'asset share', which is the proportional share of the total life fund related to each policy (see 'What do they mean').

In Malaysia, regulation requires insurance companies to pay policyholders the asset share of their policies or close to it when they surrender their participating life policies.

'The rationale is to ensure fair treatment to policyholders,' explained Ms Nancy Tan, the executive secretary of the Life Insurance Association of Malaysia.

Similar codes of practice can also be found in countries like Britain and Australia.

But unlike what is required in Malaysia, insurance companies in Singapore are not compelled by regulations to pay back to their policyholders an amount close to the asset share.

The practice was held up to the public eye in June by The New Paper's columnist, Dr Larry Haverkamp ( Dr Money). It has since created more waves.

More are now asking: Why is this not the case in Singapore?

Mr Tan Kin Lian, the former chief executive of NTUC Income, believes Malaysia's practice is 'fair to policyholders'.

The current regulation here is not enough to ensure that policyholders get a fair distribution of bonuses, he said.

Current Monetary Authority of Singapore (MAS) regulations require the bonus distribution to be recommended by each insurance company's appointed actuary and approved by its board of directors.

It also requires the insurance company to have a detailed document which lists the principles on which the distribution is based.

Complicated

'There is an underlying assumption that the life insurance company and its management will act fairly in distributing the bonuses based on the actual experience of the life fund,' said Mr Tan.

But the actual payouts to policyholders of terminated and matured policies appear to be far short of what Mr Tan believes should be the amount.

He said that the cash value given to a policyholder upon termination is much less than the asset share.

And what is the value of the policyholder's asset share?

Life insurance companies simply do not disclose this to policyholders. And for policyholders who keep their policies to the maturity date, there is no guarantee that their payout will be close to their asset share either, said Mr Tan.

Their actual payout is based on the sum assured plus annual bonuses plus terminal bonus.

'The terminal bonus is calculated in a complicated way, and varies for different groups of policyholders, based on many criteria,' he said.

'There is no way that the policyholder can know if they are getting a payout based on the asset share, even on maturity.'

Mr Nick Rhodes, NTUC Income's former appointed actuary, explained that there may be some controversy over how asset share is calculated.

This is because paying back full asset shares on life insurance and endowment policies would make them behave like investment-linked policies.

'In the UK, for this type of with-profit policies, we calculated a smoothed asset share. If the market goes up suddenly, the asset share doesn't go up as fast, and vice versa when the market goes down.

'This is fine-tuning. Different companies may do different things, but they should be open about what they are doing.'

Mr Tan went one step further and argued that insurance companies should disclose the individual asset share to policyholders.

Ms Tan said that Malaysian regulations were developed from the best practices in other countries and adapted for local practices.So, what is the response of Singapore insurers?

The New Paper contacted the top four life insurers, NTUC Income, AIA, Great Eastern Life and Prudential, for their views.

They did not respond individually. Instead, the Life Insurance Association (LIA) returned with a collective response. It said it believes 'there are adequate requirements in place for managing par business'.

LIA's executive secretary, Ms Pauline Lim, said: 'Asset share is an actuarial tool which is used by some insurers to determine policy values. The emphasis is on 'tool' ? it is one, but not the sole consideration in determining policy values.'

She pointed out that under MAS guidelines, insurers have to put in place policies to determine how bonuses are determined.

These include risk sharing rules, determination of asset backing participating products and reserving for future bonuses.

Other observers say whole life and endowment policies are to meet long-term financial needs and it wouldn't be wise to pay out the entire assets on early withdrawal.

The Singapore Actuarial Society thinks it is good to calculate asset shares, not of each policy but on the broad asset share of policy groups.

Its president, Mr Frank McInerney, said: 'The calculation of asset shares is only one of a number of investigations the appointed actuary will carry out before making a bonus recommendation to the Board.'

On whether information on asset shares should be made public, he said it was an issue for individual companies to decide.

WHAT TERMS MEAN

Participating life insurance policy

It has a guaranteed sum payable on maturity or death + non-guaranteed bonuses based on performance of life fund.

Asset share

Individual policyholder's paid premiums + investment income. From this, the insurance company takes away its expenses each year.

Sum assured:

Minimum amount payable to policyholder or his/her dependants on death of policyholder. (Applies to whole life and endowment policies.)

Terminal bonus

Additional bonus paid to reflect overall performance of a with-profit life insurance policy, at maturity or death of policyholder.

What M'sia requires

PAY ASSET SHARE UPON SURRENDER

Must pay policyholders their asset share when they surrender their participating life policies.

90% PAYMENT BEFORE 15TH YEAR

Surrender values for early years should be at least 90 per cent of their asset share.

100% PAYMENT FROM 15TH YEAR

For a whole life plan, the payment on surrender is 100 per cent of their asset share, from the 15th year onwards.

BALANCE PAYMENT

Any balance of unpaid asset share must be rolled over to next year's asset share. Any balance of unpaid asset share or estate for each cohort of policies must be completely distributed at maturity.

What S'pore requires

INTERNAL GOVERNANCE

Insurers must have an internal governance policy on the management of its participating life insurance business. Policy must address how bonuses are determined and how fund assets are invested, describe the charges and expenses, state the shareholders' profits and responsibilities, and so on.

POST-SALE INFORMATION

Insurers must disclose information post-sale, including:

• Performance of par fund over previous accounting period
• Future outlook for par fund
• Bonus allocation
• Update on changes in future non-guaranteed bonuses

POINT-OF-SALE INFORMATION

Insurers must disclose information at the point of sale, including:

• Name and address of insurer
• Nature and objective of plan
• Benefits under plan
• Information on asset investment
• Risks affecting bonus levels
• Sharing of risks
• Smoothing of bonuses
• Fees and charges
• Premium rate adjustments
• Impact of early surrender

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