Insurance is a broad term and encompass many segments which may interest you depending on your needs. Yet it is a taboo subject to some; You will have less friends if you joined the industry as a fresh insurance agent. There are also non-believers who are convinced that insurance is a pyramid scheme to enrich the sellers because the product itself is merely few pieces of paper to guarantee payment upon the occurrence of an unfortunate event.
Yet for every sceptic, there are many people who are grateful for this product without which, they would have suffered immense financial anxiety and stress in addition to their loss, if any. But there is no need for me to elaborate on the above benefits because this is common knowledge to all. I like to explain why insurance is viewed as an unique financial instrument unparallel to its peers in the context of leverage using the multiplier. Insurers, like banks, are highly regulated in Singapore and consumers are protected by Monetary Authority of Singapore. Nevertheless, insurers, like all companies, are ultimately driven by profits. What happens to their customers when they choose to abandon ship? Let’s address these questions below:
What happens to the policy holders when an insurer decides to close shop?
MAS encourages buy-out whenever an insurer decides to wind down its business in Singapore so that policy holders will not be affected by its decision. In 2015, Zurich Life exited Singapore and sold its business to Singapore Life. Singapore Life assume responsibility for all Zurich Life Singapore’s customers’ policies, totalling approximately S$6 billion of coverage for life, critical illness and disability benefits. All Zurich Life Singapore policyholders who transfer to Singapore Life will continue to have the existing terms and conditions of their policies upheld. In 2020, Aviva sold its majority shareholding in its Singapore business to a consortium led by Singapore Life for S$2.7 billion as it reduces focus on Asia. The merger is expected to be finalized in 2021. Again, Aviva policyholders will not be affected yet they will soon be able to leverage on Singapore Life’s intuitive technology therefore this merger brings more benefits.
“For every sceptic, there are many people who are grateful for this product without which, they would have suffered immense financial anxiety and stress in addition to their loss”
What happens when an insurer becomes insolvent?
An insurer who sets up shop in Singapore will be a member of SDIC and covered under the Policy Owner’s Protection Scheme (PPF). The PPF scheme administered by SDIC, protects life insurance policies issued by PPF scheme members and cover both residents and non-residents. However, this protection does not extend to policies issued by overseas branches of a licensed life insurer incorporated in Singapore. That said, in the event a PPF member fails, all claims and surrender will be guaranteed up to S$500,000 for the guaranteed sum assured and S$100,000 for the guaranteed surrender value per life assured per insurer.
Please check out SDIC link for more details.
Have you heard of capital adequacy ratio for the insurers?
As insurers are profit seeking corporations, they designed their own financial products and have a certain degree of latitude in their investments. MAS recognized that investments can be volatile to the detriment of policyholders, so MAS impose a capital adequacy ratio (CAR) requirements for all insurers incorporated in Singapore to adhere. All insurers will have to put up capital requirements as an effective buffer to cushion against possible losses. With greater transparency, it will provide clear information on the financial strength across all insurers and allow for early intervention if required. Under the insurance regulations of 2004, licensed insurers are required to maintain a CAR of at least 120% of total risk requirement or SGD5,000,000, whichever is higher. Insurers are required to update their CAR position to MAS on a quarterly basis. So in this regard, risks of insolvency for insurer is very low in Singapore because a lot of safeguards are put in place.
Participating Insurance plans including endowments offer very low returns.
Now that we are assured that there are adequate protection in the event an insurer goes insolvent, we shall now discuss the next level of concern. Some clients find the guaranteed returns of insurance policies too low and questions if the insurer is able to fulfil the non-guaranteed portion of the policy. To answer this, we need to ascertain if the interest of the policy holders and shareholders are aligned.
In the guide to participating policies, which should be distributed to the policy holder after every policy is purchased, it explains some key safeguards to protect the interests of participating policyholders. For every $1 of profit an insurer made, 90% must be distributed to the participating policy holder and a maximum of 10% to the shareholders. Furthermore, any shortfall in assets to meet the guaranteed benefit has to be fulfilled by the shareholders. This means that the insurer has the obligation to pay the guaranteed benefits even if the participating funds were to perform badly. Furthermore, any cutting of non-guaranteed bonus will inadvertently affects the shareholders’ interest else it will not be aligned to that of the policy holders. So it is in the interest of shareholders to ensure that the insurer pays the highest possible returns at all times.
What happens when there is a market downturn? How can I be assured that the insurer will always pay out at the highest projected return?
Insurers will have to invest their premiums prudently to generate returns. In addition to the above shareholder-policyholder alignment of interest, insurers practise smoothing of bonuses in order to avoid fluctuations in non-guaranteed bonus distribution year on year. So during times when the participating fund performs well, insurers may hold back some non-guaranteed bonuses. This is so that bonuses can be maintained when the fund performs poorly. Therefore despite the volatility of the markets, returns to policy holders from participating policies will be evenly distributed thus the term “smoothing of bonus by insurers”. That said, non-guaranteed is still a non-guaranteed but what I am trying to share here is that it is not in interest of shareholder for the insurer to distribute a lower rate of return to policy holders unless in a severe bear market situation which ultimately will negatively impact all assets classes.
With the above, I would like to highlight that participating insurance policies are considered relatively safer asset class as it is regulated, and policy holders are protected at multiple levels. However, it will not arouse the same level of interest as a high yield bond fund which pays out 8% p.a of dividends per month. Furthermore, the fund can pay out the dividend on a monthly basis whereas policyholder could not cash out the policy after many years or can only made claims upon certain listed events.
That said, the prime merit of a protection policy such as term or whole life plan (with multiplier) is the massive insured pay out if the insured events were to unfortunately materialised. Furthermore the payout is guaranteed by the financial institution regulated in Singapore. Premiums are fixed and guaranteed so you won’t be caught by any surprises.
Let’s take an example of a male non-smoker aged 42 next birthday paying a premium of $3,305.45 yearly for a term plan with a sum assured of $1,000,000. Premium and coverage term written for 43 years. A claim at age 62 and 72 would have a payout of 15 and 10 times respectively of the total premiums paid. However, if you wish to extend the coverage period longer beyond what some term plans can offer, you may consider to get a whole life policy with a high multiplier.
In conclusion, insurance is an ideal risk management tool and is widely used in most if not all family offices especially in the realm of legacy planning. From a savings/retirement perspective, high guaranteed endowments/annuities are also available and can be good complements with other asset classes and ought to be included in a portfolio to balance the overall risk.
Do note that above sharing on the non-guaranteed bonus herein referred to that of the participating policies. And this does not apply to non-participating policies, such as investment linked plans, which depends on their basket of funds for their accumulated cash value.
