S'poreans should reconsider buying insurance policies...

Poor return on life insurance policies

Tan Kin Lian / Columnist


Dear Mr. Tan,

May I ask if the non-guaranteed reversionary bonuses are determined by individual insurance company? Are these bonuses declarations subject to MAS regulatory control or are they depend on the mood of the insurance company?

My wife and I have similar situations with company Y. To our disappointment, the payouts of non guaranteed reversionary bonus for the matured policies are grossly reduced to a mere 0.12% of the sum assured, instead of the 0.45% as per point of sales illustration.

More unbelieving was the fact that the company declared their overall total assets investment return for 2007 was 5.7% p.a. with fixed income return of 4.9% p.a. and a strong equity portfolio investment return of 8.6%.

We feel that we are not given the fair share of the illustrated payouts of the reversionary bonus during last few years, with the strong performance of the economy and the insurance company in particular. Now, we learnt that the illustrated numbers at the point of sales are no more than a set of empty promise numbers.

I see no other alternatives, besides writing to the insurance company for clarification and going to FiDREC to seek redress. Do want to learn from you on how can the interest of the policyholders be protected from the giant insurance company from either misrepresenting or under-declaring their payouts to earn more from us, the commoners.


This policyholder is reflecting the views of hundred of thousands of policyholders who saved and waited for 10, 20 or 30 years for their policies to mature, only to see that they receive a low payout compared to what they were promised.

It is true that the investment climate has been volatile and that investment yield has been poor in some years. But they have been good in other years. These policyholders wonder if they have been given a fair deal by the insurance companies that they have trusted over the years.

My frank answer is this: the consumers have been given a poor deal.

The insurance companies are required to invest prudently to meet their long-term liabilities. By doing so, they probably earned a gross yield of 5% to 6% during the past years.

The problem is the high charges that are deducted from the life insurance policy to pay the marketing expenses, administration expenses, mortality charges and profit to shareholders.

These charges are likely to take away 2% to 4% from the yield. This leaves a net yield of 2% to 3%, which is not enough to cover the inflation rate over the years.

At the point of sale, the insurance company probably used a higher projected yield (which is probably justified at that time). Due to the lower yield actually earned, the return has been disappointing.

If the investment yield is reduced, the insurance company can act fairly to reduce its charges to its policyholders, so that the net yield remains at a decent level. This does not appear to be the case. The insurance company continues to operate at high expenses. The policyholders have no choice but to suffer in silence. If they terminate their policies, they will suffer a bigger immediate loss.

To make matters worse, the policyholder wonders if he or she has been given a fair deal, even allowing for the lower investment yield and high charges, and continuing the policy to the maturity date. The nagging question is this: "After paying all these charges, do the bonuses reflect what is fairly due to me?”

In actuarial circles, there is the concept of “asset share”. This is calculated based on the actual premiums paid and investment income earned, less the actual expenses and other charges. The principle of fairness requires that the policyholder should receive his or her “asset share” less a reasonable profit margin to the shareholders.

If the policyholder receives less than the asset share under a participating policy (i.e. a policy with reversionary bonus), it is clearly unfair.

How do the consumers know if they are getting a fair deal?

This is the responsibility of the regulator, which is the Monetary Authority of Singapore, or MAS. The regulator is required to ensure that the life insurance companies treat their policyholders fairly in respect of the bonuses distributed to them from the participating policies.

The regulator now requires the bonus distribution to be decided by the board of directors, on the recommendation of the appointed actuary, and that the process be governed by an internal governance policy, as set out in MAS notice 320.

In my view, this does not provide sufficient protection to consumers. There is a conflict of interest within the board, which represents the interest of the shareholders.

I hope that the regulator will change the approach. It is better to have an independent actuary appointed by the regulator to look at the bonus distribution and make sure that it has been declared fairly to the policyholders.

If you look at the annual report of your life insurance company, you will see the scales of bonuses declared on various series and types of policies. You will probably see many complicated scales of bonuses for different series and types of policies. You may wonder why there are so many scales and if different policies are being treated fairly in respect of the bonuses distributed to them.

Some companies may appear to be distributing more bonuses to their newer series of policies, as it helps in their volume of new sales. One wonders if this is being done at the expense of the older policies.

These thorny issues remain unresolved.

In the absence of adequate safeguards, it is better for consumers to avoid investing in life insurance policies, where the distribution of bonus is not transparent and may appear to them to be unfair. It is better for consumers to invest in a low-cost investment fund, which is more transparent. The consumer will be able to check yearly that he or she has received the actual investment gain, less the agreed charges.