This is published in today’s Straits Times

I REFER to last Thursday’s letter by Mr Larry Haverkamp, ‘Transparency in insurance: Policyholders underpaid’. He suggests that insurers have built up ‘orphaned money’ by under-declaring bonuses to participating policyholders. This is not the case in Singapore. With the introduction of the Risk-based Capital Framework in August 2004, insurers in Singapore are required to record the total amount of assets held in the participating fund as backing the liabilities to the participating policyholders. This means all assets in the participating fund belong to the participating policyholders. The issue of ‘orphaned money’ therefore does not arise.

In addition, there are rules governing the distribution of bonuses for participating funds. Under the Insurance Act, when insurers declare bonuses to participating policyholders, they can distribute not more than $1 to shareholders, as compensation for their management of the fund, for every $9 of bonus declared to policyholders. This ensures that insurers have an interest to manage the participating fund properly to achieve reasonable long-term returns for policyholders in accordance with the stated investment objectives of the fund.

These requirements ensure there is no incentive for insurers to intentionally under-declare bonuses in the hope of building up large amounts of ‘orphaned money’ to benefit their shareholders in future.

The Monetary Authority of Singapore (MAS) informed insurers in July this year that the definition of a participating policy in the First Schedule of the Insurance Act will be amended to provide even greater clarity that the assets of the participating fund belong to participating policyholders.

Angelina Fernandez (Ms)
Director (Communications)
Monetary Authority of Singapore

My Comment:

The insurance bonus issues have drawn more attention in recent years.  However, I feel most of the policy holders have emphasized too much on the bonus payout than the fundamental purpose of buying a life insurance, which is protection.

Insurance, being a relatively safer financial instrument and guarantee the insurance payout in the event of Death and Disability, can never fetch you a fantastic return due to the cost and claim incurred along the years. However, it is just good enough to cover the inflation, while you are enjoying the benefit of coverages (it is a form of consumption). One should seek alternative investment should he or she wants to get better return.

We all should remember any Insurance Company is NOT a charity. They are profit driven business and have to pay dividends to their shareholders.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
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