Dear Mr. Tan
I attend the annual general meeting of Income. I am quite confused with the statments made by several people in the panel. They said that the bonus restructuring will allow Income to give a better return, compared to the old bonus structure. They also said Income can invest more in equity,but it will not increase the risk profile. How is this possible?
I looked at the table of the asset allocation of the life companies shown in your blog. It seems that companies with high capital adequacy ratios, such as AIA, show have low allocation to equities.
REPLY
I am also quite confused with the statements. The new bonus structure allows Income to invest in a higher proportion in equities to earn a higher yield. I am not sure if this is their intention. This will certainly increase the risk profile.
Friday, May 30, 2008
Asset shares
As more insurance companies move towards distributing more bonus as non-guranteed terminal bonus, it is important to use a method that ensures that the bonuses and cash values are fair to policyholders. This cannot be left to the discretion of the appointed actuary and the board, as the payout to the policyholder may be less than fair amount.
Many companies are now using "asset shares" to determine this payouts. I found that life insurance companies in Malaysia have adopted this concept. It is stated in this webpage:
http://www.liam.org.my/cms/layout/Printer.asp?ProductID=237&catid=13
It seems that Malaysia is ahead of Singapore in adopting this good practice, to ensure that policyholders get fair values on surrender, claim and maturity. It seems that the "asset share" method is well adopted in England, Australia and South Africa.
Many companies are now using "asset shares" to determine this payouts. I found that life insurance companies in Malaysia have adopted this concept. It is stated in this webpage:
http://www.liam.org.my/cms/layout/Printer.asp?ProductID=237&catid=13
It seems that Malaysia is ahead of Singapore in adopting this good practice, to ensure that policyholders get fair values on surrender, claim and maturity. It seems that the "asset share" method is well adopted in England, Australia and South Africa.
Management expenses
Dear Mr. Tan,
I want to support your protest against the NTUC bonus cut. The bonus cut is just benefit of the manager only, because the take all the expenses first, spend all first, then only give us back a some small portion.
Thank you for your effort. I don't think you are take credit, like others say. I think you are doing a good thing to us.
I have decided to call off the Collective Protest. I will continue to monitor the developments and make sure that the interest of the policyholders are protected. Let us leave it to the board to monitor the management expenses.
I want to support your protest against the NTUC bonus cut. The bonus cut is just benefit of the manager only, because the take all the expenses first, spend all first, then only give us back a some small portion.
Thank you for your effort. I don't think you are take credit, like others say. I think you are doing a good thing to us.
KM
REPLYI have decided to call off the Collective Protest. I will continue to monitor the developments and make sure that the interest of the policyholders are protected. Let us leave it to the board to monitor the management expenses.
Disappointed at the outcome of Collective Protest
Dear Mr. Tan,
I am disappointed that you have withdrawn the Collective Protest. I still do not like the cut in the annual bonus, and the assurance that you have obtained on the special bonus. I begin to distrust life insurance policy, as the bonus can be changed in this manner.
J
REPLY
I understand your disappointment.
The assurances from the chairman, deputy chairman and the former NTUC secretary general is the best that I can get at this time. There is nothing much that can be achieved by moving the Collective Protest to the next stage. I do not wish to drag the matter and cause damage to the reputation of Income. If you do not accept the assurances, you can write directly to the board of Income.
I agree that life insurance policies are unsatisfactory due to the high cost and lack of transparency. For the past year, I have been advising consumers to buy term insurance for the protection and invest their savings in a low cost fund. You can select a fund that suit your risk profile, i.e. low or high risk.
Read this FAQ:
http://www.tankinlian.com/faq/savings.html
I am disappointed that you have withdrawn the Collective Protest. I still do not like the cut in the annual bonus, and the assurance that you have obtained on the special bonus. I begin to distrust life insurance policy, as the bonus can be changed in this manner.
J
REPLY
I understand your disappointment.
The assurances from the chairman, deputy chairman and the former NTUC secretary general is the best that I can get at this time. There is nothing much that can be achieved by moving the Collective Protest to the next stage. I do not wish to drag the matter and cause damage to the reputation of Income. If you do not accept the assurances, you can write directly to the board of Income.
I agree that life insurance policies are unsatisfactory due to the high cost and lack of transparency. For the past year, I have been advising consumers to buy term insurance for the protection and invest their savings in a low cost fund. You can select a fund that suit your risk profile, i.e. low or high risk.
Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Bonus for annuitants
At the annual general meeting of Income, I asked a question about the bonus declared on life annuities. I observed that the bonus were declared to reflect an investment yield of about 5.5%. The actual investment yield earned by the life fund was 7.8% during the past 10 years. It seems to be justified for a higher bonus to be given to the annuitants.
I asked the board to consider this matter for the future, as they have already decided on the bonus declared for the current year.
I asked the board to consider this matter for the future, as they have already decided on the bonus declared for the current year.
Debate with Nick Dumbreck about Terminal Bonus
Hi Mr Tan,
I recently read an article by Nick Dumbreck (an independent actuarial consultant engaged by NTUC Income) about terminal bonus. I wish to send the following comments for posting in your blog.
Yew Ming
Nick Dumbreck (ND): "Limiting the build-up of guarantees enables with-profits assets to be invested more freely, with a significant proportion generally being allocated to equities - and in some cases property. These are expected to generate better returns than bonds in the long run. So a higher guarantee may result in a lower payout as compared to a policy with a lower guarantee and greater investment flexibility."
Yew Ming (YM): Let's look at the facts in the public domain. Here are the figures for the par fund in 2006 :
Note that MAS requires 120% minimum capital ratio. At best, this gives significant amounts of sleep for senior management and their actuarial consultants.
Also, renowned economist Robert Shiller (Irrational Exuberance) has this to say : "The evidence that stocks will always outperform bonds over long time intervals simply does not exist. Moreover, even if history supported this view, we should recognise that the future will not necessarily be like the past"
And lower payouts from reversionary bonus payers (i.e. Income) compared to terminal bonus payers (i.e every other company)? I really doubt this. Income policyholders who have collected his/her policy payouts will know better.
ND: "My experience is that given the choice between a higher expected payout and a lower guaranteed minimum sum on the one hand, and a lower expected payout but a higher guaranteed minimum on the other, most policyholders would opt for the former. Indeed the basic idea behind the with-profits proposition is that guarantees are limited but policyholders participate in any profits which arise."
YM: This is an assumption made by ND about what the customers prefer. I think companies should never assume what customers want.. Simply ask, and you will know the answer.
ND: "Unfortunately it is not practical to accommodate the different aims of individual policyholders. It is for the board to decide, in the interests of policyholders collectively."
YM: How impractical is it to send a letter to the policyholder to ask him/her which bonus structure he/she prefers?
ND: "As yields on long-dated government bonds fell from over 10 per cent per annum at the beginning of the decade to less than 4.5 per cent at the end of 1998, many companies were slow to cut annual bonus rates despite having high exposure to equities in their participating funds. This led to reduced free assets, and several mutual firms were forced to demutualise to restore a satisfactory solvency position."
YM: There is NOTHING wrong with annual/reversionary bonus. The root cause of insolvencies was "companies were SLOW TO CUT annual bonus rates". Maybe because the industry wanted to illustrate high bonuses to compete for new business and targets high growth rates to impress shareholders.
ND: "Onerous benefit guarantees were a big factor behind the closure of Equitable Life, Europe's oldest mutual life company in December 2000. These examples show the importance of addressing the balance between guarantees and providing attractive returns in the long term."
YM: The real reasons for Equitable's failure are found in http://news.bbc.co.uk/2/hi/business/3547441.stm
Quoting the report - "Dubious practices, used by ALL life insurers to varying degrees was to STOP ALLOCATING BONUSES in the form of REVERSIONARY bonuses. These were guaranteed and had to be counted on the life insurer's accounts as a liability. Instead, an increasing LARGE CHUNK of the bonuses allocated to policyholders took the shaper of TERMINAL bonuses. These could be added or cut with impunity and without affecting the company's solvency - even if they did affect the value the customer EXPECTED". Unquote.
I think, the British Courts finally ruled that these terminal bonuses have to be paid, thus critically damaging the Equitable.
Reversionary bonus (after declaration) are guaranteed and thus needs to be actuarially reserved. This imposes discipline on the financial management of the insurance funds. Terminal bonus on the other hand, is an "actuarial sleight of hand". It breeds complacency and gives the senior management a false sense of security.
ND: "Switching to a lower annual bonus and higher final bonus will align to industry best practice, improve investment freedom and make it easier for the insurer to deliver yields to customers. It will also improve the resilience of the participating fund."
YM: The funny thing about "industry best practices" is the industry is often behaving like lemmings.
Quoting Warren Buffet - "the behaviour of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated".
And, we don't need to look far for evidence of lemming-like industry "best practices" e.g. subprime mortgage debacle, tech bubble, the recent global property bubbles, LTCM/Enron blow-up.
I used to view Income's management as standing independent from the sheeples (hybrid of sheeps and people).
Take for example Warren Buffet's description about one of his senior managers at Geico, Louis Simpson : "He derives no pleasure from operating with or against the crowd. He is comfortable following his own reason.".
ND: "In short, both policyholders and the insurer stand to gain from this new bonus structure. The lessons learnt from the UK market serve as a painful reminder of the potential consequences of resisting change in favour of the status quo."
YM: In short, Nick Dumbreck's misleads the uninformed public with THEORY. And we all know, theorectically the recent credit crisis is a 25-sigma event ie happening once every GOOGOLIAN years (1 with 100 zeros behind).
Lastly i wonder what percentage of Singaporean life actuaries invest/save in With-profits-Terminal bonus life insurance? I suggest that the local actuarial institute conduct a survey of this very telling statistic.
I recently read an article by Nick Dumbreck (an independent actuarial consultant engaged by NTUC Income) about terminal bonus. I wish to send the following comments for posting in your blog.
Yew Ming
Nick Dumbreck (ND): "Limiting the build-up of guarantees enables with-profits assets to be invested more freely, with a significant proportion generally being allocated to equities - and in some cases property. These are expected to generate better returns than bonds in the long run. So a higher guarantee may result in a lower payout as compared to a policy with a lower guarantee and greater investment flexibility."
Yew Ming (YM): Let's look at the facts in the public domain. Here are the figures for the par fund in 2006 :
Company Equity Capital
Allocation Adequacy
AIA 15% 420%
Aviva 20% 320%
GE 26% 190%
Prudential 40% 280%
Income 31% 170%
Note that MAS requires 120% minimum capital ratio. At best, this gives significant amounts of sleep for senior management and their actuarial consultants.
Also, renowned economist Robert Shiller (Irrational Exuberance) has this to say : "The evidence that stocks will always outperform bonds over long time intervals simply does not exist. Moreover, even if history supported this view, we should recognise that the future will not necessarily be like the past"
And lower payouts from reversionary bonus payers (i.e. Income) compared to terminal bonus payers (i.e every other company)? I really doubt this. Income policyholders who have collected his/her policy payouts will know better.
ND: "My experience is that given the choice between a higher expected payout and a lower guaranteed minimum sum on the one hand, and a lower expected payout but a higher guaranteed minimum on the other, most policyholders would opt for the former. Indeed the basic idea behind the with-profits proposition is that guarantees are limited but policyholders participate in any profits which arise."
YM: This is an assumption made by ND about what the customers prefer. I think companies should never assume what customers want.. Simply ask, and you will know the answer.
ND: "Unfortunately it is not practical to accommodate the different aims of individual policyholders. It is for the board to decide, in the interests of policyholders collectively."
YM: How impractical is it to send a letter to the policyholder to ask him/her which bonus structure he/she prefers?
ND: "As yields on long-dated government bonds fell from over 10 per cent per annum at the beginning of the decade to less than 4.5 per cent at the end of 1998, many companies were slow to cut annual bonus rates despite having high exposure to equities in their participating funds. This led to reduced free assets, and several mutual firms were forced to demutualise to restore a satisfactory solvency position."
YM: There is NOTHING wrong with annual/reversionary bonus. The root cause of insolvencies was "companies were SLOW TO CUT annual bonus rates". Maybe because the industry wanted to illustrate high bonuses to compete for new business and targets high growth rates to impress shareholders.
ND: "Onerous benefit guarantees were a big factor behind the closure of Equitable Life, Europe's oldest mutual life company in December 2000. These examples show the importance of addressing the balance between guarantees and providing attractive returns in the long term."
YM: The real reasons for Equitable's failure are found in http://news.bbc.co.uk/2/hi/business/3547441.stm
Quoting the report - "Dubious practices, used by ALL life insurers to varying degrees was to STOP ALLOCATING BONUSES in the form of REVERSIONARY bonuses. These were guaranteed and had to be counted on the life insurer's accounts as a liability. Instead, an increasing LARGE CHUNK of the bonuses allocated to policyholders took the shaper of TERMINAL bonuses. These could be added or cut with impunity and without affecting the company's solvency - even if they did affect the value the customer EXPECTED". Unquote.
I think, the British Courts finally ruled that these terminal bonuses have to be paid, thus critically damaging the Equitable.
Reversionary bonus (after declaration) are guaranteed and thus needs to be actuarially reserved. This imposes discipline on the financial management of the insurance funds. Terminal bonus on the other hand, is an "actuarial sleight of hand". It breeds complacency and gives the senior management a false sense of security.
ND: "Switching to a lower annual bonus and higher final bonus will align to industry best practice, improve investment freedom and make it easier for the insurer to deliver yields to customers. It will also improve the resilience of the participating fund."
YM: The funny thing about "industry best practices" is the industry is often behaving like lemmings.
Quoting Warren Buffet - "the behaviour of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated".
And, we don't need to look far for evidence of lemming-like industry "best practices" e.g. subprime mortgage debacle, tech bubble, the recent global property bubbles, LTCM/Enron blow-up.
I used to view Income's management as standing independent from the sheeples (hybrid of sheeps and people).
Take for example Warren Buffet's description about one of his senior managers at Geico, Louis Simpson : "He derives no pleasure from operating with or against the crowd. He is comfortable following his own reason.".
ND: "In short, both policyholders and the insurer stand to gain from this new bonus structure. The lessons learnt from the UK market serve as a painful reminder of the potential consequences of resisting change in favour of the status quo."
YM: In short, Nick Dumbreck's misleads the uninformed public with THEORY. And we all know, theorectically the recent credit crisis is a 25-sigma event ie happening once every GOOGOLIAN years (1 with 100 zeros behind).
Lastly i wonder what percentage of Singaporean life actuaries invest/save in With-profits-Terminal bonus life insurance? I suggest that the local actuarial institute conduct a survey of this very telling statistic.
Restructuring of bonus
At the annual general meeting of Income, I pointed out that there are three groups of participating policies:
Series EV - introduced in 2007, 2008
Series LP - introduced in 1993
Other series - introduced before 1993
Only the LP series and 1 product under the EV series are subject to the restructuring. Two products under the new EV series are not being restructured.
Income has said earlier that they are not restructuring the other series, because these policies have been issued long ago. I asked the board to review the decision on the two new EV products. Why are they not subject to restructuring?
It is important that policyholders feel that they are being treated fairly and consistently.
Series EV - introduced in 2007, 2008
Series LP - introduced in 1993
Other series - introduced before 1993
Only the LP series and 1 product under the EV series are subject to the restructuring. Two products under the new EV series are not being restructured.
Income has said earlier that they are not restructuring the other series, because these policies have been issued long ago. I asked the board to review the decision on the two new EV products. Why are they not subject to restructuring?
It is important that policyholders feel that they are being treated fairly and consistently.
NTUC Income - implementing the two objectives
Dear Mr. Tan,
Thank you very much for your effort in organising and representing us in this collective issue. I support your decision. However, would there be any safeguards to ensure that NTUC Income will implement the two objectives.
On another point, as a result of this collective action initiated by yourself, you have a strong following of supporters. May I request that all of us supporters stay together with Mr Tan as our spokesman as an informal group. Perhaps we can be known as the 'NTUC Income Watch Group".
Leon Khor
REPLY
Mr. Lim Boon Heng told me that this Social Enterprise Development Committee will continue to ensure that Income follows it social purpose. I will use this channel to present views on the future implementation of these two objectives.
I intend to write a paper on the use of asset shares as a measure of equitable bonus distribution. This will ensure that the bonus and cash values follow the asset shares. I hope that some actuaries within this group can help me to write this paper.
According to this concept, the insurance company has to calculate the asset share for each policy based on the premiums paid, investment income earned and deducting the expenses and mortality charges. The actual experience is used in the calculation. The insurance company can use the asset share to calculate the annual and terminal bonus payable on the policy. It should pay cash values that are quite close to the asset share of the policy, less a certain margin for its profits.
The chairman of Income has said at the annual general meeting that the board will look after the best interest of the policyholders. We can let him have a benchmark on what is the best interest of policyholders, in terms of sustainable bonuses and cash values.
Thank you very much for your effort in organising and representing us in this collective issue. I support your decision. However, would there be any safeguards to ensure that NTUC Income will implement the two objectives.
On another point, as a result of this collective action initiated by yourself, you have a strong following of supporters. May I request that all of us supporters stay together with Mr Tan as our spokesman as an informal group. Perhaps we can be known as the 'NTUC Income Watch Group".
Leon Khor
REPLY
Mr. Lim Boon Heng told me that this Social Enterprise Development Committee will continue to ensure that Income follows it social purpose. I will use this channel to present views on the future implementation of these two objectives.
I intend to write a paper on the use of asset shares as a measure of equitable bonus distribution. This will ensure that the bonus and cash values follow the asset shares. I hope that some actuaries within this group can help me to write this paper.
According to this concept, the insurance company has to calculate the asset share for each policy based on the premiums paid, investment income earned and deducting the expenses and mortality charges. The actual experience is used in the calculation. The insurance company can use the asset share to calculate the annual and terminal bonus payable on the policy. It should pay cash values that are quite close to the asset share of the policy, less a certain margin for its profits.
The chairman of Income has said at the annual general meeting that the board will look after the best interest of the policyholders. We can let him have a benchmark on what is the best interest of policyholders, in terms of sustainable bonuses and cash values.
Collective Protest - Settlement
I met with Mr. Lim Boon Heng and Mr. Matthias Yao today. Mr. Lim is the former secretary general of NTUC and the current chairman of the NTUC Social Enterprise Development Committee. Mr. Yao is the deputy chairman of the board of Income.
Mr. Lim assured me that Income will continue to observe its social purpose and cooperative principles and that his committee will ensure that Income continues to give good value to its policyholders.
I briefed them about the two concerns on the bonus restructure, namely:
1. To have adequate assurance on the payment of the special bonus (as it is not guaranteed)
2. To ensure that policyholders get bonuses and cash values that closely reflect the contribution to the life fund by each policy, based on the actual experience.
Both of them shared the general sentiment. They said that Income will look into ways of implementing these two objectives. This will require some time to be implemented fully.
I asked that Income give an option to the policyholder. Mr. Yao said that this has been considered, and the board has decided against it.
At the annual general meeting of Income, chairman Ng Kee Choe reaffirmed that Income will continue to look after the best interest of its policyholders. He announced three measures to deal with the concerns expressed by policyholders on the restructure of the bonus. His speech will be posted in Income's website.
I believe that these assurances are the best that can be achieved at this stage. We will not be able to achieve more by taking this collective protest to the next stage.
Hence, I have decided to withdraw the Collective Protest and will continue to monitor the developments to ensure that the policyholders interests are protected. I hope that the policyholders who submitted signatures to me will support my decision.
If any policyholder still does not accept these assurances, they can lodge the protest directly with Income.
Mr. Lim assured me that Income will continue to observe its social purpose and cooperative principles and that his committee will ensure that Income continues to give good value to its policyholders.
I briefed them about the two concerns on the bonus restructure, namely:
1. To have adequate assurance on the payment of the special bonus (as it is not guaranteed)
2. To ensure that policyholders get bonuses and cash values that closely reflect the contribution to the life fund by each policy, based on the actual experience.
Both of them shared the general sentiment. They said that Income will look into ways of implementing these two objectives. This will require some time to be implemented fully.
I asked that Income give an option to the policyholder. Mr. Yao said that this has been considered, and the board has decided against it.
At the annual general meeting of Income, chairman Ng Kee Choe reaffirmed that Income will continue to look after the best interest of its policyholders. He announced three measures to deal with the concerns expressed by policyholders on the restructure of the bonus. His speech will be posted in Income's website.
I believe that these assurances are the best that can be achieved at this stage. We will not be able to achieve more by taking this collective protest to the next stage.
Hence, I have decided to withdraw the Collective Protest and will continue to monitor the developments to ensure that the policyholders interests are protected. I hope that the policyholders who submitted signatures to me will support my decision.
If any policyholder still does not accept these assurances, they can lodge the protest directly with Income.
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