Can people buy insurance against the risk of high inflation?
My answer is "yes". But it cannot be done by commercial insurance companies. It requires a new way of thinking on the role of governments and the free market system.
I shall give my views on this matter within the next few weeks, either in this blog or in www.theonlinecitizen.com
Wednesday, June 11, 2008
Civil servants and part time jobs
I read a news report that the Malaysian Government now officially allows its civil servants to do part time work to earn a supplemental income to meet the rising cost of living.
There is a risk that the civil servant may abuse their official position for personal advantage. I wonder how they will manage this risk?
But the underlying problem is the need to give higher wages, at a time when the Malaysian Government face a budget constraint.
What is the solution? Can the free market capitalist system find a solution? Financial speculation, which is a key part of this system, appears to be the major source of the problem.
There is a risk that the civil servant may abuse their official position for personal advantage. I wonder how they will manage this risk?
But the underlying problem is the need to give higher wages, at a time when the Malaysian Government face a budget constraint.
What is the solution? Can the free market capitalist system find a solution? Financial speculation, which is a key part of this system, appears to be the major source of the problem.
Terminal bonus lead to Equitable Life's failure
Hi Mr Tan,
Guarantees cost more money. Why does terminal bonus (with less guarantees) contributed to the Equitable Life's failure?
1) Penrose report, chapter 14, para 185 and 186 analysed some financial data :
185. In 1983, the investment reserve was approximately 37% of the long-term liabilities. In 1999, it was approximately 17%. Over the period 1986 to 2000 terminal bonus payments increased by more than 14 times. Further from 1983, the mix of reversionary to terminal bonus shifted in favour of terminal bonus.
186. ...the accelerating growth in terminal bonus payments was fairly consistent over time... Had the Society recognised terminal bonus in its statutory accounts and regulatory returns on any basis consistent with PRE, its financial weakness would have been exposed throughout the 1990s.*
This shows that the Equitable was diverting free assets into terminal bonus payments. More importantly, it implies that reversionary bonus that requires prudent reserving (ie setting aside money) for all generations of policyholders is a fairer approach and helps to avoid misappropriation of funds.
2) Lets see what a policyholder had to say (http://www.emag.org.uk/index.htm?documents/assessment_28112003.html~content) :
.... throughout the 1990s Equitable declared bonuses well in excess of the value of assets to improve its marketing appeal. In consequence it was paying out departing policyholders in excess of their asset value with money from new investors. This pyramid selling left a hole of some £3bn which all policyholders who did not leave before July 2001 have paid for in savage reductions in policy values...
3) How did Equitable declare bonus in excess of the value of assets? My understanding is as follows :
- management was driven by growth (ie new business)
- terminal bonus is not guaranteed and is more flexible to increase/decrease
- so management started to shift more to terminal bonus, projecting high terminal bonus (to attract customers)
- these bonuses were not sustainable, but the terminal bonus had become a marketing tool (decreasing it will lose market share)
- so management misused the investment reserve, using it to pay high bonuses to maturing policyholders at the expense of younger generations
- management thought that since terminal bonus is not guaranteed, they can always decrease it
- management thought that when the investment market booms, all problems will be solved but investment did not boom
- effectively, they had a ponzi scheme running which did not hold up in the courts
4) How reversionary/annual bonus could have prevented the collapse?
- imposes more discipline, ie set aside provisions for bonus, ensure unsustainable bonus are cut, control new business growth
- fairer way to share profits with all generations of policyholders and not just the maturing/claiming ones
5) Why do different actuaries have different opinions?
Quoting a friend : "the one who pays the piper calls the tune".
Yew Ming
Guarantees cost more money. Why does terminal bonus (with less guarantees) contributed to the Equitable Life's failure?
1) Penrose report, chapter 14, para 185 and 186 analysed some financial data :
185. In 1983, the investment reserve was approximately 37% of the long-term liabilities. In 1999, it was approximately 17%. Over the period 1986 to 2000 terminal bonus payments increased by more than 14 times. Further from 1983, the mix of reversionary to terminal bonus shifted in favour of terminal bonus.
186. ...the accelerating growth in terminal bonus payments was fairly consistent over time... Had the Society recognised terminal bonus in its statutory accounts and regulatory returns on any basis consistent with PRE, its financial weakness would have been exposed throughout the 1990s.*
This shows that the Equitable was diverting free assets into terminal bonus payments. More importantly, it implies that reversionary bonus that requires prudent reserving (ie setting aside money) for all generations of policyholders is a fairer approach and helps to avoid misappropriation of funds.
2) Lets see what a policyholder had to say (http://www.emag.org.uk/index.htm?documents/assessment_28112003.html~content) :
.... throughout the 1990s Equitable declared bonuses well in excess of the value of assets to improve its marketing appeal. In consequence it was paying out departing policyholders in excess of their asset value with money from new investors. This pyramid selling left a hole of some £3bn which all policyholders who did not leave before July 2001 have paid for in savage reductions in policy values...
3) How did Equitable declare bonus in excess of the value of assets? My understanding is as follows :
- management was driven by growth (ie new business)
- terminal bonus is not guaranteed and is more flexible to increase/decrease
- so management started to shift more to terminal bonus, projecting high terminal bonus (to attract customers)
- these bonuses were not sustainable, but the terminal bonus had become a marketing tool (decreasing it will lose market share)
- so management misused the investment reserve, using it to pay high bonuses to maturing policyholders at the expense of younger generations
- management thought that since terminal bonus is not guaranteed, they can always decrease it
- management thought that when the investment market booms, all problems will be solved but investment did not boom
- effectively, they had a ponzi scheme running which did not hold up in the courts
4) How reversionary/annual bonus could have prevented the collapse?
- imposes more discipline, ie set aside provisions for bonus, ensure unsustainable bonus are cut, control new business growth
- fairer way to share profits with all generations of policyholders and not just the maturing/claiming ones
5) Why do different actuaries have different opinions?
Quoting a friend : "the one who pays the piper calls the tune".
Yew Ming
Principal Guaranteed, Principal Protected
Hi Mr. Tan,
Let me explain what I know about the difference since I have held some of these products before:
Principal Guaranteed – The issuer (not necessary the bank selling you the notes) guarantees it. As long as the issuer does not go bankrupt you should be safe. However the issuer of such notes are usually special vehicle companies set up by reputable banks such as Merril Lynch. So the vehicle goes bankrupt the bank itself is not affected. Not sure if that is their intention but I read it as so. But generally I think it is quite safe.
Principal Protected – Usually the issuer takes your money and go purchase a zero coupon bond and so get a discount upfront. It is protected as long as the bond issuer do not default. As I understand it the bonds invested are usually rated A+ and above (does not really mean much as Lehman Brother bonds are also rated A+). The money they get from the original discount is then used to “invest” in a risky way , i.e. options, currency and whatever. Once they have lost all your money thru these risky stuff and taken their fees, then they tell you now you are sitting on a zero coupon bond and waiting the next 5 years with zero payment.
Basically my point is that these products are TOTALLY NOT TRANSPARENT and USUALLY DO NOT EVEN give return of FD over the 5 years. If the investor wants to get that 1-2% more than FD, I suggest they go buy bond themselves and invest the rest. Sorry just my 2 cents....I do get quite passionate about this as I have seen many people suckered into such deals.
C
REPLY
Thank you for the explanation. I agree with your explanation.
Let me explain what I know about the difference since I have held some of these products before:
Principal Guaranteed – The issuer (not necessary the bank selling you the notes) guarantees it. As long as the issuer does not go bankrupt you should be safe. However the issuer of such notes are usually special vehicle companies set up by reputable banks such as Merril Lynch. So the vehicle goes bankrupt the bank itself is not affected. Not sure if that is their intention but I read it as so. But generally I think it is quite safe.
Principal Protected – Usually the issuer takes your money and go purchase a zero coupon bond and so get a discount upfront. It is protected as long as the bond issuer do not default. As I understand it the bonds invested are usually rated A+ and above (does not really mean much as Lehman Brother bonds are also rated A+). The money they get from the original discount is then used to “invest” in a risky way , i.e. options, currency and whatever. Once they have lost all your money thru these risky stuff and taken their fees, then they tell you now you are sitting on a zero coupon bond and waiting the next 5 years with zero payment.
Basically my point is that these products are TOTALLY NOT TRANSPARENT and USUALLY DO NOT EVEN give return of FD over the 5 years. If the investor wants to get that 1-2% more than FD, I suggest they go buy bond themselves and invest the rest. Sorry just my 2 cents....I do get quite passionate about this as I have seen many people suckered into such deals.
C
REPLY
Thank you for the explanation. I agree with your explanation.
Can you read this?
Only people with minds can read this
This is weird, but interesting!
fi yuo cna raed tihs, yuo hvae a sgtrane mnid too
Cna yuo raed tihs? Olny 55 plepoe out of 100 can.
i cdnuolt blveiee taht I cluod aulaclty uesdnatnrd waht I was rdanieg. The phaonmneal pweor of the hmuan mnid, aoccdrnig to a rscheearch at Cmabrigde Uinervtisy, it dseno't mtaetr in waht oerdr the ltteres in a wrod are, the olny iproamtnt tihng is taht the frsit and lsat ltteer be in the rghit pclae. The rset ca n be a taotl mses and you can sitll raed it whotuit a pboerlm. Tihs is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe. Azanmig huh? yaeh! and I awlyas tghuhot slpeling was ipmorantt! If you can raed tihs forwrad it.
This is weird, but interesting!
fi yuo cna raed tihs, yuo hvae a sgtrane mnid too
Cna yuo raed tihs? Olny 55 plepoe out of 100 can.
i cdnuolt blveiee taht I cluod aulaclty uesdnatnrd waht I was rdanieg. The phaonmneal pweor of the hmuan mnid, aoccdrnig to a rscheearch at Cmabrigde Uinervtisy, it dseno't mtaetr in waht oerdr the ltteres in a wrod are, the olny iproamtnt tihng is taht the frsit and lsat ltteer be in the rghit pclae. The rset ca n be a taotl mses and you can sitll raed it whotuit a pboerlm. Tihs is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe. Azanmig huh? yaeh! and I awlyas tghuhot slpeling was ipmorantt! If you can raed tihs forwrad it.
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