Response to "Orphaned Money: Key Question MAS Has Not Addressed" by Mr Larry Haverkamp and "Concept of Asset Share is Fairer to Policyholders" by Mr Tan Kin Lian (ST Forum, 24 Aug 2009)
I refer to last Thursday's letters, 'Orphaned money: Key question MAS has not addressed' by Mr Larry Haverkamp and 'Concept of asset share is fairer to policyholders' by Mr Tan Kin Lian (ST Forum, 24 Aug 2009).
All assets in the participating fund are allocated to participating policyholders as policy liabilities according to the valuation rules under the Risk-Based Capital Regulations introduced in 2004. It is, therefore, not possible for policy liabilities to be less than policy assets, as Mr Tan's example tries to illustrate. Insurers would be in breach of the regulations if they valued their liabilities to participating policyholders to be less than assets in the participating fund.
Similarly, it is not possible for 'orphaned money' to be stashed away as a result of underpaying policyholders who surrender early and receive less than their full 'asset share', as suggested by Mr Haverkamp.
Any remaining assets from early surrenders will be retained as assets in the participating fund and allocated as policy liabilities to the remaining participating policyholders. Indeed, an intrinsic feature of a participating product is that the same cohort of policyholders shares the performance of the participating fund, which is influenced by factors such as the lapse or surrender by some policyholders, the claims that are made, and the investment performance of the fund.
Life insurers in Singapore already use the concept of asset share in their determination of bonuses. They are required under Monetary Authority of Singapore (MAS) Notice 320 on Management of Participating Life Insurance Business to set out the methodology for deriving the asset share, along with other processes and controls.
These have to be documented in their internal governance policies which are approved and reviewed regularly by their boards. Insurers are also required to ensure their participating funds are managed according to the rules and guiding principles set out in the governance policy. MAS also regularly reviews life insurers' internal governance policies and bonus investigation reports to ensure they maintain adequate processes and controls in the management of their participating funds.
In 2007, MAS Notice 320 was introduced to enhance disclosure requirements of all existing and new participating products. Some requirements apply at point of sale - for example, insurers are now required to include in their product summaries pertinent information such as how insurers determine the assets available for each group or class of products and how bonuses will be smoothed.
There are other requirements pertaining to post-sales disclosure, where insurers are required to regularly update existing participating policyholders on how the participating fund is performing and the future outlook of bonus payouts. We will continue to work with the industry to enhance the transparency of the bonus determination process.
Angelina Fernandez (Ms) Director (Communications) Monetary Authority of Singapore