Deposit Insurance and Policy Owner's Protection Schemes Bill 2011Second Reading Speech by Mr Lim Hng Kiang, Minister for Trade and Industry and Deputy Chairman, Monetary Authority of Singapore
1 Mr Speaker Sir, on behalf of the Senior Minister, I beg to move that the Bill be now read a second time.
2 This Bill enhances existing protection schemes for depositors and insurance policy owners, and brings them together into a single piece of legislation. The Deposit Insurance Act which established the Deposit Insurance (“DI”) Scheme, as well as provisions under the Insurance Act relating to the Policy Owners’ Protection (“PPF”) Scheme, will be repealed as a result.
3 The proposed enhancements in this Bill will strengthen the protection of depositors and owners of insurance policies. In developing the enhancements, MAS consulted the industry and the public and, where appropriate, incorporated their feedback in the key features of the Schemes. MAS also took into consideration lessons learned internationally during the recent global financial crisis.
4 Mr Speaker Sir, I will first provide some background to the existing DI and PPF schemes.
5 The DI Scheme in Singapore was implemented in 2006. It aimed to provide a basic level of protection to small depositors. A DI Fund, built up through regular contributions levied on the full banks and finance companies who are Scheme members, would help ensure that depositors can receive quick compensation on their deposits up to the coverage limit without having to wait for the outcome of the Scheme member’s liquidation process. The Scheme was also designed to keep the cost of providing deposit insurance manageable, while preserving incentives for large depositors to continue to exercise market discipline.
6 At present, the DI Scheme insures Singapore dollar deposits of individuals and charities in current, savings and fixed deposit accounts held with a full bank or finance company, up to S$20,000 per insured depositor per Scheme member. This was sufficient to fully cover 86% of insured depositors when the Scheme was first designed, which was within international norms of 80-90%.
7 A separate scheme – the Policy Owners’ Protection (“PPF”) Scheme – exists to protect insurance policy owners. The PPF Scheme is provided for in the Insurance Act to compensate policy owners of life policies and compulsory insurance policies1 in the event that their insurer fails. The existing PPF Scheme covers 90% of the liabilities for life policies and 100% of the liabilities for compulsory insurance policies. The Scheme is currently post-funded. This means that PPF levies will be collected from PPF member insurers only when there is a payout following the failure of an insurer.
8 The PPF Scheme provides policy owners with certainty as to how much of their policy monies will be protected and also whether the losses they have incurred from insured events will be compensated, should their insurer fail. Besides alleviating financial distress to individual policy owners, the PPF Scheme supports public confidence in the insurance industry and helps limit possible disruption to the economy.
9 To ensure that the DI and PPF Schemes continue to provide adequate protection to depositors and policy owners, several enhancements are proposed. Mr Speaker Sir, I will now go through the key provisions of this Bill.
10 There are two main changes to DI coverage.
11 First, the coverage of the Scheme will be expanded from insuring only individuals and charities, to insuring all non-bank depositors. This means that deposits of sole proprietorships, partnerships, companies and unincorporated entities will be insured up to the coverage limit. This will mitigate potential cash flow problems of small business depositors in the event of a bank failure, which is in line with the Scheme’s primary objective of protecting small depositors.
12 Second, the maximum level of coverage under the DI Scheme will be raised from S$20,000 to S$50,000 per depositor per DI Scheme member. The separate coverage of monies placed under the CPF Investment Scheme and CPF Minimum Sum Scheme will also be raised from S$20,000 to S$50,000.
13 With the increased S$50,000 coverage limit, the proportion of insured depositors that are fully insured will be raised to 91%.
14 In addition, under the enhanced Scheme, depositors will be paid the gross amount of their insured deposits up to the DI coverage limit, without first netting off their liabilities to the Scheme member. Gross DI payout contributes to greater confidence and stability in a distressed situation as it is easier for depositors to understand and is operationally faster. It also allows depositors to have quick access to the full amount of their insured deposits up to the coverage limit, mitigating potential cash flow difficulties they may face. If payout is on a net basis, a depositor who has a loan with the same Scheme member may receive partial payout, or no payout if his loan is larger than his deposit, thereby limiting the effectiveness of the Scheme in protecting small depositors. The depositor, however, still remains responsible for any liabilities owed to the Scheme member. The Scheme member’s liquidator will be empowered to recover these liabilities from the depositor.
15 Sir, I will now explain the enhancements to the PPF Scheme.
16 First, the scope of coverage will be expanded. Currently the PPF Scheme only covers life policies written by life insurers as well as compulsory motor third party injury and work injury compensation insurance policies. The PPF Scheme will be extended to cover all accident and health (“A&H”) policies written by life insurers and Singapore policies of specified personal lines written by general insurers. These specified personal lines are personal motor insurance, individual and group short-term A&H insurance, personal property insurance for structure and contents, foreign domestic maid insurance, and personal travel insurance.
17 In addition, the PPF Scheme will be enhanced to cover 100% (up from the current 90%) of the liabilities of life policies, subject to caps2. The increase in the level of coverage will help allay the concerns of policy owners, should they become anxious that their insurer may fail and seek to cancel their policies. Where the level of coverage is 90%, some policy owners may believe that they are better off getting back 100% of their policies’ surrender values, rather than waiting for compensation under the PPF Scheme. But if the insurer does not fail, policy owners who prematurely surrendered their life policies may not be able to obtain equivalent new insurance cover, for example, due to advanced age or deteriorating health.
18 The introduction of the aggregate caps, which did not exist previously, will mitigate the risk of moral hazard as it creates an incentive for policy owners to exercise prudence in their selection of insurers. In this way, the caps will keep the PPF Scheme affordable. This approach is similar with the DI Scheme, which provides for 100% coverage up to a cap of S$50,000 per depositor. General insurance policies will be fully covered with no caps, as general insurance policies typically indemnify losses as they occur and payouts are made based on actual claims incurred. As there is no relationship between the amount of losses and the level of sophistication of the policy owner, the moral hazard risk is lesser.
19 In addition, the revised PPF Scheme will now be pre-funded, like the DI Scheme. Life insurers and general insurers will pay levies annually into the PPF Life Fund and PPF General Fund, respectively. A pre-funded approach is more equitable compared to a post-funded approach, as the failed insurer would have contributed to the fund prior to its failure. It will also expedite payout in the event that an insurer fails.
Review and Administration of the Schemes
20 Sir, the coverage limits and scope of the DI and PPF Schemes have been carefully calibrated to meet the objectives of these Schemes. These features will be reviewed from time to time by the MAS in consultation with the Singapore Deposit Insurance Corporation (“SDIC”). To facilitate changes that may arise from such reviews, the Minister-in-charge of MAS will be given powers to approve an increase in coverage for these Schemes, based on MAS’ recommendation. In its review, MAS will have regard to the interests of depositors and policy owners, taking into account the costs to the Schemes, or the stability of, or confidence in, the financial system. If the increase is temporary, the Minister may also decide on the duration of the increase and the period of any extension.
21 Sir, I will also speak briefly on the administration of the Schemes. The SDIC, which currently administers the DI Scheme, will also administer the PPF Scheme. This arrangement ensures cost efficiency and leverages on the SDIC’s capabilities. Since its incorporation, the SDIC has established systems and processes to ensure that insured depositors can be compensated quickly in the event of a payout.
22 The SDIC will collect premium contributions and levies from DI and PPF Scheme members respectively, compensate those who are insured in the event of a payout, and educate the public on the DI and PPF Schemes. In addition, the SDIC will manage the DI, PPF Life and PPF General Funds. These three funds will be maintained separately and no inter-fund lending will be allowed. The Bill requires the SDIC and the funds to be audited, and for a copy of the audited financial statements, auditor's report and annual report of SDIC’s key activities during the year, to be provided to the Minister.
23 Sir, the proposed enhancements to the DI and PPF Schemes will strengthen the safety net for small depositors and policy owners. The enhancements have been carefully designed to achieve this objective, while keeping the costs of the Schemes manageable and preserving incentives for market discipline.
24 Mr Speaker Sir, I beg to move.
1 “Compulsory insurance policy” is defined in the Insurance Act as any policy or security which satisfies the requirements of the Motor Vehicles (Third Party Risks and Compensation) Act or the Work Injury Compensation Act.
2 For example, the guaranteed benefits of individual life policies and voluntary group policies will be aggregated and subject to caps of S$500,000 for sum assured and S$100,000 for surrender value on a per life assured per insurer basis (excluding annuities) while compulsory group policies will be subject to an aggregate cap of S$100,000 for sum assured and S$50,000 for surrender value on a per life assured per policy basis (excluding annuities). No caps will be applied to A&H policies.