Orphaned money in Life Insurance Fund

There is some debate in the Straits Times Forum about "orphaned money" in the participating fund of a life insurance company.

The term "orphaned money" is coined by Larry Haverkamp (who writes as Dr. Money in The New Paper) to refer to the money that is left in the participating fund when a policyholder terminates his or her policy and receives less than the "asset share" under the policy. The asset share is calculated as the premiums received, investment income earned, less the charges taken from the policy.

The Monetary Authority of Singapore has stated that the insurance companies are required to use the concept of asset shares in the distribution of bonuses on participating policies and to follow an approved "governance framework" involving the appointed actuary and the top management.

I hope that the MAS can clarify how this arrangement works, and how the interest of the policyholders are protected under this framework. If the life insurance companies pays less than the asset share on the termination of the policy, what recourse does the policyholder have? Does the policyholder even know about this fact, as the asset share is not disclosed to him (i.e. lack of transparency).

Some jurisdiction requires the asset share to be calculated for each policyholder and for the full asset share to be paid to the policyholder on termination of the policy after it has been in force for a certain number of years. I suggest that Singapore should adopt this approach.

The Monetary Authority of Singapore, Life Insurance Association and the Singapore Actuarial Society have stated that under the law, all money in the participating fund belongs to the participating policyholders and, therefore, the existence of orphaned money does not arise.

I am not able to follow this reasoning. We know that there are orphans in Singapore. These are children whose parents are no longer around. Can we say that as these orphans are being cared for by the state, they are no longer "orphans"?

I am inclined to follow Larry Haverkamp's reasoning that money in the participating fund that is taken from the asset share of terminated policies should be termed as "orphan money". In actuarial literature, the term used is the "estate".

However, I wish to raise the following fundamental issues:

a) Currently, there is no legal requirement that the asset share attributed to an individual policy should be paid to the policyholder on the termination of the policy, even on maturity. It is possible for a policyholder, on maturity, to receive less than the asset share, on the reasoning that the money is required to "smooth" the bonus for the remaining participating policyholders?

b) Why is there a need to penalise the policyholder of a surrendered policy by paying less than the asset share, when the high expenses and other charges have already been deducted from the asset share of the policy? Already, the asset share for a policy in the early years may be less than half of the total premiums paid.

I hope that the Monetary Authority of Singapore will address these fundamental issues that affects the long term savings of over one million policyholders and their families.

Tan Kin Lian