Mark to market and asset bubbles

There is an accounting principle called "mark to market". It is generally recognized that the most recent transaction represents the best indication of the current value of a specific asset and that it is better for the financial accounts to share the "fair values" of these assets.

This accounting principle works well when there is a true market with many transactions or where the prices are not driven by manipulation, speculation, gambling, greed and fear.  Unfortunately, the imperfect situation occurs more commonly than the true market situation.

Many property transactions do not reflect the true market as they are big ticket items, and are driven by manipulation and fear. These transacted prices are then used to create an impression of the market values. This is how bubbles are created.

Bubbles will create wealth for the speculators, but will eventually have to burst, giving a lot of economic pain for ordinary people who are caught with the over-priced assets that have to be paid over a lifetime. This does not create a sound economic or social foundation.

I hope that the "mark to market" rule can be modified to recognize its undesired role in creating bubbles in properties. I also hope that effective measures be taken to prevent future bubbles, such as the recent measures taken in Singapore and now being applied in China. It recognizes that property prices cannot be left to the market and have to be better controlled.

Tan Kin Lian

Broadcast of World Cup matches

How much should the operator pay for the right to broadcast the World Cup matches in Singapore? FIFA wants $100 million. The operator (Singtel, Starhub or both) offers to pay a lower fee, as they are not likely to get sufficient revenue to make a profit.

This is free market at work (or rather, fail to work). There is free negotiation, but there is no real market, as there is only one supplier, i.e. FIFA. Is FIFA abusing its monopolistic pricing power, or is it just trying to get a fair amount from affluent Singaporeans?

Rather than pay a flat fee, it would be better for the operator to work with FIFA on a revenue sharing formula. FIFA can decide on a fee per viewer (for the entire series of matches) and the operator can add on its charges to offer the final product to consumers. The price charged will determine the number of subscribers who are willing to pay this fee.

Let me make a guess about a fair fee to pay to FIFA. I estimate that 300,000 homes would be willing to pay $150 to watch the matches on TV. The operator has to keep $50 to cover its marketing and operating cost. This would leave $100 per subscriber for FIFA, or an estimated $30 million for 300,000 subscribers.  If the viewer is willing to pay $200, the fee to FIFA could be increased to $45 million.

I hope that the operator can agree with FIFA on a revenue sharing model or FIFA should reduce its fee to $30 to 45 million. This would be in the interest of soccer and sports.

Tan Kin Lian

Policy wordings

In many states in America, the policy wordings used by insurance companies have to be approved by the regulator. I find this to be a good practice. The regulator can check that the wordings are clear and are fair to consumers. It will minimize disputes that have to be resolved in court. It is also a good practice for insurance companies to use standard wordings for the common types of coverage, rather than be allowed to write their own wordings.

I hope that this practice can be adopted in Singapore and that the regulator can play an active role in achieving this outcome - to ensure fair treatment of consumers.

Tan Kin Lian

Fair settlement of claims

Many claims officers think that their responsibility is to reduce the claim payments and save money for the insurance company. They may not be aware that they also have a duty to ensure fair settlement of claims. Some states in America have laws that forbid unfair claim practices, such as:


–Refusing to pay claims without conducting a reasonable investigation
–Not attempting to provide prompt, fair, and equitable settlements
–Offering lower settlements to compel insureds to institute lawsuits to recover amounts due

This is taken from the text book that I use to teach Risk Management & Insurance at a local university.

Tan Kin Lian

Talk at Yishun Public Library

I am giving a talk at Yishun Public Library on Saturday 23 January 3 to 4 pm on the subject "Coping Financially in Difficult Times". More details are available here. I invite my readers to attend this talk.

LED lighting

According to this report, LED lighting has the potential to reduce energy consumption significantly.

Misleading illustrations

Some life insurance products were designed to provide an annual cash bonus. The underlying return on the policy is poor, usually less than 2% p.a., due to the high expenses and profit margin. To enjoy the cash bonus, the consumer has to pay an additional premium that is usually more than 10% of the cash bonus. For example, to get a cash bonus of $2,000, the additional premium could be $2,200 a year. The consumer is not aware about this type of structure.

To hide the poor return, the insurance agent tells the customer that the cash bonus can be re-invested in an investment linked fund to earn 5% or 9% per annum. This is stated to be not guaranteed, but the consumer does not know that the projections are over-optimistic.

By illustrating with this high projected return, the benefit illustration will show a higher return on the policy, perhaps 4% or more. If it was possible to earn 9% per annum, the consumer should invest the entire premium into the investment linked fund, rather than just the cash bonus.

I hope that the authority will ban this type of projection, as it is misleading to the consumer.

Tan Kin Lian