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
Tuesday, January 19, 2010
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
–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
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
Monday, January 18, 2010
Big cut in maturity payment
A policyholder bought a 21 year anticipated endowment policy. At that time, the policy showed a projected return of 5.5% per annum. The company used 7% to project the accumulation of the triennial payments and also included reversionary and maturity bonus that were not explained in a transparent manner. However, the company did explain that the projected amounts were not guaranteed.
On maturity, the policyholder was given a payout that is about 35% lower than the initial projection. The final yield was reduced to 1.6% per annum. The insurance company explained that the low payout was due to the difficult investment climate. In my view, this is only partly true. Another major contributor was the highly optimistic assumptions used in the initial projection, to entice the consumer to buy the insurance policy.
I hope that the authority will ask the insurance company to be accountable for its initial projection. While it is acceptable for the final payout to be lower to reflect the actual investment climate, the difference should not be as much as 35%. I believe that this type of unfair treatment applies to large numbers of policyholders.
I have advised consumers not to trust the optimistic projections that are used to sell life insurance policies, unless there is a higher standard of business integrity and protection of consumer rights.
Tan Kin Lian
On maturity, the policyholder was given a payout that is about 35% lower than the initial projection. The final yield was reduced to 1.6% per annum. The insurance company explained that the low payout was due to the difficult investment climate. In my view, this is only partly true. Another major contributor was the highly optimistic assumptions used in the initial projection, to entice the consumer to buy the insurance policy.
I hope that the authority will ask the insurance company to be accountable for its initial projection. While it is acceptable for the final payout to be lower to reflect the actual investment climate, the difference should not be as much as 35%. I believe that this type of unfair treatment applies to large numbers of policyholders.
I have advised consumers not to trust the optimistic projections that are used to sell life insurance policies, unless there is a higher standard of business integrity and protection of consumer rights.
Tan Kin Lian
Benefit Illustration - Single Premium Whole Life Policy
I analysed the benefit illustration for a reader of my blog. The figures have been changed or removed to protect the identity of the policyholder.
1. You are investing a single premium of $30,000 in a life insurance policy. The distribution cost represents 7.9% of the invested sum. This is high, but it is typical of life insurance policies (where a high commission is paid to the agent).
2. If you decide to terminate the policy within 5 years, you will get a cash value that is less than the single premium. This policy, like all life insurance policies, provides poor liquidity. You cannot withdraw your investment without suffering a high penalty. As may need to withdraw your investment to meet some unexpected cash need in the future, it better to have the flexibility, especially in an uncertain world with insecure employment.
3. Here is the projected yield on your investment. If you keep the investment for 30 years, you are guaranteed a minimum cash value which represents a yield of 2.33% p.a. If the insurance company is able to earn an average yield of 3.75% on its investments in the future, they projected a non-guaranteed payout which a yield of 3.1% p.a. If they earn 5.25%, the non-guaranteed payout represents yield of 3.96% p.a. These yields are reasonable, but not attractive.
4. If you decide to invest on your own in an exchange traded fund, such as the STI ETF, and you receive an average yield, net of charges, of 5.25% over 30 years, your investment would accumulate to an amount that is 45% more than the non-guaranteed cash value provided by the life insurance policy at the end of 30 years.
5. I usually recommend to young people to learn about managing the risk of long term investments. After they understand the risk, they would usually prefer to invest in an exchange traded fund (which offers diversification of risk) and a potential better return. They will face short term fluctuation, but they understand that the fluctuation does not really affect the long term value of their investment.
6. You are offered an option for you to buy a rider that will accelerate the payment of the sum assured when you contract one of the critical illness. This “acceleration” means that the sum assured is payable earlier, rather than being paid on death. However, there is an additional cost for this “accelerated payment”. I think that the chance of making a claim is quite low, and this cost is rather high. But, I do not have the statistics to know if it is worth paying this additional premium for the accelerated benefit.
Tan Kin Lian
1. You are investing a single premium of $30,000 in a life insurance policy. The distribution cost represents 7.9% of the invested sum. This is high, but it is typical of life insurance policies (where a high commission is paid to the agent).
2. If you decide to terminate the policy within 5 years, you will get a cash value that is less than the single premium. This policy, like all life insurance policies, provides poor liquidity. You cannot withdraw your investment without suffering a high penalty. As may need to withdraw your investment to meet some unexpected cash need in the future, it better to have the flexibility, especially in an uncertain world with insecure employment.
3. Here is the projected yield on your investment. If you keep the investment for 30 years, you are guaranteed a minimum cash value which represents a yield of 2.33% p.a. If the insurance company is able to earn an average yield of 3.75% on its investments in the future, they projected a non-guaranteed payout which a yield of 3.1% p.a. If they earn 5.25%, the non-guaranteed payout represents yield of 3.96% p.a. These yields are reasonable, but not attractive.
4. If you decide to invest on your own in an exchange traded fund, such as the STI ETF, and you receive an average yield, net of charges, of 5.25% over 30 years, your investment would accumulate to an amount that is 45% more than the non-guaranteed cash value provided by the life insurance policy at the end of 30 years.
5. I usually recommend to young people to learn about managing the risk of long term investments. After they understand the risk, they would usually prefer to invest in an exchange traded fund (which offers diversification of risk) and a potential better return. They will face short term fluctuation, but they understand that the fluctuation does not really affect the long term value of their investment.
6. You are offered an option for you to buy a rider that will accelerate the payment of the sum assured when you contract one of the critical illness. This “acceleration” means that the sum assured is payable earlier, rather than being paid on death. However, there is an additional cost for this “accelerated payment”. I think that the chance of making a claim is quite low, and this cost is rather high. But, I do not have the statistics to know if it is worth paying this additional premium for the accelerated benefit.
Tan Kin Lian
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