AIA policy-holders panic over AIG

The last few days in the financial market have been much more turbulent than the typhoon and hurricane weather around the world. Lehman Brother’s filling for chapter 11, sale of Merrill Lynch to Bank of America and the big one, the threat of AIG, parent of AIA, going bust. Following the appearance of crowds at AIA customer service to surrender their policies, MAS and AIA have issued statements informing policy-holders that AIA has enough funds to back its liabilities, . The latest news being the Federal Reserve buying over 79.9% of AIG. This has effectively killed the threat of AIG going under and provides temporary relief for the financial markets and AIA policy holders in Singapore.

Following this episode of the near collapse of AIG, many people are asking: what would happen to their policies if their insurer was to go bankrupt?

In Singapore, there are regulatory requirements to ensure that an insurer has sufficient assets to cover most, if not all of its liabilities in the event of winding up. However, this does not guarantee that the insurer’s assets are adequate to meet its liabilities as assets may be reduced by asset flight, impairment or amount of liabilities may be larger than estimated. If that were to happen, a program called the Policyholder’s Protection Fund (PPF) that has been provided for under the Insurance Act since 1986 will kick in. The PPF calls for the establishment of funds for life and general insurance. I’ll just discuss more on the life insurance part.

Currently, the PPF covers 90% of of all liabilities for all life and compulsory insurances. Life insurance refers to any insurance policies that pays a benefit that is contingent on the survival or death of the life assured, and does not include any accident and health policies. Compulsory insurance are policies such as Motor Insurance or Workman Compensation. The PPF also provides for the transfer of policies to another insurer or substitute policies issued by another insurer. However, note that the continuity of coverage is not guaranteed as the ability of MAS to secure such coverage may be limited by practical constraints. The PPF coverage only extends to Guaranteed sum assured and Guaranteed cash value.

In December 2005, MAS called for a review of the PPF to keep relevance with the changing insurance landscape. Some of the proposed changes include:

• Extending the PPF to accident and health policies
• Introduction of absolute caps – $500K for sum assured, $100K for cash value. Refer to Appendix below for examples. This cap will not apply to disability income, long-term care  and medical expense insurance. A simple ratio method will be used to derive the coverage ratio of the affected policy
• Where it is not practicable for the remaining policies to be transferred, the PPF is to be given the flexibility to run-off portfolio of policies or allow the liquidator to compensate policy holders up to the PPF coverage limit the terminate the policies accordingly.
• To establish a Pre-funded PPF of fund size $60 million (based on protected liabilities of life insurers at end 2003) over 10 years.

What lessons can we learn from this AIG fiasco and the PPF scheme?

1. Diversify their insurers/investments. Don’t get everything from 1 company. Even the biggest company can fail. To buy a policy based on the size of the company is not wise.
2. Insurance policies are a relative safe form of asset in Singapore. Bank deposits are only protected up to the 1st $20K. The PPF protects up to 90%. There are other similar arrangements among our platforms for other asset classes.
3. There is an added risk in getting policies with high non-guaranteed values as only Guaranteed values are protected under PPF. Such high non-guaranteed value plans are very common in the market.
4. As the cash value of regular premum Investment-Linked-Products (ILP) are non-guaranteed and depends on the underlying investments, there is no protection of the cash value under PPF. Only the guaranteed coverage (sum assured) is protected. As some plans guaranteed a coverage to age 65 (based on the fulfillment of some conditions) there may be a coverage under PPF on the sum assured up to age 65.

The trouble at AIG has certainly brought out the importance of having strict and robust financial regulatory environment. Although this saga may dent peoples’ confidence in insurance companies, it will bring about higher level of confidence in the overall regulatory regime and cement Singapore’s position as a leading wealth management hub.

Appendix

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