A lady have wrote in to The Straits Times Forum on the 25th July 2011 sharing her experience of getting insurance advice from 3 different banks (Banks should not act like insurance agents). She and her husband visited the banks with the impression that banks are independent and would not push only their own companies’ products. But they met representatives from each bank that focused on only one of the insurers’ policies.

There are 3 main distribution channels in Singapore:

• Through Agency – All products from 1 insurer distributed through their own agents. A small number of products may be distributed through banks or IFAs.
• Bancassurace – Products from a few insurance companies distributed through the banks’ relationship managers/consultants
• IFA channel – Most products from majority of the insurance companies

Generally, agents and IFAs do not have fixed salaries and make their living based on commissions. A minority charge fees for advice. Bank consultants are paid a salary and commissions for productions in excess of their sales targets.

The general argument in favour of the agency model is that the agents, being only exposed to their own products, know them inside out. The counter-argument is that they only have their own company’s products and have no choice but to promote them. Commissions may drive them to promote only the high-comm products. I have come across agents who mis-sold products even though they should have known them inside-out. I have also seen insurance portfolios with all high-comm policies. On the other hand, I do know of agents who does a good job and really know their stuff.

Because they are paid a salary, bank consultants have to meet sales targets. This is common in the sales industry. Sales targets drive people to work hard. Simple. Problem is, sales targets may drive the consultants to choose promote the products that will help meet their targets or engage in aggressive selling practices. There have been a number of criminal offenses committed due to the pressure of meeting sales targets.

IFAs on the other hand, claim that they are independent and is able to choose from a wide stable of products to suit the clients’ needs. While it is a fact that they have a wide stable of products, it may not be so straightforward to judge if they are really independent. More products does not mean that the best ones will be picked. In the extreme scenario, the rouge IFA can do more damage for picking the most lousy stuff with the highest comm. Give a full set of tools to a sculptor and he can come up with works of art. Give the full set of tools to a criminal and he and think of all sorts of ways to cut you up!

So, back to the question: how can you get the best advice? There is no way of guaranteeing it.

Ultimately, it is the adviser who makes the difference. The perfect scenario will be a ethical and competent adviser having access to all products.

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An old lady went to the insurer after she received a letter stating that her policy had lapsed. Shocked as she is, she was told that  the ILP had lapsed because the units in her ILP policy were insufficient to pay for the charges. The lady said that the money were her ‘coffin money’ (棺材本) and she made complaints.

In came the compliance department to investigate the case. It was found that the agent who sold her the policy had already left the firm and the new agent did not take note if the cash value is enough to meet the charges.

There is nothing extraordinary about this story. It can happen to any ILP policy holder.  In the policy wording is a statement that the policy would lapse if the cash value is insufficient to meet policy charges. The mortality and mobility charges increases with age.

When the policy holder is young, the charges will be low, reflecting the lower risk of a younger life. The premium is more than enough to pay for the charges. As the policy holder ages, the charges increase, finally meeting the premium at some point in time, normally in the late 50s or early 60s. From this point onwards, there would be no more investment as all the premium will be used for the charges. But the policy holder continues to grow older and the charges continue to increase. To pay for the unpaid charges, the insurer will deduct from the accumulated cash values. Finally, in the event that the accumulated cash value is insufficient to pay for the charges, the policy lapses.

Some people may point at finger at the agent who took over the policy for not monitoring the cash values. That in my opinion, may not be totally justified. Why?

First, it is not the 2nd agent that sold the policy. Why did the original agent sell an ILP to an old lady? Consider that ILPs only got popular in the 90s, the old lady would not be that young at that time.

2nd, even if the 2nd agent took note of the policy values, what can he do? If he ask the old lady to surrender the policy, how much surrender value would be left? What if a insured event occurs after surrendering of policy? The damage is already done when the policy is sold.

Everyone needs to earn a living. In taking over the servicing of the policy, the new agent would probably not be taking any commissions or count as sales targets. Most or all of the commissions would probably have been taken by the original agent. The 2nd agent has to find other clients or in this case, sell something to the old lady. The commission/pay structure does not promote servicing on a long term basis. Would anyone work for free? Advisers work to earn a living, not work for charity.

Unlike other with-profits plans like endowment or whole life, the responsibility on the investment lies with the policy holder, not the insurer. If there is no proper monitoring, disasters could happen, just like what happened to the old lady. When someone gets an ILP for protection, there are some basic questions to answer. Would the policy-holder be savvy or active enough to monitor the investment values? Would the agent who promised to do that for you be around years later?

As ILPs got popular in the 90s, would may see an dramatic increase in ILP complaints in 10 year’s time.

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Many industry players view this ‘free’ 1st year coverage as a marketing gimmick. Many other industries run similar campaigns. For example, electronic stores may offer a free DVD player for purchase of a LCD TV. The intention of promotion is to get the attention and interest of consumers and to sell them other products. An important to answer is – Have the products that have been proposed meet the needs of the client?

The high lapse rate signal that the policy owner do not view that coverage as a need. The strong economic numbers would make financial hardship an unlikely reason for the phenomenon. Many promoters of similar ‘free’ campaigns would tell you “If you don’t like it, you can just cancel it’. Only those that have been approached know if similar tactics have been used.

I had the thought that most of the policy owners would have conveniently continued with the policy after the 1st year as it would be ‘troublesome’ to cancel. After all, it is a common tactic that telcos and tele-marketers use to get consumer to sign up plans. To my surprise, this has not been the case. However, no lapse numbers was published. We do not know it is 20% or 80%.

There is no free lunch in this world. If you are offered something for ‘free’, most probably, you will be paying through other means.

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The agent claimed he was from CPF Board. After getting to know that my colleague’s client was on the NTUC integrated shield plan, the agent claim that the old plan will not be affected and got my colleague’s client to sign the forms. My colleague only got to know that his client has switched integrated shield plans when he received a termination notice from the insurer.

By unknowing changing his shield plan, the client faces the risk of getting excluded on any pre-existing illness that may be covered under the old plan. From what the agent was doing, I would doubt the health declarations were done properly and in violation of the Principle of Utmost Good Faith.

Be careful of what the person knocking at your door say. Check with your adviser when in doubt.

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When I first got to know they are going to place advertisement in the papers a couple of days ago, I was worried that they will place fancifully colored full page advertisements that cost tens of thousands of dollars. I was pleasantly surprised to find their their advert taking just slightly more than a quarter page in simple black and white.

This insurer rarely places advertisements in the media. In my opinion, this is good for policy-holders as marketing cost is lowered, thus translating into better value for policy-holders. When coming up with premiums, insurance companies has to take into account mortality and morbidity rates, investment income, expenses and a profit margin. Advertisement is a form of expense. A lower expense would normally point to a lower premium, if not, a bigger amount for investment. Investment return is an unknown future occurrence. Expenses is a known current outflow. If the outflow is lower, this would naturally mean a lower risk for the insurer and thus the policy-holder. However, a lower expense would not mean lower premiums as the insurance company may use different mortality/morbidity tables, take different investment return estimates or go for higher profit margin. A competitive market with balanced distribution channels would mitigate the chances of having too high a profit margin.

In my opinion, the responsibilities of the insurance company is not to generate publicity but to provide the promised coverage and a reasonable return in the case of participating plans. But without publicity, consumers may not even know that such companies exist. Many man-in-the-street would never bother to check out such companies. The responsibility then rest with advisers who then have to recommend the products with superior product features and not the ones with superior commission structures. This is sadly, easier said than done.

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I visited them at the hospital later in the day. It pains your heart to see a 3 month old coughing her lungs out. The last thing you want to worry about is the hospital bill.

A good shield plan is the most basic plan for everyone. And when it comes to children, some advisers will use emotional selling to try and sell endowment, whole life or ILPs without even mentioning shield plans. Commission is primary reason.

After getting a shield plan for the baby, the emphasis of the protection portfolio should be placed on the parents who are the the care-givers and income providers. As parents are  more willing to spend on children rather than on themselves, again, emotional selling is used to sway the parents towards getting some plans for the child instead of for themselves. This is much easier than convincing the parents to protect themselves.

If you really love your children, get them a good shield plan and then get yourself well protected. Only think about getting more policies for them after that.

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It is very common to find Investment-Linked Plans (ILP) being promoted along with the gift. If you are getting a policy because of the freebie, stop and think: Who is paying for the gift? Insurance companies are not charities. They too are for-profit organisations. Are the gifts really ‘free’?

If you still want to get that ILP, ask yourself some practical questions

• Are there any other alternative methods or strategies to meet your objective? Note that the not adviser have the access to other methods
• Do you know how the plan works and how is it funded? What is the long term potential pitfall?
• If you are thinking of getting it from a adviser on a transactional basis, is the adviser going to help you monitor, rebalance and shift the asset allocation to fit the investment objective in the future? Building a portfolio and then not monitoring and doing the necessary rebalancing could prove disastrous in the long run due to the change in the phase of life
• If the adviser promised you that he or she will do the necessary monitoring, ask why would he or she do that if they are not compensated for the work done. No 1 works for free. Is he or she giving empty promises to close the sale?
• If that adviser has sold many of such plans, how is he or she going to survive in the long run by monitoring so many policies for free?

Many advisers might dazzle you with some of seemingly superior technical features of insurance policies. Before getting any, remember to consider the practical aspects as well.

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• Interest in saving account – 0.2+% p.a
• Interest in 1 mth FD – 0.3+% p.a.
• Interest in 12 mths FD – 0.8+% p.a.
• $20K in Company A plan, 3+% p.a. In 6 years, Total amount: $C (The RM drew a horizontal line with 6 short vertical lines and wrote the interest below the short vertical lines)
• $10K in Company X plan, 2+% p.a. In 5 years, Total amount: $Y (The Rm drew similar things as above)

The returns looks good right? The RM only talked about the ‘high’ returns. Nothing was mentioned about whether they are guaranteed. The returns are non-guaranteed and all the amounts are projection values.

Such sales tactics are very common. Mesmerised by all the figures, unknowing consumers can fall prey easily. Luckily my client was not among the ‘victims’. But who knows how many have already fallen into such traps?

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The recent problems facing Lehman Brothers Minibonds, DBS High Notes and Merrill Lynch Jubilee Notes are examples of financial products having nice packaging. Under these ‘safe’ notes are complex structured products that might result in investors losing the capital. However, they were packaged as safe bond like instruments giving good ‘coupons’. Why call them Minibonds when they are not bonds? Junk bonds, which are below investment grade bonds, are now called high-yield bonds!

Some insurance products are packaged way to nice too. Policies that sell using the notion of having exciting returns from investments, retirement plans sold as fixed deposits with guaranteed returns after a number of years, saving plans that gives you a guaranteed cashback every year.

Good products are often simple, easy to understand and un-exciting. When your adviser recommend products that does not look and sound exciting, he or she may be introducing you the good ones. Nice packaging does not mean quality. Quality products does not mean they must have nice packaging.

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