”AIA SINGAPORE has more than sufficient capital and reserves above the regulatory minimum requirements to meet our obligations to policyholders,” said the Singapore-registered subsidiary of the beleaguered AIG in a press statement issued two days ago.
In the aftermath of Federal Reserve Bank of New York’s decision to lend AIG US$85 billion to keep it afloat, how well sheltered are AIA Singapore’s insurance funds in the financial tsunami that is drowning stock markets worldwide?
Despite the throng of crowds at AIA Tower’s main lobby these past two days, a straw poll by NextInsight shows most policyholders are holding on to their policies.
”Yes, I am concerned but if everyone surrenders his policy, fund redemptions will only worsen the financial markets”, said a policyholder.
One of NextInsight’s active forumers, who started the AIA saga thread under ‘scbchan’, is an experienced actuary.
NextInsight interviewed ‘scbchan’, whose real name is Benjamin Chan, for an exclusive low-down on the numbers behind AIA’s claim of being able to meet policy obligations.
We zoomed in on “participating policies”, which account for over half of AIA’s Singapore life policy liabilities.
(Participating policies are the most common type of life insurance policy and allow the policyholder to receive bonuses when the underlying insurance fund performs favorably.)
Asset base to meet immediate policy liability is 1.5 times
AIA's insurance funds are about 75% in fixed income and 20% in equities & real estate.
AIA's total fund assets for meeting policy plus other liabilities as at 31 Dec 2007 amounted to S$14.8 billion with 15% equities and 75% in fixed income.
Assuming the worst-case hypothetical scenario where all of AIA’s participating policyholders surrendered their policies as at 31 Dec 2007, it would have needed to pay out S$8.3 billion, against policy assets of S$12.1 billion for this category.
These figures were drawn from an MAS filing of AIA’s balance sheet. That is, the portion of fund assets for meeting policy liabilities were S$12.1 billion.
Most of AIA's equity investments were in Singapore blue chips, and these would have fallen by 30% since 31 Dec 2007 going by the fall in the Straits Times Index of SGX's top 30 stocks.
Factoring in a 30% drop in equities value, AIA's policy assets would still be around S$11.4 billion, estimates Mr Chan.
This still leaves a buffer of some S$3.1 billion over the S$8.3 billion surrender value.
So what checks and balances exist to safeguard the policyholders' claim?
Together with the insurer’s CEO, an appointed actuary lays out investment guidelines to which the insurance fund manager has to adhere.
This is the fund’s investment mandate, which defines its aims, the limits within which it is supposed to invest, and the asset allocation policy it should follow.
”Even if AIG were to become insolvent, the insurance funds maintained by AIA Singapore are protected by [Singapore’s] Insurance Act and [these funds] cannot be touched by creditors of its parent company,” commented Mr Chan in a recent posting on NextInsight’s forum.
Now with an international reinsurance group, Mr Chan was referring in particular, to section 17 on the establishment of insurance funds.
Section 17 of the Act requires insurers to maintain separate funds to meet the obligations to policyholders for different categories of insurance policies sold.
Categories are grouped by domestic versus offshore, life versus non-life as well as their sub-categories.
Revenues mostly from policies that allow policyholders to participate in fluctuations of the insurance fund's market value.
Life insurance policies are in three sub-categories:
(1) Participating Policy
Backed by PAR Funds (abbreviated from ‘participating’), these allow policyholders to receive non-guaranteed (bonus) payouts over and above the benefit payment guaranteed by the insurance contract.
For example, a S$100,000 life insurance policy may pay bonuses in excess of S$1,000 a year.
Actual bonus amount is dependent on performance of the underlying insurance fund.
The present value of AIA’s policy liabilities in this category amounted to S$12.1 billion as at 31 Dec 2007.
What’s the difference between this and immediate surrender value (S$8.3 billion)? Well, liabilities on the insurer’s balance sheet include future undeclared bonuses as well as the present value of the sum assured.
Conceptually, policy liabilities aggregate the probability of the policyholder making a claim multiplied by the present value of sum assured.
(2) Non-participating Policy
These cost the policyholder less insurance premiums, but do not pay bonuses.
(3) Investment-linked Policy
Investment-linked policies work like unit trusts.
Redemption values fluctuate directly with the underlying insurance fund, but should the policyholder die or become permanently disabled, beneficiaries receive the sum assured and/or the value of the investment units.
So what advice does the actuary have for the man in the street?
"Think hard before you surrender your policy," says Mr Chan.
"AIA will benefit the most, since the surrender values are set such that the insurer profits on pre-mature surrender."
"Your [insurance] agent [will also win], since after the dust settles in the next few months, you will consider buying another new policy and he will earn his upfront commission all over again" cautions the actuary.
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