Friday, August 7, 2009
Survey: Sit Back and Watch (SBW) Award
I wish to give the SBW Award to the organisation or person in Singapore who sits back and watch, when it is their duty to step forward and uphold justice. Who do you nominate? Survey.
Off-loading the risky credit default swaps
I share this hypothesis. Does it look close to reality?
During the years prior to 2005, investment banks were making huge profits by issuing credit default swaps to guarantee the bonds issued by borrowers. They sold these swaps to other investors and made a good margin.
In the later years, as the economic situation becomes difficult and defaults on mortgages rises, the investment banks were saddled with swaps that they were not able to off-load to ther investors.
Some clever but dishonest banker conceived the idea of designing a structured product to hide these swaps and sell them to retail investors. They looked for countries that are wishes to be a financial hub and have a history of being pro-business and weak in consumer protection. Singapore and Hong Kong were selected.
This was the beginning of the crisis of the credit-linked notes.
Tan Kin Lian
Lehman Brothers Victim alliance in Hong Kong
The Lehman Brothers Victim alliance in Hong Kong web site has a news section that shows related Chinese and English news http://www.lbv.org.hk/content/pages/newsclip.php .
Happy National Day
To the citizens, permanent residents and friends of Singapore, Happy National Day - in advance for 9 August 2009.
Suing the Wrong Party
The situation in Singapore is very sad. The investors have to take an expensive and uncertain class action to sue the distributors of the credit-linked notes. Although the distributors were, in my opinion, negligent in selling the notes to the investors, they earned only a modest commission (maybe 3%) from the transaction.
A better solution is for the distributors to collaborate with the investors to sue the issuers of the credit linked notes. The issuers were the party that benefited most through the creation of these notes. They were also responsible for writing the prospectus in a manner to hide the true nature of the structured product, hence misleading not only the investors but the distributors as well.
The distributors had a fiduciary duty to their customers. It is only right that they should do all they can to help their customers. In this regard, the action of Great Eastern Life should be applauded. The other financial institutions should emulate this good example to do what is fair and right for their customers.
If the distributors, being financial institutions, buy over the credit linked notes for 50% of the invested sum (plus 50% of the ultimate proceeds), they will have the financial and legal means to sue the issuers to recover any damages that were caused by their action. The distributors can also decide on the best action to recover and protect the value of the underlying assets. In contrast, there is no way that the individual investors can take any of these actions.
Another possible action is for the government authority to take the appropriate action on behalf of the consumers. This was done in many countries, most notably in New York State and other parts of USA. Hong Kong is also adopting a similar approach, although done at a somewhat late stage.
I hope that the financial institutions and the government authority can take this action now. Better late than never.
Tan Kin Lian
Platform number in MRT stations
Do you have trouble identifying the right platform at our MRT stations? Read here for some suggestions to improve the sign. Share your own suggestions.
Thursday, August 6, 2009
TRANSPARENCY IN INSURANCE: Policyholders underpaid?
Aug 6, 2009
TRANSPARENCY IN INSURANCE
Policyholders underpaid?
THE report last Friday, 'Insurance funds need more transparency', is a good start. But there is more.
We have invested more than $60,000 per household in whole life and endowment policies.
The money goes into a huge policyholders' fund at each life insurance company. We know little about the fund or how the money is invested.
It is very different from buying a unit trust, where you get a certain number of units in proportion to your ownership in the fund. These units amount to the fund's net asset value or NAV. It is updated and published daily.
Policyholder funds have the same concept but use the term 'asset share' instead of NAV.
Another difference is insurance companies do not disclose the asset share. This makes it easy for insurers to underpay policyholders without them knowing it. Insurers acknowledge this happens with early surrender policies, but do not say if it also happens with policies held to maturity.
As the rightful owners are policyholders who have left the fund - and supposedly cannot be found - it is called 'orphaned money' or money without a home.
Underpayments to policyholders accumulate over the years, and are now huge. Aviva in Britain made a distribution of $2.7 billion last year. In that case, policyholders got 70 per cent of the money and Aviva kept 30 per cent. The company claimed that legally, it could have kept it all.
That is one way insurers benefit from orphaned money. Another is earning a risk-free 10 per cent on the income it generates.
A third way is to provide a buffer to absorb losses in case of a market downturn. It means the fund avoids dipping into tier 1 capital, which is largely stockholders' money.
Officially, the rationale for holding orphaned money is different: It provides a buffer for policyholders to avoid bonus cuts in downturns. Not correct. Insurers typically cut bonuses in downturns - like now - while the orphaned money keeps growing.
Singapore insurers disclose nothing about orphaned money. We do not know how much there is or where insurers keep it. Does it remain in the policyholders' fund or has it been transferred to stockholders?
Larry Haverkamp
TRANSPARENCY IN INSURANCE
Policyholders underpaid?
THE report last Friday, 'Insurance funds need more transparency', is a good start. But there is more.
We have invested more than $60,000 per household in whole life and endowment policies.
The money goes into a huge policyholders' fund at each life insurance company. We know little about the fund or how the money is invested.
It is very different from buying a unit trust, where you get a certain number of units in proportion to your ownership in the fund. These units amount to the fund's net asset value or NAV. It is updated and published daily.
Policyholder funds have the same concept but use the term 'asset share' instead of NAV.
Another difference is insurance companies do not disclose the asset share. This makes it easy for insurers to underpay policyholders without them knowing it. Insurers acknowledge this happens with early surrender policies, but do not say if it also happens with policies held to maturity.
As the rightful owners are policyholders who have left the fund - and supposedly cannot be found - it is called 'orphaned money' or money without a home.
Underpayments to policyholders accumulate over the years, and are now huge. Aviva in Britain made a distribution of $2.7 billion last year. In that case, policyholders got 70 per cent of the money and Aviva kept 30 per cent. The company claimed that legally, it could have kept it all.
That is one way insurers benefit from orphaned money. Another is earning a risk-free 10 per cent on the income it generates.
A third way is to provide a buffer to absorb losses in case of a market downturn. It means the fund avoids dipping into tier 1 capital, which is largely stockholders' money.
Officially, the rationale for holding orphaned money is different: It provides a buffer for policyholders to avoid bonus cuts in downturns. Not correct. Insurers typically cut bonuses in downturns - like now - while the orphaned money keeps growing.
Singapore insurers disclose nothing about orphaned money. We do not know how much there is or where insurers keep it. Does it remain in the policyholders' fund or has it been transferred to stockholders?
Larry Haverkamp
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