Barking up the wrong tree

Latest: an edited version of this letter was published in the Straits Times Forum page on 4 January 2011. See
http://www.straitstimes.com/STForum/Story/STIStory_751527.html

Editor

Forum Page

Straits Times

I wish to give a different angle to the points raised by Jimmy Koh ("Don't give in to pressure against new insurance test", ST 27 Dec).

Mr. Koh argued that the new test is necessary "to equip insurance gents ... to advice their clients properly and fairly on ... investment linked policies". I am afraid that, like the proverbial dog, the advocates of this approach are "barking up the wrong tree".

Most investment-linked policies have high charges that take away more than 40% of the accumulated savings from the consumers. Although this is disclosed in the benefit illustration, how many consumers know about it? How many insurance agents point this out to the consumer? Even if the consumer asks about the high charges, also known as "the effect of deduction", some dishonest agents might explain that this is the cost of the life insurance protection - when the true cost is only a small fraction of the total deduction. 

The truth is that a large part of the deduction goes to pay for the commission to the agent, the over-riding commission to the agency managers, high marketing expenses including the sales contests and incentive trips and the profit margin of the insurance company.

It it difficult for the insurance agent to give proper advice when they face this kind of conflict of interest. Do they look after the interest of the client and forego the attractive commission?  I am afraid that this type of ethical issues cannot be answered through a written test.

After trying to deal with a similar issue for a few decades, the regulatory authorities in the UK and Australia have concluded that the only way to avoid the abuse caused by the conflict of interest is to ban the payment of commission for the sale of life insurance type of investment products. I hope that the Monetary Authority of Singapore will implement a similar approach, to safeguard the financial future of consumers. 

Tan Kin Lian