Football fans will remember that Wigan FC played the last game of the Premier League against Manchester United. That game decided MU to be the champion of the League.
My first encounter with Wigan was about 25 years ago. I was in a train which stopped at Wigan Wallgate. I found the name Wigan to be strange, and Wallgate to be strange also. I mentioned this to my English friend. He laughed and told me that the town of Wigan actually had two train stations, called Wigan Wallgate and Wigan North Western. He told this joke.
An Indian immigration worked in Wigan for many years. He received a telegram asking him to return to India, as his mother was very sick.
We went to the train station in Wigan and asked for a train ticket to take him to Bombay, India. Nobody at the station had every heard of Bombay or India. They sent him by train to London.
Nobody in London heard of Bombay or India either. So, they sent him to Paris. He finally arrived in India after much difficulty. He stayed in Bombay for some time until after his mother passed away. Now it is time for him to return to England.
He went to the train station in Bombay and asked for a ticket to Wigan. The clerk replied immediately, "Yes, sir. Do you want to be at Wigan Wallgate or Wigan North-western?"
Where is the joke? During the days of the British Empire, nobody in England has heard of any place outside of England. Everybody in the British Empire knows all the train stations in England!
Wednesday, May 21, 2008
Tuesday, May 20, 2008
MAS Guidelines on Fair Dealing Outcome
I have submitted my views to MAS on their consultation paper on "fair dealing outcome" to consumers.
MAS wants to make the management and board of financial institution responsible to achieve this outcome. The key points of my paper are:
1. The management and board of financial institutions have the goal of making the most profit for shareholders. It is difficult for them to be responsible for "fair dealing outcome" for consumers. There is a conflict of interest.
2. "Fair dealing outcome" has to be defined more clearly. It should be defined as a product that have fair (not excessive) charges and give good value to consumers.
3. For complicated financial products, the regulator must ask two independent financial experts to study and give their views. The vews of the experts should be posted in a website to guide consumers.
I quote the example of new drugs. The regulator tests and approves the new drugs before they are sold to the public. They do not expect the consumers to do their own testing. Financial products should go through the same test.
MAS wants to make the management and board of financial institution responsible to achieve this outcome. The key points of my paper are:
1. The management and board of financial institutions have the goal of making the most profit for shareholders. It is difficult for them to be responsible for "fair dealing outcome" for consumers. There is a conflict of interest.
2. "Fair dealing outcome" has to be defined more clearly. It should be defined as a product that have fair (not excessive) charges and give good value to consumers.
3. For complicated financial products, the regulator must ask two independent financial experts to study and give their views. The vews of the experts should be posted in a website to guide consumers.
I quote the example of new drugs. The regulator tests and approves the new drugs before they are sold to the public. They do not expect the consumers to do their own testing. Financial products should go through the same test.
Pay and Performance of Leaders
Someone asked my views on this topic a few weeks ago. I posted my views in this blog. I have since written an expended version, which will appear in http://www.theonlinecitizen.com/ later today under a new title.
Annual and Terminal Bonuses
Dear Mr. Tan,
I wish to share my views on this matter. Please post it in your blog.
1) Does terminal bonus smooth returns for policyholders?
Policyholders who have the rotten luck of dying, surrendering (due to unemployment/financial hardships), or whose policy matures (to pay for their children's university education) when the investment markets are doing badly, will see low returns on their terminal bonus policies - perhaps insufficient for their initial plan on how to use the maturity payout.
Policyholders who claims/surrenders/matures during good investment times will be paid the returns shown in the benefit illustration (ie around 3.5% to 4.5%).
But is this fair and equitable? Is this the intention of with-profits life insurance policies?
For reversionary bonus, the impact of investment market volatility on the claimants, surrenders, maturities are significantly reduced, since past bonuses are guaranteed and cuts in reversionary bonus affects all policyholders fairly.
Compare this to terminal bonus which affects only unfortunate claimants in bad investment cycles. Higher reversionary bonus payouts provide higher certainty for all policyholders.
2) Bonuses are not guaranteed anyway, so are they different products?
The provision of certainty and higher bonus-vesting (via high reversionary bonus) adds value to policyholders and is a very different product from the high terminal bonus version.
My friend gave me this analogy. If you ask your investment broker to buy a secure long-term government bond, but instead he gives you a well diversified unit-trust but giving you an excuse that you can expect higher returns, will you be happy with it?
A promise is a promise. Income has promised policyholders a design of high reversionary bonus (low terminal bonuse). Arguably, Income's management does not have the right to change to a low reversionary bonus design unilaterally. In the past, I have personally recommended Income's policies based on this high reversionary bonus design. The move to 'industry practice' is a significant drawback.
3) So what's the value-add of Terminal Bonus? Does it really give higher returns? Are terminal bonus less likely to be cut?
Using an insurance adviser's example, a return of 3.5% is about long-term bond gov rate. Old income policies also returns around the same rate.
Which is more valuable to policyholders, an uncertain return of 3.5% (based mostly on terminal bonus) or a more-certain return of 3.5% (based mostly on reversionary bonus)? Clearly, the reversionary bonus. Bear in mind that 3.5% is about the returns of very secure long-term government bonds anyway.
All else being equal, are policies with high terminal bonus less likely to suffer bonus cuts? Evidently no. Since during the last investment down cycle, industry players cut terminal bonus significantly as well.
4) What about solvency and investment allocation? Terminal bonus approach allows more allocations to high returns/risk assets right?
My recent statistics collated from the MAS website, shows industry players that uses terminal bonus approach have on average solvency ratio of 300%, equity investment ratio of 20%-30%. What level of solvency ratio is adequate? Is 300% too high?
Bearing in mind, MAS minimum is 120% at company level. Are these companies being too safe at the expense of policyholders? With such a comfortable buffer of 300% solvency ratio, shouldn't allocations to risky investments be higher?
Yew Ming
I wish to share my views on this matter. Please post it in your blog.
1) Does terminal bonus smooth returns for policyholders?
Policyholders who have the rotten luck of dying, surrendering (due to unemployment/financial hardships), or whose policy matures (to pay for their children's university education) when the investment markets are doing badly, will see low returns on their terminal bonus policies - perhaps insufficient for their initial plan on how to use the maturity payout.
Policyholders who claims/surrenders/matures during good investment times will be paid the returns shown in the benefit illustration (ie around 3.5% to 4.5%).
But is this fair and equitable? Is this the intention of with-profits life insurance policies?
For reversionary bonus, the impact of investment market volatility on the claimants, surrenders, maturities are significantly reduced, since past bonuses are guaranteed and cuts in reversionary bonus affects all policyholders fairly.
Compare this to terminal bonus which affects only unfortunate claimants in bad investment cycles. Higher reversionary bonus payouts provide higher certainty for all policyholders.
2) Bonuses are not guaranteed anyway, so are they different products?
The provision of certainty and higher bonus-vesting (via high reversionary bonus) adds value to policyholders and is a very different product from the high terminal bonus version.
My friend gave me this analogy. If you ask your investment broker to buy a secure long-term government bond, but instead he gives you a well diversified unit-trust but giving you an excuse that you can expect higher returns, will you be happy with it?
A promise is a promise. Income has promised policyholders a design of high reversionary bonus (low terminal bonuse). Arguably, Income's management does not have the right to change to a low reversionary bonus design unilaterally. In the past, I have personally recommended Income's policies based on this high reversionary bonus design. The move to 'industry practice' is a significant drawback.
3) So what's the value-add of Terminal Bonus? Does it really give higher returns? Are terminal bonus less likely to be cut?
Using an insurance adviser's example, a return of 3.5% is about long-term bond gov rate. Old income policies also returns around the same rate.
Which is more valuable to policyholders, an uncertain return of 3.5% (based mostly on terminal bonus) or a more-certain return of 3.5% (based mostly on reversionary bonus)? Clearly, the reversionary bonus. Bear in mind that 3.5% is about the returns of very secure long-term government bonds anyway.
All else being equal, are policies with high terminal bonus less likely to suffer bonus cuts? Evidently no. Since during the last investment down cycle, industry players cut terminal bonus significantly as well.
4) What about solvency and investment allocation? Terminal bonus approach allows more allocations to high returns/risk assets right?
My recent statistics collated from the MAS website, shows industry players that uses terminal bonus approach have on average solvency ratio of 300%, equity investment ratio of 20%-30%. What level of solvency ratio is adequate? Is 300% too high?
Bearing in mind, MAS minimum is 120% at company level. Are these companies being too safe at the expense of policyholders? With such a comfortable buffer of 300% solvency ratio, shouldn't allocations to risky investments be higher?
Yew Ming
Land Banking
Dear Sir,
I wish to hear your opinion about land banking opporunity through X as follow:
> audited track records 29 yrs
> no clients losing money
> audited by Y
REPLY
I do not like this investment product. There is no liquid market. You can put your money in, but you have to wait a long time before you can find someone to buy the investment from you. I have been approached many times to invest in the product, but I always declined.
You can search my blog for my past postings on this type of investment. Type "land banking" and click on Search Blog.
I wish to hear your opinion about land banking opporunity through X as follow:
> audited track records 29 yrs
> no clients losing money
> audited by Y
REPLY
I do not like this investment product. There is no liquid market. You can put your money in, but you have to wait a long time before you can find someone to buy the investment from you. I have been approached many times to invest in the product, but I always declined.
You can search my blog for my past postings on this type of investment. Type "land banking" and click on Search Blog.
Monday, May 19, 2008
Uncertain yield
A policyholder sent to me a whole life policy (premiums payable for 10 years) taken for a child age 19, covering a sum assured of $50,000.
The yield for the first 10 years is negative. The yield becomes positive over the subsequent 20 years due to the non-guaranteed special bonus. If the special bonus is reduced, the yield will fall accordingly. The yield on this policy is uncertain.
Total Cash Value Yield
Premium Gtd N-Gtd Total p.a.
10 yr $15,980 $14,050 $1,523 $15,573 -0.5%
20 yr $15,980 $18,400 $6,887 $25,287 2.2%
30 yr $15,980 $23,700 $15,723 $39,423 3.0%
The yield for the first 10 years is negative. The yield becomes positive over the subsequent 20 years due to the non-guaranteed special bonus. If the special bonus is reduced, the yield will fall accordingly. The yield on this policy is uncertain.
Revolution in financial advisory industry
Mr. Tan,
I'm an ardent follower of your blog since it was launched. It has been delightful gaining insight into your views on investment and insurance.
I just read your entry on the fee based approach. For me, that is a very viable alternative for both clients and advisors which I whole-heartedly endorse. I, too, believe "Buy Term, Invest the Rest" is a mantra that give the best value to most clients.
However, most financial advisory firms do not advocate this. It might be attributed to :-
1) Infrastructure. The two investment platform, iFast and Navigator, available do not carry low-cost funds especially index funds or index ETFs.
2) Business sustainability. The current business model of the firms are meant to maximize shareholder value.
3) The Advisors. Advisors are commissioned based and as such, it's human instinct to "milk" as much as possible, considering that the amount of time expended in travelling and prospecting need to be justified.
With your approach of clients visiting the "clinic", I am sure that advisors will be more willing to jump onto the bandwagon and hopefully, lead to a revolution in the financial advisory industry.
W
I'm an ardent follower of your blog since it was launched. It has been delightful gaining insight into your views on investment and insurance.
I just read your entry on the fee based approach. For me, that is a very viable alternative for both clients and advisors which I whole-heartedly endorse. I, too, believe "Buy Term, Invest the Rest" is a mantra that give the best value to most clients.
However, most financial advisory firms do not advocate this. It might be attributed to :-
1) Infrastructure. The two investment platform, iFast and Navigator, available do not carry low-cost funds especially index funds or index ETFs.
2) Business sustainability. The current business model of the firms are meant to maximize shareholder value.
3) The Advisors. Advisors are commissioned based and as such, it's human instinct to "milk" as much as possible, considering that the amount of time expended in travelling and prospecting need to be justified.
With your approach of clients visiting the "clinic", I am sure that advisors will be more willing to jump onto the bandwagon and hopefully, lead to a revolution in the financial advisory industry.
W
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