Even if AIG go under, the insurance funds maintained by AIA Singapore are protected by the Insurance Act here and cannot be touched by AIG creditors. However if the underlying fund has investment in US banks or \"problematic\" bonds, the value of the investment will of course be affected. But this is unrelated to the AIG problem. The typical whole life and endowment policies are issued in SGD so the liabilities are in SGD, thus the majority of the assets backing these policies should be in SGD, given that currency mismatch carry a very high risk based capital charge which most insurers want to avoid. So I think the US assets are limited, but of course the value of the insurance fund would have been lowered in line with the decline in STI.
Sep 16, 2008, The Straits Times Policyholders throng AIA centre By Lorna Tan HUNDREDS OF anxious policyholders thronged insurer AIA Singapore\'s Customer Service Centre in Finlayson Green on Tuesday. Many wanted to surrender their life insurance policies, on fears and uncertainty over the company\'s future financial stability. AIA is a subsidiary of insurance giant AIG which is scrambling to prevent its own collapse. To make matters worse, AIG\'s credit rating was downgraded by Standard & Poor\'s Ratings Services on Monday, further rattling investors. Over in Singapore, about 40 AIA customers were already waiting outside the centre when it opened its doors at 8.45am. By the late morning, there were hundreds of AIA customers who wanted to make enquiries and surrender their plans. They were not daunted by the long wait of two to three hours, the time it took to be attended to by AIA staff after getting the queue number. Among those in the long queue was AIA customer John Tan, 53, who wanted to surrender five AIA policies that he has owned for about 12 years. \'There is alot of uncertainty in the US market and financial institutions are collapsing one by one. If AIG files for bankruptcy and AIA goes go bust, our funds may be frozen or suspended and I may lose everthing,\' he said. His annual premiums amounted to $50,000. Another policyholder Irene Chua, 59, said that she was there to surrender her 14-year old investment linked insurance policy. \'AIA is owned by AIG and there is no assurance from anybody that we can get our money back,\' she said. Another policyholder who declined to be named said that instead of surrendering she has opted to request for the maximum loan amount from her four policies. \'By getting a loan based on the cash value of my policies, I will have some cash at hand and I do not lose my insurance cover,\' she explained. She has worked out that the difference between her loan amount and the surrender value was about $6,000. The situation at AIA prompted the Monetary Authority of Singapore to caution policyholders from acting rashly to terminate their AIA policies. Doing so might result in the customers suffering losses from premature surrenders and losing the coverage they might need, it stated. Just before noon, AIA opened up the ninth floor of AIA Tower at Robinson Road to cater to the growing number of customers.
AIA just issued a statement to calm policyholders:
www.aia.com.sg/AIA_Media_Statement_16Sep08.html
A downward spiral effect is building up if confidence doesn\'t return to AIA. After cash in the insurance funds is used up to pay surrender values, AIA have to sell their assets, which for their equity pot are Singapore blue chips. This will further depress the STI. These past few days seem like the beginning of the end. When everybody is fearful, we should be at the bottom of the market.
This is the relevant section in the Insurance Act dealing with the segregation of insurance fund: \"Section 17(4) There shall be paid into an insurance fund all receipts of the insurer properly attributable to the business to which the fund relates (including the income of the fund), and the assets comprised in the fund shall be applicable only to meet such part of the insurer\'s liabilities and expenses as is properly so attributable but shall not be applied to meet any levy payable by the insurer under section 46.\" Like valuing stock using DCF method, the appointed actuary of an insurer set the insurance liabilities using DCF method, discounting future benefits less future premiums. It is common to set the liabilities to be at least as high as the current surrender values of all policies. The assets backing these liabilities have to be much higher to create a \"solvency margin\". So there should be sufficient resources within the insurance fund to pay for all surrender if all policyholders choose to surrender at the same time (assuming these assets can be turned into cash at current value). Most surrender in the earlier years (meaning before reaching 15-20 years for a whole life policy) will result in a loss to the policyholder. Who will gain from your surrender? 1. AIA, since the surrender values are set such that the company still make profit on your policy. 2. Your agent, since after all the dusts are settled in the next few months you will consider buying another new policy and he will earn his upfront commission all over again! So think carefully before you act!
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