Regulator finds insurance firms failing to disclose risks, offer unsuitable products

SINGAPORE - Financial advisors at banks and insurance companies have fallen short of fair dealing standards when selling products to retail customers, a mystery shopping survey by the Monetary Authority of Singapore (MAS) has showed.



Key regulator findings: 

• Advisers carried out some degree of fact finding during the shopper visits, but the information collected was inadequate. Some only asked for the shoppers' personal particulars and employment. Pertinent information such as the shoppers' investment experience, financial aims, risk profile and financial situation was frequently left out. 
• Most advisers provided basic information on the product, but disclosures on risk factors, amount and frequency of fees and charges, warnings, exclusions and caveats, as well as the free-look period, were left out in a significant number of advisory sessions. 
• Almost a third of the product recommendations made by the advisers were assessed by the industry panel as unsuitable. The products recommended often did not match the shoppers' financial objective or their stated investment horizon.

Revealing the findings on July 6th, the MAS said most sales representatives failed to conduct comprehensive fact-finding about the shopper's investment experience, financial objectives, risk preferences and financial situation. This impeded the ability of representatives to make suitable product recommendations, it said.

The MAS also found that while most representatives disclosed basic information about the products recommended, disclosures on risk factors, amount and frequency of fees and charges, warnings, exclusions and caveats, as well as the free-look period were omitted in a significant number of cases. The regulator said inadequate disclosures may result in consumers making poor investment decisions due to a lack of understanding of the product's features and risks.

The top three categories of products recommended were endowment insurance policies, unit trusts and investment-linked life policies, the MAS survey showed. Almost a third of the recommendations were assessed by the industry panel as unsuitable, mainly because the products did not match the shoppers' financial objectives or stated investment horizons.

The survey findings suggest there is "significant room for improvement" for the industry, MAS said.

Mr David Gerald, President and Chief Executive of the Securities Investors Association (Singapore), said the findings were "disheartening" and "disconcerting", saying the lack of disclosure meant that an investment product could appear more attractive than it was.

He said SIAS "will focus on tailoring our investor education programmes to help investors know their needs and clarify their financial objectives and understand their risk preferences."

Mr Tan Hak Leh, President of the Life Insurance Association of Singapore, said the association noted the MAS survey findings and the shortcomings, which "require the industry's further attention".

He did not say what specific steps would be taken to improve the life insurance sales advisory process. 


Sources: http://www.todayonline.com/Business/EDC120707-0000038/Coming-up-short  Jul 07, 2012
http://news.asiaone.com/News/Latest%2BNews/Singapore/Story/A1Story20120707-357796.html
http://www.businesstimes.com.sg/premium/top-stories/mas-mystery-shoppers-expose-shoddy-financial-advisers

Regulator starts public consultation on treatment of settlement options in life policies

The Monetary Authority of Singapore (“MAS”) has released a  consultation paper to seek feedback on MAS’ proposed treatment of settlement options in life policies.  The consultation paper is available on the MAS website at  http://www.mas.gov.sg/News-andPublications/Consultation-Paper.aspx. 

The paper proposes to disallow the provision of settlement options under new life policies, except for the option to convert into a life annuity

Existing life policies with settlement options provision, regardless of whether such options have been exercised, will be grandfathered (old rules apply).

Regulator releases a consultation paper on review of Risk-based capital framework in Singapore

RBC 2 Review: June 22nd 2012, MAS released a consultation paper on review on Risk-Based capital framework for insurers in Singapore. The aim is to enhance the original RBC framework, first introduced in 2004. The primary objective of the review is to address more risk types as well as to better align the framework with the upcoming Basel III regulations for banks. 

Following were the proposals raised in the paper. MAS proposes to implement the RBC 2 requirements for the accounting year ending 31 December 2013. There will be at least 2 years of parallel run with the existing RBC framework and appropriate floors imposed to prevent sudden release in capital requirements.

Proposal 1: MAS proposes to incorporate an explicit risk charge to capture spread risk within the RBC 2 framework.

Proposal 2: MAS proposes not to impose an explicit risk charge for liquidity risk. MAS will work with the industry to conduct liquidity stress-testing, and assess the soundness of the insurer's liquidity risk management practices as part of MAS‟ risk-based supervision.

Proposal 3: MAS proposes to incorporate an explicit risk charge to capture operational risk within the RBC 2 framework, calculated as: x% of the higher of the past 3 years‟ averages of (a) earned premium income; and (b) gross policy liabilities, subject to a maximum of 10% of the total risk requirements. Where x = 4% (except for investment-linked business, where x = 0.25% given that most of the management of investment-linked fund is outsourced)

Proposal 4: MAS proposes to incorporate an explicit insurance catastrophe risk charge in the RBC 2 framework. This would be done through prescribing a number of man-made and natural catastrophe scenarios, with an explicit risk charge computed accordingly from a combination of these scenarios. MAS intends to work with the industry associations, reinsurance brokers and the other risk institutes/academia in Singapore to design relevant standardised catastrophic scenarios. For life business, the explicit insurance catastrophic risk charge can be derived based on a pandemic event.

Proposal 5: MAS proposes to recalibrate risk requirements using the Value at Risk (“VaR”) measure of 99.5% confidence level over a one year period. MAS will be engaging the industry on the calibration exercise, and target to finalise the calibration factors/shock scenarios by 1Q 2013. Data would need to be collected for this purpose. The recommended calibration factors or scenarios will be consulted prior

Proposal 6: MAS proposes not to allow for diversification benefits when aggregating the capital risk requirements. MAS is, however, prepared to consider diversification benefits if the industry is be able to substantiate, with robust studies and research conducted on the local insurance industry, that there are applicable correlations which can relied on during normal and stressed times.

Proposal 7: MAS proposes to allow the use of partial or internal model in the next phase of the RBC 2 review, after the implementation of the standardised approach. The internal model, which will be subject to approval by MAS, will have to be calibrated at the same level as the standardised approach.

Proposal 8: MAS proposes to incorporate the same Basel III features (i.e. equity conversion or write-down on breach of regulatory capital requirements) for the Approved Tier 1 resource. This means that instruments that qualifies as Approved Tier 1 resource must:

(a) automatically convert to ordinary share capital, as and when the insurer needs to absorb losses, and in any case, when the insurer breaches its regulatory capital requirement;

(b) be subject to write down as long as losses persist, as and when the insurer needs to absorb losses, and in any case when the insurer breaches its regulatory capital requirement.

The limits on the amount of Approved Tier 1 resource that can be recognised, as set out in the  existing Insurance (Valuation and Capital) Regulations 2004, will remain unchanged.

Proposal 9: MAS proposes to allow a part of the negative reserves to be recognised as a form of positive financial resource adjustment under Financial Resources. MAS will consult further on the amount to be recognised.

Proposal 10: MAS proposes to classify Aggregate of Allowances for Provision for Non-Guaranteed Benefits, where applicable, as a form of positive financial resource adjustment, rather than as a capital item.

This applies to an insurer maintaining any participating fund, and subject to the condition that the unadjusted capital ratio remains below the adjusted capital ratio, where:

Adjusted capital ratio, in relation to the insurer, means the ratio of the financial resources of the insurer (excluding the financial resources of any participating fund) to the total risk requirement (calibrated at 99.5% VaR over a one-year period) of the insurer (excluding such requirement arising from any participating fund); and Unadjusted capital ratio, in relation to the insurer, means the ratio of the financial resource of the insurer (including the financial resources of any participating fund) to the total risk requirement (calibrated at 99.5% VaR over a one-year period) of the insurer (including such requirement arising from any participating fund).

Proposal 11: PCR is the higher supervisory intervention level at which the insurer is required to hold sufficient financial resources to meet the total risk requirements which corresponds to a VaR of 99.5% confidence level over a one-year period. 

An insurer which breaches its PCR will need to submit a plan on how to restore its capital position within 3 months. If the PCR is met, MAS will not normally intervene on capital adequacy grounds. This does not preclude MAS from requiring an insurer to maintain financial resources above the PCR if there are other supervisory concerns.

As a countercyclical measure, MAS will have the flexibility and discretion to allow insurers more time to restore its capital position, for example, during periods of market stresses.

PCR needs to be maintained at both the company level, as well as at an insurance fund level.

Proposal 12: MCR is the lower supervisory intervention level at which the insurer is required to hold sufficient financial resources to meet the total risk requirements which corresponds to a VaR of 90% confidence level over a one year period. If an insurer breaches its MCR, MAS may choose to invoke the strongest supervisory action (such as stopping new business, withdrawal of licence etc). MCR will be calibrated as a fixed percentage of the PCR. This percentage will be determined after quantitative impact studies are done. MCR needs to be maintained at both the company level, as well as at an insurance fund level.

Proposal 13: MAS proposes the following two approaches with regards to the risk-free discount rate for SGD-denominated liabilities.

(a) To keep to the same LTRFDR formula as set out in paragraph 5.5, but X and Y will now be 20 and 30 respectively. This is on the expectation that the 30-year SGS will have adequate liquidity when RBC 2 is implemented. This means:

- Durations 0 to year 20: Use prevailing yields of SGS 

- Durations 30 year and above: 90% of historical average yields (since inception) and 10% of latest 6-month average yield of 30-year SGS

- Durations 20 to year 30: Interpolated yields  

- Durations 30 year and above: Keep the yield flat at the prevailing yield of 30-year SGS

(b) To remove the LTRFDR formula altogether, ie.,

- Durations up to 30 Years: Use prevailing yields of SGS

Proposal 14: MAS proposes that insurers follow the regulatory requirements pertaining to discounting as prescribed by the insurance supervisory authority in the jurisdiction issuing the currency, for valuing non-Singapore dollar denominated liabilities for both life and general business.

Proposal 15: MAS proposes to extend the discount rate requirements for life business to general business as well, for liability durations above 1 year. For liability duration of 1 year and less, no discounting would be required.

Proposal 16: MAS proposes to introduce Enterprise Risk Management requirements, including those relating to Own Risk and Solvency Assessment, to insurers. We will consult industry on the ERM requirements and target to issue a final document by end of 2012.

http://www.mas.gov.sg/resource/publications/consult_papers/2012/CP_RBC2_20120621.pdf

AIA against fee-based model for insurance agents

Source: Asia One

The raging debate surrounding the potential replacement of the traditional commission-based model in insurance with a fee-only model remains a key concern for AIA Group, which believes this overhaul is unwarranted.

"I'm sorry to say that no one has done salary agents and proved that it is any cheaper than commission agents. If it is that easy and you can do salary agents cheaper, why aren't all companies doing it?" said AIA Group regional chief executive Ng Keng Hooi in an exclusive interview with BT.

This comes a week after Monetary Authority of Singapore (MAS) managing director Ravi Menon revealed plans to shake up the advisory landscape by reviewing the existing commission-based structure through the Financial Advisory Industry Review (Fair).

Under a fee-only model where agents and advisers are paid a salary, it has been suggested that agents may merely fulfil the bare minimum.

Conversely, Mr Ng added that commission-based remuneration promotes meritocracy, which acts as an incentive for agents who are paid only after they successfully complete a sale.

While the UK and Australia have already taken measures to ban commissions for financial advisers in a bid to ensure greater professionalism and transparency, it does not mean Singapore has to follow suit, said Mr Ng.

"We have to be careful not to look at the UK and Australia and say that is the best model and it is better than Singapore's. If you use salary agents, they can do very well or very poorly, and are still paid a fixed pay. I am not sure that it is much cheaper than on a commission basis."

Part of Mr Menon's proposed review also centred on relooking the multi-tier distribution structure, where supervisors stand to earn commissions on top of what agents earn. These commissions, embedded in insurance products, have been criticised for unnecessarily increasing the costs borne by customers.

Local cooperative insurer NTUC Income has already discarded the multi-tier system in an attempt to lower distribution costs and deliver greater value to customers, distinguishing itself from other insurers in the process.

But AIA Group is unlikely to follow in NTUC Income's footsteps, with Mr Ng commenting that this may not be a cheaper alternative and could inadvertently lead to reduced productivity.

"If paying managers on a salary basis is cheaper, most of the insurers would have gone there already. But you see - all over the world, and not just Singapore - no one has done it well," he said.

"Salary is a lot more complicated. Especially when the manager is older, productivity may go down. Ours is based on you delivering the sales and then you are rewarded accordingly."

Additionally, much has been made about insurance agents profiting more in commissions by hard-selling whole life insurance plans as premiums for those plans are higher than pure protection plans (or term insurance), which may not be in their customers' best interest.

"Simple term life insurance is sometimes all a person needs to protect against risk," said Mr Menon in his speech last week.

This issue has been oversimplified, said Mr Ng.

He said that customers have different preferences, with some opting for whole life insurance as they prefer a product with a savings element that offers a cash value, unlike term insurance that does not.

"You cannot tell them 'no, you should not have it'. The important thing is to make them see that there is (a term insurance product and a whole life insurance product) . . . and give them this option - which is what we have trained our agents to do."

Despite AIA's in-house estimations placing protection gap figures in Asia at US$20 trillion, there is still an underlying underinsurance problem plaguing the average Singaporean as the general sentiment has leaned towards investment products, said Mr Ng.

"Our belief is that it should be at least 5-10 times annual income," he added. "We did some studies and we found that only two out of 10 Singaporeans are adequately protected. Our challenge is that, sometimes, customers want returns and are not placing enough emphasis on the protection bit."

Consequently, AIA has embarked on its Premier Agency strategy to develop and train more agents to bridge this gap by encouraging clients to first address their protection needs wholly before selecting investment-type products.

On the topic of expansion, while Mr Ng reiterated AIA Group CEO Mark Tucker's intention to focus on organic growth, he declined to comment on reports surrounding AIA's rumoured interest to acquire ING Groep NV's Asian insurance unit in a deal valued at over US$6 billion.

However, he did not rule out the opportunity for potential M&A transactions if the right deal comes along. Said Mr Ng: "All I can say is if there is something that is financially sensible which gives returns to our shareholders . . . we would look at it."

Meanwhile, AIA Group's spate of hiring former Prudential staff for its management ranks has incited speculation that it is part of a deliberate strategy to poach its rival's top talents. Mr Ng, a former Prudential employee himself, was quick to dispel this allegation.

"In some places, it happens to be true because it so happens that Mark and I came from there and we do know some of these people," he said. "I can tell you a lot of people want to join us but they do not meet the standard, and they could be from Prudential. The main thing is that we are in a good position where we are able to attract people."

Financial advisory industry in Singapore expects consolidation in its ranks if the regulator changes the compensation model to fee based structure

THE financial advisory industry expects consolidation in its ranks, with the industry set to undergo the most wide-ranging shake-up in more than a decade.

 Among the areas highlighted by the Monetary Authority of Singapore’s (MAS) managing director Ravi Menon yesterday evening in his speech to the Life Insurance Association was the proposal to move from a commission-based model to a fee-based one to avoid conflicts of interest between adviser and client.

If Singapore were to move towards a fee-based model, the Government would have to start educating customers now and ensure the market is ready to accept the changes before they are made, IPP Financial Advisers’ managing director Albert Lam said.

...

Another consequence of this industry review is likely to be consolidation among industry players, heads of these financial advisory firms said.
The financial advisory industry in Singapore has grown in the past decade to around 60 firms, players estimate.

India as an example that had rolled out similar proposals in 2009. “There was a massive consolidation in India, and a lot of companies found that they could not survive.”

Read more: BT Invest

Veteran insurance agents in Singapore reeling from potential industry changes.

SOME of the most senior and well-established insurance agents were left reeling by the sweeping changes proposed by the regulator to the life insurance industry last night.

This is because these established agents, who are at the managerial and director levels, derive a substantial part of their income from the commission-based structure currently in place. A senior insurance manager, who declined to be named, said: “There are serious financial implications. I am not sure if I will be losing my job soon.”

Insurance bosses were also worried about what the changes would mean for their ability to retain talent at the senior levels.

Mr Khoo Kah Siang, general manager of Great Eastern Life, said: “It is important that we have an industry that is able to attract people. The question is, what is the best structure? “Perhaps there could be some tweaks to the tiered structure, and working together with the regulators, maybe we can help to come up with a structure that is workable both for the industry and the consumer.”
Their concerns come as the Monetary Authority of Singapore (MAS) yesterday said that it is looking to review how the insurance industry pays its 13,000 agents.

MAS managing director Ravi Menon, who spoke last night at the Life Insurance Association 50th Anniversary dinner, said MAS was looking to review the multi-tiered distribution structure.



Read more: BT invest