At the Life Insurance Association of Singapore (LIA) AGM held a few days ago, Mr Low Kwok Mun, Executive Director (Insurance Supervision) of MAS addressed a few things affecting the insurance industry in his speech.

Some of his points include:

• Reminding the industry not to neglect the important social role which only insurers can play, which is to ensure that the protection needs of Singaporeans are met. By and large, most Singaporeans are still under-insured.
• Urging the industry to step up on consumer eduction with a focus on what consumers do not understand. This includes:
  • Understanding on how bonuses of participating policies are determined.
  • Charges for investment-linked products (ILP).
  • Claims for medical insurance being invalidated due to pre-existing conditions and confusion over whether certain medical procedures are admissible for claims.
• Clearer transparency and disclosure between the savings and protection charges in an insurance policy.

While the points mentioned are very relevant, I am not so sure whether they will lead to much changes in the absence of regulatory changes. Urging is hardly a strong enough incentive.

Actually, a lot of complaints and misunderstandings can be avoided if insurance policies are carefully explained at the point of sale. In this aspect, the industry still have a lot of room for improvement.

I am sure all of us frequently read in the newspapers about motor insurance premiums having to go up because of ever increasing claims. And how insurance companies are making losses from their motor insurance portfolio.

Have you ever wondered why so many of them are still around despite (supposedly) making losses year after year?

I don’t for one second doubt the part on increasing motor claims, but that only reflects half the story. The profitability of a general insurance company depends heavily on two factors:

1. Their underwriting loss/profit (difference between premiums and claims plus expenses)
2. Their investment loss/profit

What most people fail to appreciate is that an underwriting loss is expected and perfectly normal in the course of business. A good insurance company would be able to remain profitable even in the face of underwriting losses.

This is something that Warren Buffett has bought up repeatedly many times in his annual letters to his shareholders. I have reproduced below the section that deals with this subject from his latest letter which was published last Saturday (The entire letter can be found here).

Note: Property-casualty insurance would be similar to what we call General Insurance in Singapore. It refers to the class of insurance that covers motor, home, property, etc. The other class of insurance is Life Insurance.

Extracted from Warren Buffett’s 2010 letter to Berkshire’s Shareholders on 2009 Performance

Our property-casualty (P/C) insurance business has been the engine behind Berkshire’s growth and will continue to be. It has worked wonders for us. We carry our P/C companies on our books at $15.5 billion more than their net tangible assets, an amount lodged in our “Goodwill” account. These companies, however, are worth far more than their carrying value – and the following look at the economic model of the P/C industry will tell you why.

Insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect-now, pay-later model leaves us holding large sums – money we call float” – that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float we hold remains remarkably stable in relation to premium volume. Consequently, as our business grows, so does our float.

If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money – and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition, so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of float.

In my perhaps biased view, Berkshire has the best large insurance operation in the world. And I will absolutely state that we have the best managers. Our float has grown from $16 million in 1967, when we entered the business, to $62 billion at the end of 2009. Moreover, we have now operated at an underwriting profit for seven consecutive years. I believe it likely that we will continue to underwrite profitably in most – though certainly not all – future years. If we do so, our float will be cost-free, much as if someone deposited $62 billion with us that we could invest for our own benefit without the payment of interest.

Let me emphasize again that cost-free float is not a result to be expected for the P/C industry as a whole: In most years, premiums have been inadequate to cover claims plus expenses.

Consequently, the industry’s overall return on tangible equity has for many decades fallen far short of that achieved by the S&P 500. Outstanding economics exist at Berkshire only because we have some outstanding managers running some unusual businesses. Our insurance CEOs deserve your thanks, having added many billions of dollars to Berkshire’s value. It’s a pleasure for me to tell you about these all-stars.

Prudential confirmed yesterday that it plans to buy American International Assurance (AIA), the Asian life insurance arm of American International Group (AIG), at a price of US$35.5billion (S$50billion).

The sale will allow AIG to pay back some of its US$182.5billion debt to the US government.

If the planned deal goes through, Prudential will become the largest life insurer in Singapore, Hong Kong, Malaysia, Thailand, Indonesia, the Philippines and Vietnam.

The combination of Prudential and AIA will create an entity with a combined agency size of 7,800 insurance agents and more than 3.2 million policies in Singapore.

Local insurer Great Eastern (GE) Life with just 2,700 agents and three million policies will be the closest rival.

Prudential has been on an acquisition streak of late. Back in January this year, they also bought UOB Life from UOB Group.

The other day, I was referred to someone who wanted to get some health (or medical) insurance. According to her, she didn’t have any medical insurance cover and wanted to use some of her Medisave to get an appropriate cover.

This was a fairly straightforward transaction but usually, what I will do is to double check whether that person has any existing medical insurance in place first. This of course includes the integrated shield plans.

One way of checking this would be to check that person’s CPF yearly statement (either hardcopy or online). See the example below which shows a person having a medical plan with Aviva.

The reason is that if someone had an existing integrated shield plan in place and applies for another one, the old plan would be replaced. There are some implications for changing medical insurance as it generally excludes coverage for pre-existing conditions. So when someone changes their plan, they will run the risk of losing insurance coverage for a pre-existing condition.

Sometimes, pre-existing conditions can be unknown which makes it even more dangerous.

So, I will usually discourage switching medical plans between different companies (especially long standing plans) unless there is a very strong reason to do so.

As it turned out, she was already covered under an integrated shield plan with one particular insurer but she was totally unaware of it. Her Medisave transactions for the entire year didn’t show any deductions so I figured her husband must be paying for her (Other possibilities would be children or parents).

After checking through her husband’s CPF statements, I managed to confirm this and could even tell which plan they were on by looking at the amount of premiums that was being deducted.

Her husband wasn’t 100% aware he had actually covered her wife. The interesting thing is that he was recently contacted by his agent just a few days ago to upgrade his medical insurance plan. He signed a few forms and even got his wife to sign some forms.

Which makes it even more amazing because one of the forms that someone has to sign when upgrading a medical plan is to give a declaration of continued good health and inform the insurer if there were any new medical conditions.

And I’m not too sure how the wife in this case would be able to do that if she didn’t even know she was upgrading a medical plan!

Monetary Authority of Singapore (MAS) is consulting the public on recommendations to amend and enhance various features of the Deposit Insurance (DI) Scheme in Singapore.

Two key changes being proposed include raising the coverage limit from S$20,000 to S$50,000 and also to provide coverage beyond the deposits of individuals and charities, to other non-bank depositors such as sole proprietorships, partnerships, companies and unincorporated entities.

The consultation paper can be found here:

Review of Deposit Insurance Scheme in Singapore

MAS invites interested parties to give their views and comments on the proposals contained in the Consultation Paper. Comments should be submitted to policy@mas.gov.sg by 26 March 2010.