AIG meltdown: Is your AIA policies safe?

By this time it is quite evident that AIG have a massive credit problem and are scrambling to short up its credit lines.

What is concerning Singaporeans are whether their policies are safe.

Patrick Lim from PromiseLand, an IFA house posted abit of guidance on his blog.

In it he mentioned about how this debacle came about and the after effects of it. But what is news to singaporeans is this:

Around 100 worried customers of an AIG subsidiary, American International Assurance (AIA), queued outside its Singapore office to check the status of their policies.

Tan Peng Hock, 60, said he did not mind surrendering a policy worth about $42,000 despite possible losses.

“I prefer to hold cash for the time being…It’s better to be safe than sorry,” Mr Tan told Reuters news agency.

Next he provides the keynotes from the key recommendations for the revised life insurance and general insurance PPF scheme follow by some examples highlighted in the keynotes.

membership – which insurers have to participate?

Will explicitly cover all registered direct life insurers, except captive insurers.

Membership will be compulsory.

scope of coverage – which business is covered?

Continue to cover all life policies guaranteed benefits.

Will be extended to cover all accident and health policies written in the life insurance fund.

Will apply to both Singapore and offshore policies, as well as both individual and group policies.

Will not cover the life insurance business written by overseas branches of registered life insurers incorporated locally.

Only the life insurance business written by the branch office in Singapore will be covered for registered life insurers incorporated overseas.

level of coverage – how much is being protected?

Will protect 90% of the amount of all liabilities of protected policies.

With the exception of disability income, long-term care and medical expense insurance policies, all other protected policies will be subject to an absolute cap of S$500,000 for sum assured and S$100,000 for surrender value. A simple ratio method will be used to derive the coverage ratio of the affected policy owner.

The aggregate cap will apply on the aggregate sum assured and surrender value of all life policies owned by the policy owner and issued by the same insurer.

continuity of coverage – what would happen upon liquidation?

Provides for the transfer of in-force policies from the defaulted life insurer to another insurer as long as the transfer is reasonably practicable. The 90% limit and absolute cap on coverage will apply.

For remaining policies that cannot be transferred or settled by the liquidator, the PPF will be given the flexibility to run-off the portfolio of policies where practicable for it to do so.

In short, other than disability income, your AIA life policies and term policies should be protected, however to an absolute cap of 90% of your coverage and surrender value and also this amount cannot exceed 500k for coverage and 100k for surrender value (for those life policy that have accumulated cash value). Some Examples are provided here.

APPENDIX 1: APPLICATION OF CAPS FOR LIFE INSURANCE POLICIES

Scenario (a): Total policy benefits do not exceed caps

Mr Tan owns 3 policies from ABC Insurer, which defaults. Details of his policies are as follows:

Sum Assured Surrender Value
Policy 1 $50,000 $10,000
Policy 2 $100,000 $0
Policy 3 $150,000 $8,000
Total $300,000 $18,000
PPF Benefit Caps $500,000 $100,000
PPF Protects 90% of Benefits
$270,000 $16,200
Mr Tans policies do not exceed PPF benefit caps and hence will be protected for 90% of
policy benefits. Upon the default of the insurer, Mr Tans policies are covered by PPF up
to the following respective amounts:

Sum Assured Surrender Value
Policy 1 $45,000 $9,000
Policy 2 $90,000 $0
Policy 3 $135,000 $7,200
Total $270,000 $16,200

Scenario (b): Total sum assured exceeds caps, whilst total surrender value does not

Mr Lee owns 2 policies from ABC Insurer, which defaults. Details of his policies are as follows:

Sum Assured Surrender Value
Policy 1 $500,000 $10,000
Policy 2 $100,000 $0
Total $600,000 $10,000
PPF Benefit Caps $500,000 $100,000
PPF Protects 90%
of Benefits,
Adjusted for
Benefit Caps
82.5% x $600,000 =
$495,000
82.5% x $10,000 =
$8,250
The protection ratio of 82.50% can be derived from:
Average (90% x $500,000 / $600,000, 90% x $10,000a / $10,000)
a Since the total surrender value does not exceed the PPF cap, this would be 90% of the total sum assured.

Mr Lees policies exceeded PPF benefit caps for the sum assured. The average
coverage, taking into account the effect of the cap on the sum assured, is applied across
all policies. As a result, PPF protects Mr Lee for 82.50% of his policy benefits.
Upon the default of the insurer, Mr Lees policies are covered by PPF up to the following respective amounts:

Sum Assured Surrender Value
Policy 1 $412,500 $8,250
Policy 2 $82,500 $0
Total $495,000 $8,250

Scenario (c): Total sum assured does not exceed caps, whilst total surrender value does

Mr Lim owns 4 policies from ABC Insurer, which defaults. Details of his policies are as follows:

Sum Assured Surrender Value
Policy 1 $50,000 $40,000
Policy 2 $100,000 $42,500
Policy 3 $80,000 $30,000
Policy 4 $120,000 $0
Total $350,000 $112,500
PPF Benefit Caps $500,000 $100,000
PPF Protects 90%
of Benefits,
Adjusted for
Benefit Caps
85% x $350,000 =
$297,500
85%x $112,500 =
$95,625

The protection ratio of 85% can be derived from:
Average (90% x $350,000b / $350,000, 90% x $100,000 / $112,500)

Mr Lims policies exceeded PPF benefit caps for the surrender value. The average
coverage, taking into account the effect of the cap on the surrender value, is applied
across all policies. As a result, PPF protects Mr Lim for 85% of his policy benefits.
Upon the default of the insurer, Mr Lims policies are covered by PPF up to the following
respective amounts:

Sum Assured Surrender Value
Policy 1 $42,500 $34,000
Policy 2 $85,000 $36,125
Policy 3 $68,000 $25,500
Policy 4 $102,000 $0
Total $297,500 $95,625

Since the total sum assured does not exceed the PPF cap, this would be 90% of the total sum assured.

Scenario (d): Both total sum assured and surrender value exceed caps
Miss Wong owns 3 policies from ABC Insurer, which defaults. Details of her policies are as follows:

Sum Assured Surrender Value
Policy 1 $500,000 $100,000
Policy 2 $100,000 $50,000
Policy 3 $150,000 $50,000
Total $750,000 $200,000
PPF Benefit Caps $500,000 $100,000
PPF Protects 90%
of Benefits,
Adjusted for
Benefit Caps
52.5% x $750,000 =
$393,750
52.5% x $200,000 =
$105,000

The protection ratio of 52.5% can be derived from:
Average (90% x $500,000 / $750,000, 90% x $100,000 / $200,000)
Miss Wongs policies exceeded PPF benefit caps for both the sum assured and surrender
value. The average coverage, taking into account the effect of the caps for both sum
assured and surrender value, is applied across all policies. As a result, PPF protects Miss
Wong for 52.5% of her policy benefits.
Upon the default of the insurer, Miss Wongs policies are covered by PPF up to the
following respective amounts:
Sum Assured Surrender Value
Policy 1 $262,500 $52,500
Policy 2 $52,500 $26,250
Policy 3 $78,750 $26,250
Total $393,750 $105,000

Personally, I don’t think this will affect AIA much. The most likely scenario is that should AIG looks to sell AIA, they can sell it well to other major insurance player globally.

But as a general rule of thumb, you will still lose money on your policies but should this PPP scheme works (which should!) you will still keep the majority of your money.

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